On An Extension Of The Directors Duty Of Loyalty On The Bankruptcy Law

In the wake of the debt binge of the 1980s, the number of financially distressed corporations has increased dramatically. Because a struggling company rarely ceases operations overnight, directors still need to make investment and operational decisions concerning the best use of the company's existing assets. This need remains whether the firm will regain profitability or will be liquidated. Financial distress also intensifies conflicts of interest between shareholders and creditors. Indeed, when these constituencies are unable to recover their investments in the corporation because of insufficient assets, both shareholders and creditors have incentives to maximize their individual returns regardless of the possible adverse impact on other corporate participants and on the overall value of the firm.From the perspective of corporate governance, therefore, determining for whose interest directors should act during this highly volatile period will lead to different outcomes. Directors' alliances with either shareholders or creditors influence decisions ranging from the day-today operation of the business to the future of the firm, such as whether to attempt an out-of-court debt restructuring or to seek protection. Most commentators thus far have focused on the relationship among the corporation's managers, shareholders and creditors during bankruptcy proceedings. Although corporate governance is an important issue when a firm is in bankruptcy, we also need to address the problem of these corporate actors' opportunistic behavior as the company's financial condition deteriorates before bankruptcy. This article thus shifts the focus to an earlier point on the time line of corporate existenceThe aim of this article is to discuss such a situation---as a company approaches financial difficulty, a conflict of interests between shareholders and creditors seem inevitable, and the role of its directors. On this circumstance, the role of directors becomes more and more crucial. The issue of directors' fiduciary duties and liabilities, especially in the case of its insolvericy, where the corporate shareholders are replaced by its creditors as a new class of beneficiaries, and the directors' duties shift from the former to the latter.This article divides into four parts.PartⅠof this Article analyzes the relationship of the shareholders, corporations and directors in the light of the company nature theory. Given an idea that is if we can devise a set of rules that gives parties incentives to maximize the firm's value even when the firm is in financial trouble, we can reduce the overall social loss when the corporation eventually is pushed into either voluntary or involuntary bankruptcy.In partⅡ, the author examines the self-interested behavior of shareholders and creditors during pre-bankruptcy insolvency and argues that maximizing either constituency's interest does not benefit the firm. The director should maximize the company's value even when the company is in financial distress. However, for the practice, directors should put the interest of creditors on the priority.PartⅢcompares a director's fiduciary duties and liabilities in insolvency in England and the USA, draw a picture of the present state of statutory as well as case law in the two legal systems.Finally, in the PartⅣ, according to the current insolvency law examine, the author develops a theory that would explain the cases dealing with directors' fiduciary duties as the company becomes insolvent and build a liabilities system resulting from breach of those duties in insolvency liability in China.