My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency

My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency

Amir Licht

Series number :

Serial Number: 
551/2020

Date posted :

November 03 2020

Last revised :

February 23 2021
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Keywords

  • Corporate governance • 
  • fiduciary duties • 
  • Stakeholders • 
  • creditors • 
  • vicinity of insolvency • 
  • zone of insolvency

Fiduciary duties in the vicinity of insolvency form a notoriously murky area where legal space warps. Courts openly acknowledge that it is difficult to identify its boundaries, and the content of these duties is equally uncertain and inconsistent across jurisdictions. This Article expands the theoretical basis for a special legal regime in virtually or liminally insolvent firms.

In addition to the conventional rationale of opportunistic risk shifting, law makers should be mindful of managers’ tendency to unjustifiably continue failing projects, known as escalation of commitment. Second, this Article addresses the substantive content of a duty to protect creditors, either as in the form of a duty to consider creditors’ interest or as the statutory rule against wrongful (or insolvent, or reckless) trading. Specifically, it argues that when these duties are enlivened at the very edge of the zone of insolvency, the mission of directors should transform from entrepreneurial to custodial and should include a trustee-like duty of caution.

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Published in

Published in: 
Publication Title: 
Forthcoming in Washington University Law Review

Authors

Professor
Real name:
Amir Licht
Research Member
Harry Radzyner Law School, Interdisciplinary Center Herzliya