Competing Approaches to Director Liability in the Zone of Insolvency

When should directors be held liable for their company’s distressed financial condition? In a recent article, we show that the answer varies widely across legal regimes. We focus on the zone of insolvency, a phase in the company’s life when its financial condition is unstable and deteriorating, but it has yet to enter a formal bankruptcy proceeding (and theoretically may never enter such a proceeding).

There are two main approaches to dealing with directors’ actions when their company is in this zone. Under the American and Canadian approach, directors are generally held to the same corporate law standards that … Read more