Guidelines for Director Decision Making in Chapter 11

During a Chapter 11 case, the interests of the debtor's main constituencies — eg, secured lenders, unsecured creditors, management and employees — often conflict. For example, the secured lenders may want a prompt sale of the business to assure that its value is maintained and they are repaid (partially or in full) as soon as practicable. On the other hand, the debtor's unsecured creditors and management team may be desirous of a longer Chapter 11 case. This desire is fueled by the hope that, as time goes on, the value of the business will increase (which would maximize distributions to unsecured creditors) and the Chapter 11 case may be effectuated through a stand-alone restructuring (which would increase the likelihood that the management team keeps its job).

A debtor's board of directors is responsible for making the major decisions in a Chapter 11 case. These decisions, which must be consistent with the goal of preserving the debtor as a going concern (if possible) and maximizing value of the debtor's estates, are subject to bankruptcy court approval. A board's adherence to non-bankruptcy corporate governance standards will insulate its decisions from being second-guessed by the bankruptcy court.