Perspective on Bankruptcy bill
Books on bankruptcy
Bankruptcy in Briefa service of the Moran Law Group |
Home/
Business Bankruptcy/ Duties
Officers of insolvent corporation owe legal duties to creditors*
In the normal course of business, corporate officers and directors owe duties of loyalty to the shareholders of the corporation. That duty shifts to become a duty owed to the creditors when the corporation becomes insolvent (generally, the debts exceed the value of the assets of the corporation).
Officers and directors of the insolvent corporation must put the interests of the creditors ahead of their own interests and the interests of the shareholders. State law in most jurisdictions prohibits paying dividends to shareholders when the corporation is insolvent. The corporation cannot give away its property or sell it to insiders at below market rates.
State law may
vary on whether the corporation may pay some creditors ahead of others. In
California, paying a preference is perfectly legal; however, after a bankruptcy is
filed, that legal payment may be recovered from the unwitting creditor. More
on preferences |
Officers' duties to others
Even following a corporate bankruptcy, the officers may still have liabilities to taxing authorities to file W-2 forms for employees or K-1's for partnerships.
The corporation's bankruptcy does not eliminate any legal liability of any other entity: the personal guarantee of a shareholder or officer is not voided when the corporation files bankruptcy, unless that claim is paid in full in the bankruptcy.
[ Up ] [ Nuts & bolts ] [ FAQs ] [ Shareholder liability ] [ Officer's duties ] [ Corporate 7 ]
* Corporations are creatures of state law and the rights and duties of officers are defined in state law. The material above reflects California law. Consult a business attorney for the law of the state where you do business.
02/16/03