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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Duties of and Risks to Directors and Officers of Insolvent Enterprises

By Marshall S. Huebner and Amber Leary
February 01, 2023

For both distressed companies and their directors and officers (D&Os), insolvency is often complex and fraught. D&Os owe ongoing fiduciary duties to the company, and must often make difficult decisions that impact the enterprise and its creditors, shareholders, employees and other stakeholders. There are various reasons to serve as a D&O of a distressed company, many that mirror the reasons people first chose to serve.

D&Os of distressed companies have a unique opportunity to help an enterprise navigate challenges and to facilitate the best available outcome for stakeholders. Moreover, despite the noteworthy developments described below, D&Os can still take substantial comfort from the fact that major business decisions in Chapter 11 require bankruptcy court approval after public notice and right to object, and that Chapter 11 plans of reorganization often provide D&Os who "see things through" with debtor releases and exculpations, even if third-party releases are not ultimately available.

Those factors have traditionally been viewed as making bankruptcy fairly low risk for D&Os. Several recent developments have, however, shifted the landscape somewhat and altered the risk profile.

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