Study Of Directors' Duty Shifting Doctrine

Over the years, the interests of courts and scholars regarding corporate governance always lie in the conflicts of interest between creditors and shareholders. Creditors holding fixed claims to the assets of corporation generally prefer corporate decision making that minimizes the risk of firm failure. Shareholders have a greater appetite for risk, because, as residual owners, they reap the rewards of firm success while sharing the risk of loss with creditors. Traditionally, the corporate governance system imposes a fiduciary duty on the corporation's directors to maximize the value of the shareholders' interests in the firm. Over recent years, however, a number of courts have suggested or held that these fiduciary duties of corporate director may shift to the creditors when firms move into and through periods of deepening financial distress. This view has been increasingly accepted by American courts and scholars, and gradually formed a doctrine: directors'duty shifting doctrine. This doctrine means that directors'fiduciary duty of a solvent corporate is to maximize the interests of shareholders but that duty changes to act in the best interests of creditor as the firm moves into actual insolvency. Finally, when the corporation enters the reorganization process, the duty of directors is to maximize the estate's value for the interests of all the stakeholders. By taking the case of the United States, this article describes development process and contents of the doctrine, introduces the objections to the doctrine from American academic world, concludes that shareholders and creditors are the appropriate beneficiaries of fiduciary duty of directors in an insolvent corporation, and then demonstrates the significance to our protection of interests of creditors.This article includes five parts.Part I of the article briefly describes the origin, development and establishing process of the duty shifting doctrine via three typical cases. The central point is that many courts of America held a positive attitude toward the doctrine and established the trigger of duty shifting is the firm's actual insolvency.In Partâ…¡, a detailed analysis is conducted on the beneficiaries of fiduciary duty and its contents specified by the directors'duty shifting doctrine during the operation of corporations. As actual insolvency triggers change of beneficiaries of directors'fiduciary duty, we highlights the corporate actual insolvent period and illustrates the rationales for fiduciary duty to creditors. Part III of this article presents one critical opinion toward the doctrine. They believe that by a one-sided method of analysis of residual claims, the doctrine undermines the ownership structure of shareholders, ignoring the economic rights and non-economic rights of shareholders.Part IV introduces another critical opinion toward this doctrine from the perspective of combination of corporate governance and bankruptcy governance that the doctrine conflicts with the corporate governance system and ignores the protection function to the interests of creditors of the reorganization system. The doctrine will impose the purpose of protecting creditors on corporations, resulting in the mismatch between the purpose and means.In the last part, we present the appropriate rationale of the directors'duty shifting doctrine and demonstrate the significance to our country by comparing with relevant system in some civil law countries and combining with the status quo in our country, and then summarize this article.