Part III: Issues When Dealing with a Failed Corporation — Analysis and Conclusion

(April 26, 2010): Part III: Analysis and Conclusion

In the midst of an economic downturn, headlines are filled with accounts of failed corporations and bankruptcies as well as notorious government bailouts. There are many threatened lawsuits directed at officers and Directors of corporations for breaches of their fiduciary duties or seeking judicial declarations that corporations are insolvent or in the so-called "Zone of Insolvency". Gheewalla provides important guidance to Directors, creditors and their professionals. It establishes that, irrespective of whether a Delaware corporation is within the zone of insolvency or insolvent, individual creditors cannot assert direct claims for breach of fiduciary duty against Directors. In the case of an insolvent corporation, however, creditors can assert derivative claims on behalf of the corporation against Directors. It should be noted that the ruling is limited to breach of fiduciary duty claims: it does not restrict other kinds of claims or rights that may be asserted by creditors directly against a corporation under a contract, agreement or applicable law. Also, the ruling may engender increased litigation over when a corporation becomes “insolvent” and which parties should have the right to prosecute derivative claims.