A Study Of Directors’ Duties Of A Corporate In Insolvency

Directors’duty of fiduciary consists of duty of care and duty of loyalty, and other duties stipulated in the law. In normal circumstances, directors have the fiduciary duty to company, and the aim is to maximize the company’s interests. Because company is an independent legal status, directors generally undertake the fiduciary duty to the company itself instead of shareholders, creditors or others, unless otherwise provided by law. But when the company become insolvent, there are several changes: the structure of interests in the company will be more strained, especially between the shareholders and debtors;company governance structure also changes, debtors, not shareholders have rest rights to the company;and there will be more judicial intervention affecting company autonomy when the bankruptcy proceedings begins.All these indicate that, directors’management will have direct effects on creditors’benefits when the company is insolvent. Director’duties can regulate their behaviors, so it is necessary to study the issue about director’s duties expanding to debtors. Moreover, in order to save the company and protect debtors’interests, and guarantee the order of bankruptcy proceedings, the content of director’s duties should also be made some adjustment. Therefore, the provisions about director’s duties should respect to these changes above, both in the object and the content of this duty. Furthermore, the duty should be discussed specifically in three different stages:the first stage is that when the company becomes insolvent, but hasn’t enter to the bankruptcy proceeding yet; the second stage is in the bankruptcy proceedings; and the last is the enforcement stage of the reorganization plan or composition agreement.This paper is divided into five sections. Chapter one sketches the general issues concerning directors’ obligations, including directors’legal status, the object and the content of directors’obligations under the circumstances of non-insolvency, thus laying a foundation for further discussing directors’obligations in terms of insolvency.Chapter two discusses the influence of insolvency on directors’ obligations. This is discussed from three different aspects:the change of companies’benefits, the corporate governance structure, and company autonomy. This section tries to prove that, under the circumstances of insolvency, directors’obligations should also change according to these changes below:the strained structure of interests in the company, debtors’ participation in company’s governance, the expanding of operational control, and the exercise of supervision right.Chapter three demonstrates the special characters of directors’ obligations in bankrupt companies, including the objects and the content of these obligations. The former is that, expect the duty to company, directors should also have the duty of care to debtors; the latter is that,firstly, the specific circumstances of the company should be analyzed when deciding whether directors breach their duties; secondly, directors’duty to company should be specific in accordance with company’s bankruptcy, and the content of directors’duty to debtors should centre on making some limitation to directors’operation power; lastly, the fact of company’s insolvency decides that directors should have special duties different to normal circumstances.Chapter four further demonstrates about the expanding of directors’ duty to debtors when the company becomes insolvent. Firstly, it introduces academia’s criticism to the opinion and makes a response; secondly, compares about this issue between different countries, then analyzes the reference value to our country; finally, discusses about the conflicts between directors’duty to company and to debtors, and finally expounds the possibility of harmonization.Chapter five is about the specific content of directors’duties in the three different stages which have been stated above. In the first stage(when the company becomes insolvent but hasn’t enter to the bankruptcy proceeding), the specific contents of directors’loyalty duty should be in accordance with the specific circumstance especially those duties:the prohibition of usurping the company’ opportunity; the prohibition of self-trading, and the prohibition of business strife. When the company is insolvent, directors’duty of care should focus on saving companies, but they shouldn’t treat debtors in bad faith. When it is impossible to expect the company to avoid liquidation, directors’duty to debtors should be in priority, and directors should take all reasonable measures to minimize the debtors’loss. In the bankruptcy proceeding, both directors’duty to company and to debtors have a common aim, which is to maximize the bankruptcy estate. In the enforcement stage of the reorganization plan or composition agreement, directors only have the fiduciary duty to the company, which is to guarantee the successful enforcement of the reorganization plan or composition agreement. What’s more, the bankruptcy law of our country also impose other obligations to directors, including the prohibition of bankruptcy frauds(or these behaviors will be revocable and void); the transfer of shares is banned in special time,they should also accept supervision and provide assistance.