Creditors Cannot Contract Around Their Fiduciary Duties and Withhold Their Consent from a Debtor to File for Bankruptcy

(Excerpt) Many courts have found that a debtor may not contract away their right to voluntarily file for bankruptcy. However, debtors and creditors have implemented creative measures to avoid this principle. For example, a creditor may seek the appointment of a so-called “blocking director” on a company’s board of directors, who would control the company’s bankruptcy filing. Additionally, some creditors seek a “golden share” in order to have veto power over changes to the company’s charter, including veto power over whether the company can file for bankruptcy. In determining whether these mechanisms are void under public policy, courts will consider whether the director or member retains a fiduciary duty to the debtor. This memorandum explores what these mechanisms are and when they are void against public policy in a fourfold approach. Part I addresses the public policy issues that courts must consider when dealing with a creditor’s efforts to control a company’s bankruptcy filing. Part II examines what a blocking director is and when it is used. Part III explains what a golden share member is and when it is used. Finally, Part IV concludes that a creditor cannot generally block a debtor from filing for bankruptcy unless the creditor’s designee retains a fiduciary duty to the debtor