Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

Restructuring & Insolvency

Italy Small Flag Italy

The recent legislative compression of avoidance actions appears to have contributed to producing a collateral effect — namely, the considerable proliferation of suits aimed at seeking liability for breach of duties in insolvency proceedings. The categories of defendants in suits of this sort have become larger: in addition to directors and statutory auditors, mention must be made of parent companies in group contexts, external auditing firms, shadow (de facto) directors and, last but not least, lenders having substantially managed the debtor in difficulty or having imprudently extended credit to the debtor in difficulty.

Restructuring proceedings have not the effect of releasing directors and other stakeholders from liability for previous actions and decisions.

Spain Small Flag Spain

The declaration of insolvency could not be seen as a remedy to release liabilities; in any event, not all actions and decisions taken by directors or stakeholders may be enough to be considered as affected by the categorisation of the insolvency proceedings as guilty.

In fact, two elements are required to categorize insolvency as guilty: (i) willful misconduct or gross negligence on the part of the formal or de facto directors or managers with general power and any person who had that status within the two years before the declaration of insolvency, and (ii) the insolvency situation must have been created or aggravated, in addition to a causal relationship between the two elements.

In addition, directors’ liability is not automatic. Rather, an action or omission must be proved to have caused or worsened the insolvency of the debtor, by means of an intended or negligent conduct.

Japan Small Flag Japan

Generally, commencement or completion of insolvency proceedings does not have the effect of releasing directors and other stakeholders from liability for their previous actions and decisions. As such, if a director of a company causes damages to a third party (e.g. a creditor) in breach of their obligations owed to such a party, he/she may be held liable for such damages regardless of commencement or completion of any restructuring or insolvency proceedings.

Denmark Small Flag Denmark

No, neither restructuring nor insolvency proceedings release the management or the shareholders from liability for decisions made prior to the restructuring or insolvency proceedings if the decisions in question intentionally or (grossly) negligently caused a loss for the company, shareholders or a third party, see the reply to questions 11 and 12 above.

Australia Small Flag Australia

A director or officer of a company may be liable under the Corporations Act for civil and criminal penalties or to compensate the company if the company incurs a debt while insolvent (insolvent trading). Directors and officers may also attract liability for breaching their statutory duties of reasonable care and diligence in the exercise of their powers and to act in good faith and for a proper purpose. Statutory liability may also be imposed where directors or officers improperly use their position to gain an advantage for themselves or cause detriment to the company.

In some situations directors may become personally liable for unremitted amounts of income tax or GST. The Commissioner of Taxation must give 14 days’ notice to the directors setting out the details of the unpaid amount and the penalty. Directors may avoid a penalty if the company pays the unremitted amount, the company enters into an agreement relating to the unremitted amount, an administrator is appointed or the company goes into liquidation. The courts maintain a general discretion under the Corporations Act to excuse directors from liability in some circumstances if they can be shown to have acted honestly and reasonably.

The terms of a scheme of arrangement and a DOCA can incorporate releases from liability for directors and other stakeholders.

Cayman Islands Small Flag Cayman Islands

No, to the extent they exist, such liabilities will continue until the date of dissolution of the company.

Switzerland Small Flag Switzerland

No. Quite to the contrary, there is an increased likelihood that director's liability claims are scrutinized in an insolvency context. That said, such claims will typically not be pursued where a restructuring has been achieved although no formal release will occur.

Germany Small Flag Germany

Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.

However, claims of the creditors for damages suffered jointly by them due to a reduction of the insolvency estate before or after the opening of the insolvency proceedings (‘collective damage’) may, during the insolvency proceedings, be asserted only by the insolvency administrator (Sec. 92 Insolvency Code).

Even in an insolvency plan, the liability of directors towards their company for breaching their duties cannot be waived (Sec. 225a(3) Insolvency Act, Sec. 93 Stock Corporations Act, Sec. 43(3) with 9b(1) Limited Liability Companies Act).

Mexico Small Flag Mexico

Neither Restructuring nor Insolvency Proceedings release directors, managers or other stakeholders from liability. Please refer to our answer to Question 11 above.

British Virgin Islands Small Flag British Virgin Islands

The effect of restructuring proceedings on directors’ liabilities, etc, will depend on the terms of the arrangement in question. If there is no express provision releasing directors, they remain liable.

Directors of a company that is dissolved following its liquidation will be given a reprieve in relation to potential claims; however, in certain circumstances a dissolved company may be restored into liquidation for the purpose, eg, of realising an asset or pursuing a claim that was not dealt with during the liquidation. A claim against a malfeasant director may be sufficient grounds on which to seek such a restoration.

Bermuda Small Flag Bermuda

It is not unusual for the terms of a restructuring proposal to contain provision for directors to be released from liability for previous actions and decisions. However, the inclusion of such a release is often a vexed and hotly debated issue for creditors. Absent express exclusion in the terms of the scheme, directors will remain liable for their prior acts.

Greece Small Flag Greece

The GIC provides for the full discharge from its debts of a debtor who has not acted in bad faith and has been declared excusable (syggnostos) by the Court. The discharge may be requested by the debtor after the lapse of a period of two (2) years as of the declaration of bankruptcy or upon the completion of bankruptcy proceedings (whichever date comes first). The debtor may not be discharged from debts created due to an unlawful act committed due to intention or gross negligence. In case bankruptcy is completed through the ratification of a reorganization plan, the debtor is automatically discharged, except if the plan provides otherwise. The above discharge of the debtor may be effected only once, unless the new discharge is due to a reorganization plan.

Generally a reorganization plan may provide for shareholders and guarantor to be released for their liabilities or to limit their liability to the actual size of debt post restructuring in case of a debt haircut.

Singapore Small Flag Singapore

Neither the commencement of insolvency proceedings nor resignation by a director can absolve the said director of any previous transgressions. There appears to be an increasing trend of former officers being pursued personally by the liquidator or judicial manager.

United Kingdom Small Flag United Kingdom

There is no automatic release for directors or other stakeholders when a company enters an insolvency or restructuring process. Directors may often want to conduct sales through an administrator if they are concerned about breaching director’s duties. Alternatively, directors or other stakeholders may be able to negotiate a release of liability contractually (e.g. in a restructuring agreement).

Further, there are some transactions that may be reviewable by an insolvency practitioner. These most notably include: transactions at an undervalue, preferences and invalid floating charges and are all provided for in the Insolvency Act 1986. These are all subject to look back periods that vary according to whether the transaction was entered into with a party connected with the company or a director.

Indonesia Small Flag Indonesia

As explained, the responsibility also applies to members of the BOD who served as a director within the last 5 years for any action before the declaration of bankruptcy that might include a fault or negligence that has caused the bankruptcy. This also applies to the members of the BOC. For a finance institution, the directors or commissioners of the bankrupt debtor will not be able to serve as directors or commissioners in any other finance company because their appointment will be assessed by the relevant government institution.

France Small Flag France

Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.

Israel Small Flag Israel

Neither restructuring nor insolvency proceedings release directors, executives or other stakeholders from liability.

The Netherlands Small Flag The Netherlands

Restructuring or insolvency proceedings, in principle, do not lead to a release of stakeholder or director liability. Depending on the circumstances this could however occur.

Luxembourg Small Flag Luxembourg

No, directors and other stakeholders remain liable for previous actions and decisions. They can be held liable either by the receiver or, in certain cases, by individual creditors. Certain guarantors of the debtor’s debt can be released.

Belgium Small Flag Belgium

No, directors and other stakeholders remain liable for previous actions and decisions. They can be held liable either by the trustee or, in certain cases, by individual creditors. Certain guarantors of the debtor’s debt can be released.

Argentina Small Flag Argentina

Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.

As mentioned in question 11, directors and other stakeholders shall be liable for the damages caused and the action against them must be brought by the liquidator or the creditors if the liquidators fails to do so.

United States Small Flag United States

Section 1123 of the U.S. Bankruptcy Code serves as the basis by which a debtor can seek to obtain various forms of releases in a plan of reorganization from certain types of potential prepetition claims and causes of action. Specifically, section 1123 of the U.S. Bankruptcy Code provides that a plan of reorganization may “provide for the settlement or adjustment of any claim or interest belonging to the debtor or to the estate” and may “include any other appropriate provision not inconsistent” with the U.S. Bankruptcy Code. There are generally two types of plan releases: (a) a debtor release and (b) a third-party release (i.e., a release by a debtor’s creditors), which may be consensual or non-consensual. Debtor releases, consensual third-party releases and non-consensual third-party releases are subject to different legal standards for approval.

Releases from liability provided by debtors to non-insider, non-debtors are subject to the business judgment standard. However, a proposed release of claims held by a debtor against an “insider” of that debtor (i.e., an officer or director) may be subject to a higher level of scrutiny, referred to as the “entire fairness standard,” which examines whether the settlement is procedurally and substantively fair.

Consensual third-party releases — releases that require the affirmative agreement of the creditor affected — are generally permitted. However, there is some disagreement among courts as to when a release is consensual. Some courts construe consent narrowly, requiring a party to affirmatively vote in favor of a plan and forgo opting out of — or electing to opt into —the release to demonstrate consent. Other courts, however, have found that parties that fail to vote on or object to a plan or are unimpaired by a plan are deemed to have consented to any such third-party release.

Non-consensual third-party releases may be permissible, but are only granted in extraordinary cases, and may be unavailable altogether in certain jurisdictions. In determining whether a non-consensual third-party release is permissible, courts will generally look to whether such releases are fair, necessary to the reorganization and supported by specific factual findings.

Poland Small Flag Poland

No, restructuring or bankruptcy proceedings do not have such effect. As far as limited liability and joint-stock companies are concerned, a management board member shall be liable towards the company for any damage inflicted through an act or omission contrary to the provisions of law or the articles of association, unless no fault is attributable to such member.

Ireland Small Flag Ireland

Irish law does not provide for any such release of liability.

Updated: July 21, 2017