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)

Hungary Small Flag Hungary

Successful bankruptcy and insolvency proceedings do not mean that the directors or stakeholders are released from liability for previous actions and decisions.

Indonesia Small Flag Indonesia

The restructuring or insolvency proceedings should not release the liability of the debtor’s directors and other stakeholders for previous actions and decisions, either the liabilities to (i) the third party; and (ii) the debtor or the shareholders of the debtor. The Company Law stipulates that the directors of a company shall be released from their liabilities to the debtor or the shareholders of the debtor based on the resolution of the General Meeting of Shareholders.

The Company Law clearly states that every member of the Board of Directors / Commissioners of the debtor shall be jointly, severally and fully personally liable:

a. for the losses of the debtor if the relevant director / commissioner is proven to be at fault or negligent in the performance of his/her duties in managing the Company with good faith and full responsibility for a director or in supervising and advising the Board of Directors for a commissioner; and

b. if (i) the relevant director / commissioner is proven to be at fault or negligent which leads to the bankruptcy declaration of the debtor and the (ii) assets of the bankrupt debtor are not sufficient to settle the entire obligations of the debtor, for the unpaid claims of the bankrupt debtor’s creditors (This also applies to those holding director / commissioner position within 5 years prior to the bankruptcy declaration).

Canada Small Flag Canada

There is no general or automatic release for directors or other stakeholders during a debtor company’s insolvency or restructuring proceeding. In the context of a CCAA or BIA Proposal proceeding, both acts provide that claims against directors that arose before the commencement of proceedings under either act and that relate to obligations of the debtor company for which the directors would, in law be liable by reason of their capacity as a director of the debtor company, may be compromised under the terms of the Plan or Proposal, as may be applicable. The following claims against directors cannot be compromised: claims in relation to (i) contractual obligations with one or more creditors of the debtor company, (ii) allegations of misrepresentation made by the directors to the creditors of the debtor company, or (iii) wrongful or oppressive conduct by the directors.

As discussed in Question 10 above, there is significant precedent in Canada for the granting of third party releases in the context of class action-related CCAA restructurings.

Germany Small Flag Germany

There is no such effect that directors or other stakeholders are generally released from liability for previous actions or decisions. On the contrary, during the course of the insolvency proceedings the insolvency administrators gather information specifically on the actions taken prior to their appointment, in order to examine what party or stakeholder may have induced or catalyzed the debtor’s distress for their own benefit and / or to the detriment of the estate or other parties. Furthermore, an insolvency plan may not stipulate waivers in regard to the personal liability of directors towards the company for breaching their duties.

South Africa Small Flag South Africa

No. Directors will remain liable for any claims against directors for their actions prior to insolvency or restructuring proceedings.

Brazil Small Flag Brazil

See previous question.

Czech Republic Small Flag Czech Republic

Insolvency proceedings do not have any automatic effect on releasing directors and other stakeholders from their liability for previous actions or decisions.

Cayman Islands Small Flag Cayman Islands

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

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.

Singapore Small Flag Singapore

Neither restructuring nor insolvency proceedings will release directors and other stakeholders from liability for previous actions or decisions.

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.

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 question above regarding “Liabilities of directors and others”.

China Small Flag China

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.

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.

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.

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.

United States Small Flag United States

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.

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.

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.

New Zealand Small Flag New Zealand

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.

Romania Small Flag Romania

Once an insolvency procedure completed, no claim for tort liability may be filed against the bodies who have managed the company before insolvency.

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.

Israel Small Flag Israel

Please see our answer to Section 10 above.

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.

Ireland Small Flag Ireland

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

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.

Mexico Small Flag Mexico

Neither Restructuring nor Insolvency Proceedings release directors, managers or other stakeholders from liability. Please refer to our answer to Question 14 above.

Spain Small Flag Spain

The restructuring or insolvency proceedings do not release directors and other stakeholders from liabilities for previous actions and decisions. Moreover, the SIA regulates that when a directors or stakeholders, before the DIP, have done acts with malice and serious fault that generated or aggravated the insolvency, the procedure could be qualified as tortious (art. 163 SIA). If these subjects are eventually declared affected by the sentence of qualification, they could be condemned to the prohibition to administrate the assets of others for a period of two to fifteen years, as well as to act on behalf to any person during the same period (art. 172.2.2 SIA), the loss of any right recognized in the procedure, to return the assets of the debtor, or may have received from the aggregate assets, as well as compensating the damage and losses caused. Furthermore, directors or boards of directors could be condemned to pay totally o partially the credits that have not been satisfy by the liquidation of the assets 8art. 171.2.3 SIA).

In addition, during the insolvency proceeding, the IA is entitled to apply for initiating a labiality action against directors or boards of directors (art. 48 SIA). The result of this sentence is suitable with consequences of the tortious DIP.

Portugal Small Flag Portugal

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Updated: July 9, 2018