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

Restructuring & Insolvency (3rd edition)

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.

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 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.

Cayman Islands Small Flag Cayman Islands

Any liabilities for previous actions and decisions are unaffected by the commencement of the liquidation and will continue until the date of dissolution of the company. The liquidator of the company can bring claims against the former directors in the liquidation. However, the liabilities of directors and other stakeholders may be released as part of a restructuring implemented by a scheme of arrangement (see question 8).

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.

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”.

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.

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.

Bermuda Small Flag Bermuda

No. See answers to question 14 above.

Guernsey Small Flag Guernsey

See above.

Ireland Small Flag Ireland

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

Jersey Small Flag Jersey

  1. No

Mexico Small Flag Mexico

Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions. However, nothing prevents parties to the restructuring plan from inserting personal releases or other forms of indemnities.

Peru Small Flag Peru

Pursuant to the Companies Act, directors and other stakeholders are not released from liability for previous actions and decisions by restructuring or insolvency proceedings, but they are rather liable in the cases established by the provisions thereof mentioned in question 14 above. Now, once the insolvency proceeding has been started, the Creditors’ Meeting will jointly decide on the debtor’s administration regime during the restructuring of its assets. For that purpose, it may decide to continue with the same administration regime, or shift to a new one, or to a mix (see question 8). On the other hand, in dissolution and liquidation proceedings, the functions of its legal representative and all managerial functions shall cease and be taken over by the Liquidator.

Finally, in a bankruptcy proceeding, the bankrupt, for as long as it remains as such, may not (a) incorporate companies or, in general, any legal entities, or be part of one already incorporated; (b) serve as director, manager, attorney-in-fact, or representative of companies or, in general, legal entities; (c) be the tutor, curator, or legal representative of natural persons; (d) be administrator or liquidator of debtors in proceedings regulated by law. The condition of bankrupt will have an effective term of five years starting on the date on which a court declared bankruptcy, except for unpaid claims derived from court-ordered damages in favor of the State. The bankrupt status for the above-mentioned representatives starts on the date on which the legal entity he or she represents is declared bankrupt.

Poland Small Flag Poland

Under the Polish Law, there is no direct rule regarding release of liability for previous actions performed and decisions made by directors or stakeholders. Filing the bankruptcy petition, opening of restructuring proceedings or approving the arrangement within arrangement approval proceedings – made within 30 days after the grounds for declaring bankruptcy arise, releases members of the board (or other persons obliged to take action in accordance with the law) from liability for insolvent debtor’s obligations.

Singapore Small Flag Singapore

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

Sweden Small Flag Sweden

No, generally speaking, there is no such automatic release for directors or other stakeholders when a company enters insolvency or restructuring proceedings.

However, it should be noted that such personal directors’ liability as described above in Question 14, relating to unpaid taxes or new debt accruing during capital inadequacy and non-compliance by the directors to take prescribed measures, may effectively be avoided if the debtor (i.e. its directors) either files for bankruptcy (insolvency proceedings) or files for company reorganization and presents a solution to its debt situation (often by way of a public composition), no later than on the day of the taxes becoming due or other debt being incurred.

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.

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.

United States Small Flag United States

Although the Code does not contain explicit language specifically releasing directors and other stakeholders, prepetition claims held by a debtor against these persons, such as a derivative claim, are property of the debtor’s estate and may be released by the debtor under a reorganization plan if a court finds that doing so represents a valid exercise of the debtor’s business judgment, is fair, reasonable, and in the best interests of the debtor’s estate.

A debtor’s reorganization plan also may contain non-debtor, third-party releases (i.e., the release of claims or causes of action related to the debtor that are held by a non-debtor against another non-debtor) including claims against directors and other stakeholders. Although the approval by a court of consensual third-party releases, such as when a creditor votes in favor of confirming a reorganization plan containing third-party releases and does not otherwise object to their approval, is generally noncontroversial, courts remain divided over whether the Code authorizes non-consensual, third-party releases.

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. within a restructuring agreement).

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.

Belgium Small Flag Belgium

Restructuring and insolvency proceedings do not release directors and other stakeholders from liability for previous actions and decisions. Both the bankruptcy trustee as well creditors and tax authorities can initiate liability proceedings.

Israel Small Flag Israel

Current Israeli legislation does not release officers or directors from liability for any previous actions or decisions.

The new Insolvency Law even expands the liability imposed on directors and officers with regard to management of a distress company and increases their exposure, as mentioned in section 14 above.

As set forth in section 10 above, creditor restructuring agreement will sometimes include a provision regarding the release of the officers and shareholders from liability, subject to making a contribution to the creditor restructuring fund.

Romania Small Flag Romania

According to Law 85/2014, the judicial administrator, the creditors committee or in their absence, the creditor whose claim represents more than 30% of the total amount of the receivable against a Romanian company in insolvency, can file a claim of personal liability against the manager or members of the board of directors/managing bord, if they consider them responsible for the company’s situation.

Regarding the insolvency provision, the persons who can be responsible for bringing the company into insolvency are:

  • directors of the debtor that act individually or as members of board of directors;
  • managers and managing directors of the debt having the powers of management and disposal of the company’s assets;
  • members of the supervision committee – auditors, accountants, censors;
  • any other persons who contributed to the insolvency – associates, accountants, other persons who supervise the company’s activity.

Under art. 169 of Law no. 85/2014, at the request of the judicial administrator or the liquidator, the syndic judge may order that all or part of the debt of the legal person who has become insolvent, without exceeding the damage linked to that action, shall be borne by the members of the management and /or supervisory bodies within the company, as well as any other person who has contributed to the debtor's insolvency, by acting as described expressly by Law 85/2014.

However, in the case of plurality of persons causing the company’s insolvency, the liability of the mentioned persons is joint under the condition that the commencement of the insolvency is contemporary or prior to the period of time when they exerted their mandate or when they held the position in which they contributed to the state of insolvency.

Updated: June 5, 2019