Vol 22 (2025) - Issue 2

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Different Paths and the Same Destination for Creditors’ Interest Protection: A Comparison of European and United States Rules on the Shift of Directors’ Fiduciary Duties in the Vicinity of Insolvency

Synopsis
In the vicinity of insolvency, the shift in directors’ fiduciary duties from shareholders to creditors is evident from an economic perspective, but legal liability for considering only one party’s interests while overlooking the other varies by jurisdiction. The US maintains shareholder primacy, requiring directors to prioritise shareholder interests until formal bankruptcy. In contrast, European countries like the UK and Germany include creditor interests, extending fiduciary duties to the mid-to-late stages of the vicinity of insolvency. This paper argues that, although the US does not support a shift in fiduciary duties during the vicinity of insolvency, alternative creditor protection mechanisms still provide creditors with the opportunity to hold directors accountable after the fact. This approach, though slightly delayed and more complex than directly assigning rights, achieves a similar outcome to the European model of holding directors liable for breaches of fiduciary duty towards creditors. In designing provisions for the shift and accountability of fiduciary duties in the vicinity of insolvency, it is advisable to balance the economic reality of this phase with legal responsibility.
Accountability should commence with the initiation of formal debt resolution tools, using as a general standard whether directors’ prior operational decisions over a defined period resulted in a diminution of corporate
value, while allowing directors to demonstrate that these decisions were grounded in reasonable business judgment as a defence against liability.