Directors’ Duties in Insolvency: Clarifying What’s at Stake

This comment on the Quebec decisions in Peoples v. Wise addresses the question of whether corporate directors’ duties of care and loyalty should shift from shareholders to creditors when the firm becomes insolvent or approaches insolvency. In an ideal world of perfect enforcement, directors would optimally owe a duty to the collective interests of shareholders and creditors. But given the existence of non-legal sources of discipline on directors and officers, and the risks of judicial error, courts have adopted a highly deferential posture towards review of director decision-making, which implies relatively light judicial scrutiny of the matter which is at the heart of the tension between creditors and shareholders: the risks that directors cause the company to assume. Given this substantive deference, the question of whether duties shift from shareholders to creditors in insolvency recedes in importance. Having said that, there may be a procedural justification for shifting the duties: in insolvency, creditors become the parties with better incentives to enforce the duties. The comment concludes by raising a possibly more important question about whether the content, rather than the beneficiaries, of the directors’ duties should change in insolvency. Given that market influences on directors’ behaviour may change in insolvency, there may be an argument to change the substance of the duties in insolvency