Community of Interest when Bordering Insolvency

Under company law in the United States and a large number of other legal systems, the board of directors of a company’s only fiduciary obligation is, under normal circumstances, to represent and protect the interest of the company’s shareholders; this normally restricts their fiduciary liability for their decisions. However, cases, particularly in the United States, have held that when a company is bordering on insolvency, creditors gain an equitable interest in the business and directors acquire an obligation to also protect creditors’ interests. In such a situation, directors can be held to have violated this duty if they, for example, allow the company to transfer significant amounts of capital to shareholders in such a way as to ensure that little remains to pay its creditors. See Trading While Insolvent