With businesses focused on the impact of the novel coronavirus (COVID-19) pandemic on current and future liquidity, balance sheet and cash flow concerns, and an expected decline in the level and profitability of business activity in these difficult and uncertain times, in many cases attention has turned to the issue of the duties and responsibilities of directors to creditors when a corporation is financially troubled and is either approaching insolvency (the so-called “zone of insolvency”) or becomes insolvent.

When a corporation is solvent, directors’ fiduciary duties are to shareholders only. It is well-established under Delaware law that, when a corporation is solvent, directors’ duties run to the corporation and the corporation should be managed for the benefit of its shareholders. While there has been some discussion within the corporate community in recent years about boards also taking into consideration the interests of other stakeholders, fiduciary duties are not owed to creditors of a solvent corporation. Instead, creditors of a solvent corporation are protected through other means, such as contracts, fraud and fraudulent conveyance laws, implied covenants of good faith and fair dealing, bankruptcy law, general commercial law and creditors’ rights.

(more…)