5 - Directors’ Duties in the Zone of Insolvency in Emerging Economies

Summary

This chapter starts by explaining that, when a company becomes factually insolvent but it is not yet subject to a formal insolvency proceeding, the shareholders – or the directors acting on their behalf – may engage, even in good faith, in various forms of behavior that can divert or destroy value at the expense of the creditors. Moreover, the individual behavior of certain creditors can also destroy or divert value in a situation of financial distress. For this reason, most jurisdictions around the world respond with a variety of strategies, including the imposition of special directors’ duties in the zone of insolvency. The chapter identifies six regulatory models for the design of directors’ duties in the zone of insolvency. After exploring the advantages and weaknesses of each regulatory model, the chapter analyzes a variety of country-specific and firm-specific factors that may affect the desirability of a particular regulatory approach. It concludes by suggesting various policy recommendations for the design of directors’ duties in the zone of insolvency taking into account the particular features of emerging economies.