Zone Of Insolvency: Decision-Making In Times Of Distress
Mondaq Business Briefing › United States Law Articles in English (2011)
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Zone Of Insolvency: Decision-Making In Times Of Distress
Introduction
This recession has been one of the most deeply penetrating; it has affected organizations across the board, including not-for-profits. The number of financially distressed companies has grown, as have the resulting implications for their boards of directors. This is especially true for companies that are approaching the zone of insolvency, the legal term applied when a company is in imminent danger of going bankrupt. As illustrated in Exhibit 1, courts have found that the fiduciary responsibility of directors and officers at companies approaching or residing in the zone of insolvency is not to the corporation and its shareholders, but to a wider community of stakeholders, particularly creditors. For this reason, boards must face the possibility that creditors will bring derivative claims against directors for breach of fiduciary duty. Recent court rulings have clarified that only durin...See the full content of this document
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