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 :

November 03 2020
SSRN Share

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 exceptionally difficult to identify its boundaries, and the content of these duties is equally uncertain and inconsistent across jurisdictions. This paper 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 paper addresses the substantive content of a duty to protect creditors, either as a duty to consider creditors’ interest or as the rule against wrongful (or insolvent, or reckless) trading. 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 trusteelike duty of caution.

View full abstract

Authors

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