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“The ‘Zone of Insolvency’: What are the Duties of Officers and Directors?” The Corporate Counselor

May 2, 2016
Daniel F. Blanks , Kelly Dunn

In an article published in the May 2016 issue of The Corporate Counselor, Daniel F. Blanks, a partner in the Jacksonville office, and Kelly Dunn, an associate in the same office, provide insight on the importance for officers and directors to exercise certain fiduciary duties and explain how such duties may shift when companies are in the “zone of insolvency.” “Delaware courts have long led the development of the parameters of these duties, which arise from statutes and vary from state to state,” write Mr. Blanks and Ms. Dunn. In their day-to-day duties, directors and officers must demonstrate the care and skill of a sensible person in similar circumstances. They are also obligated to act in good faith, always in the best interests of the corporation and its shareholders, and to refrain from using their positions of trust and confidence to further their personal interests.

Mr. Blanks and Ms. Dunn explain the business judgement rule, which is when directors and officers make business decisions that are reasonably informed, rational, and made in good faith in a manner reasonably believed to be in the best interest of the corporation. For corporations in the “zone of insolvency,” which is when a corporation is in financial distress, there has been a misconception that fiduciary duties of care and loyalty are owed to the creditors of a corporation instead of the corporation and its shareholders. Mr. Blanks and Ms. Dunn explain that two Delaware cases clarify that at all times, up until the point of insol­vency, directors and officers owe fiduciary duties to the corporation and its shareholders and not to third-party creditors. It is only once a corporation is insolvent that creditors’ interests be factored into decisions. For the full article, please click here (subscription required).