With the vast number of corporations in New York and other states in the United States that are incorporated in Delaware, the judicial pronouncements of Delaware courts on director duties are of great importance to directors and attorneys advising boards of directors. For the past 70 years, Delaware courts have grappled with the question of how directors’ duties may change when a company becomes insolvent, or even enters the “zone” of insolvency. The concept that insolvency should trigger a change in directors’ duties was driven by the principle that when a company becomes insolvent, the claims of the company’s creditors are given higher priority over the interests of shareholders. In the context of an insolvent corporation, courts questioned whether the directors’ duties shifted from shareholders to creditors; whether directors have a duty to prevent a company from going deeper into insolvency by shutting down the company and marshalling the assets for the benefit of creditors; and whether the duties shifted to creditors even when a company is solvent, but is teetering on insolvency.
All of these and other questions led to significant uncertainty as to the nature and extent of directors’ duties when the corporation becomes insolvent. Although the Delaware courts ultimately were responsible for triggering many of these questions, the Delaware Supreme Court in Gheewalla and the recent Delaware Chancery Court decisions in Quadrant answered these questions and provided much needed clarity on directors’ duties.
