Introduction

The previous chapter dealt with the general duties of directors and their application to capital maintenance restrictions, notably the prohibition of unlawful distributions. Like the entire concept of capital maintenance, this aspect of creditor protection is not linked to a state of factual insolvency. However, many legal systems – with England and Germany among them – impose further and more specific creditor-regarding responsibilities on company directors where the company approaches, or has already reached, a situation of insolvency or financial distress. The rationale underpinning these additional responsibilities towards creditors is that, once the shareholders' investment has been wiped out, the creditors replace the shareholders as the residual risk-takers. At this point directors should instigate some kind of organised response designed to protect the interests of the creditors. That may take various forms and aim at either rescuing the business or liquidation, in a formal procedure or by way of informal arrangements with creditors. If the company, and more specifically the directors, fail to take appropriate steps, the creditors, often unaware of the company's precarious state of affairs, are likely to suffer harm from the continued trading of the company, while the chances that the company will ever regain solid financial ground will usually dwindle rapidly.