Directors' Liability - Duties During Insolvency

In a previous post, we discussed areas of exposure and avenues for recourse for directors of insolvent companies. In this post, we look at how directors' legally prescribed duties may shift during insolvency.

In some countries, notably the United States, the fiduciary duties of directors are legally transferred from the company to its creditors. In Canada, directors' fiduciary duties remain with the insolvent company, but a duty of care to all company stakeholders is added to directors' legal responsibilities. Directors must consider the reasonable expectations of creditors, employees, contractors and business partners, in addition to those of shareholders.

In practice, this generally means that a company should not carry on business if it can't meet its obligations as they come due. If a company continues normal-course business activities - outside court-ordered creditor protection - it risks a legal action for trading while insolvent. Directors, as the ultimate