Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Restructuring & Insolvency (2nd Edition)
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 question above regarding “Liabilities of directors and others”.
When an enterprise goes bankrupt, a possible cause that will make a director or shareholder of it liable for its bankruptcy is that the director or shareholder has violated his/her duty of loyalty or care to the enterprise, and there is causation between such violation and the bankruptcy. Otherwise, the directors and shareholders of the enterprise will not be held accountable for their normal operation of the enterprise. Likewise, the liability that the directors and shareholders should assume for previous actions and decisions will not be released simply because a procedure of liquidating or restructuring the enterprise is initiated.
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.
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.
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.
As noted above, a debtor may seek various forms of releases for prepetition claims and causes of action in a plan of reorganization. Section 1123 of the Code states 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 Code. Releases tend to be either a debtor release or a third-party release and third-party releases may be consensual or non-consensual. Each type of release is subject to different legal standards.
Releases by debtors to non-debtor, non-insiders are subject to the business judgment standard and thus given broad deference, whereas debtor releases against insiders are often held to a slightly higher standard.
Consensual third-party releases are generally permitted, but courts differ on what is “consensual” with some courts construing it very narrowly and others taking a broader view of what “consent” means. For the most part, non-consensual third-party releases are permitted only in rare cases, and in some jurisdictions are not permitted at all.
Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.
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.
As discussed in question 10 above, New Zealand insolvency processes do not make any provision for the release of directors or other stakeholders from liability for previous actions and decisions, as claims against such parties are often valuable potential avenues of recovery for creditors when insufficient assets are available.
Once an insolvency procedure completed, no claim for tort liability may be filed against the bodies who have managed the company before insolvency.
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.
Please see our answer to Section 10 above.