Board resignations and bankruptcy: key considerations when determining whether to step down from a board in advance of a bankruptcy filing.

• Author: Grunfeld, Dan
• Position: BANKRUPTCY

WHETHER TO RESIGN from a board of directors at a time when a company is seriously considering filing for bankruptcy is one of the most difficult decisions most board members will ever face. Beyond the legal and business aspects, such a decision is also rife with difficult emotional considerations: Am I putting my personal needs before those of the company? Am I abandoning my colleagues at a difficult time? Am I increasing my personal exposure? What are the ramifications if I don't resign and the company proceeds to file for bankruptcy?

Each decision has its own unique set of facts and circumstances which need to be carefully scrutinized on an individual basis. However, any decision as to whether a board member should or should not resign is impacted by the following eight considerations:

1. There Are Occasions Which Dictate That a Board Member Should Resign: If the board member is aware that other members of the board, or management, are committing fraud and not willing to correct the problem, then the board member should resign. Failure to do so could result in that individual being considered a part of the fraudulent conduct. In these rare circumstances, the board member also needs to establish a record by voicing his or her concerns in a formal written letter prior to resignation.

2. Deciding to Resign Is Often Not in the Best Interests of the Company or the Board Member: In too many cases, the decision to resign from the board just prior to bankruptcy ends up being ill advised for both the board member and the company. For the company, the resignation represents a public affirmation that things are seriously amiss. For the individual board member, the problems that led to bankruptcy have, by and in large, already occurred, while the individual was a member of the board. Therefore, resigning will not void a director's history with the company or shield the individual from actions previously taken during his or her tenure. Rather, resignation denies the former director the opportunity to be involved in the decision-making process going forward, such as ensuring that proper steps are taken during the pre-bankruptcy planning phase. This may include hiring independent counsel and financial advisors, as well as implementing appropriate procedures to protect the interests of the shareholders and creditors.

   [ILLUSTRATION OMITTED]

   Resignation also denies former directors the ability to "steer the course" through involvement in subsequent...