20 April 2013

"Deepening Insolvency"

"Exploring the Depths of Deepening Insolvency" sounds like the name of really bad soap opera. It's actually the title to my most recent podcast of an interview with Jack Williams and Kathy Phelps, authors of ABI's newest publication, The Depths of Deepening Insolvency: Damage Exposure for Officers, Directors and Others. Jack and Kathy were easy to interview, and the subject of their book should be significant to everyone who lends or gives financial advice to a company in financial distress.

As many know, officers and directors of a corporation owe "fiduciary" duties to the corporation. The twin duties of loyalty and care require directors and officers to treat the interests of the corporation with the utmost care. And what if they don't? The corporation can sue them. And if the corporation doesn't take action, its shareholders may do so.

But what if the corporation is insolvent? What if the value of its assets less its liabilities is a negative number? The shareholders are "out of the money" and some courts have held that the corporation's creditors may enforce the fiduciary duties if the corporation fails to do so. After all, insolvency entails that the shareholders no longer have an economic interest in the corporate entity, which means the creditors do have one.

So far nothing to worry most folks but a few courts have taken matters one step further and allowed creditors to sue an insolvent corporation's lenders, financial advisors, and--gasp!--attorneys for not putting the corporation out of business sooner. Preemptive corporate euthanasia, I suppose we could call it.

Many other courts have rejected extending such liability to third parties but everyone who works for for businesses teetering on the financial edge should listen to the podcast while waiting for their copy of the book.

1 comment:

  1. My boss was talking to us about corporate insolvency in Brisbane this week during our corporate meeting. I had no idea what it was before he explained it. This helps me a lot with understanding that concept.