Treating creditors as shareholders: fiduciary duties of directors and officers of insolvent corporations in Florida.

• Author: Ambs, Stephanie E.

When a Florida corporation experiences sustained financial distress, the options considered by its leadership are numerous and can include seeking bankruptcy protection and winding up affairs pursuant to a state-court assignment for the benefit of creditors. As the options are weighed, directors and officers of insolvent or potentially insolvent corporations should bear in mind their responsibilities to a growing constituency that includes both shareholders and the corporation's creditors. For the most part, directors and officers can discharge their duties to creditors by acting diligently and with the best interests of the corporation in mind and by using measured and prudent judgment in all matters. This article outlines these fiduciary duties and explains how they can be discharged.

Fiduciary Duties of Directors and Officers in Florida

Under applicable Florida corporate law, a director must perform his or her corporate duties 1) in good faith; 2) with such care as an ordinary prudent person in a like position would exercise under similar circumstances; and 3) in a manner the director reasonably believes to be in the best interests of the corporation. (1) "Florida law has long recognized that corporate officers and directors owe duties of loyalty and a duty of care to the corporation." (2) The first duty, the duty of good faith, is general and requires that directors and officers act at all times with honesty of purpose and in the best interests and welfare of the corporation.

The fiduciary duty of care requires that directors and officers use the amount of care that ordinarily careful and prudent men would use in similar circumstances, and consider all material information reasonably available in making business decisions. (3) The duty of loyalty to the corporation obligates directors and officers to devote themselves to the affairs of the corporation with a view toward promoting the interests of the corporation. Directors and officers run afoul of this duty when they either appear on both sides of a transaction involving the corporation or when they receive a personal benefit from a transaction not received by shareholders generally. (4) All three duties referenced in the statute are owed to the corporation and, therefore, the corporation's shareholders. They apply in all actions taken by officers and directors in connection with the corporation.

Insolvency and the Vicinity of Insolvency--Fiduciary Duties to Creditors

In Florida, officers' and directors' fiduciary duties are extended to the corporation's creditors when the corporation is insolvent or is in the "vicinity of insolvency." (5) Accordingly, insolvency does not create a new duty for directors, it "simply adds beneficiaries" of existing duties. (6)

* When is a Corporation Insolvent? --Under F.S. [section] 607.01401(16), a corporation is considered insolvent when it is unable to pay its debts as they come due in the ordinary course of its business. A company could also be insolvent or in the vicinity of insolvency if 1) its assets lack short-term liquidity; 2) its liabilities exceed the fair market value of its assets; and/or 3) its capital may not be able to support the financing of its future operations. (7)

* What is Required to Discharge Fiduciary Duties if a Corporation is Potentially Insolvent?--As previously noted, insolvency or the vicinity of insolvency does not create a new duty for directors and...