Meaning
Fiduciary obligation requiring company directors to consider or act in the interest of the creditors when a company faces the prospect of insolvency. The creditor duty shifts the focus of management from maximizing shareholder value to preserving the asset pool for those with a prior claim. It becomes the primary concern for the board as soon as the company is insolvent or is likely to become insolvent.
Triggering Point
Directors must identify the specific moment when the company ceases to be clearly solvent on either a balance sheet or cash flow basis. Failure to recognize the onset of the creditor duty exposes individual board members to personal liability for losses incurred during continued trading.
Liability Protection
Documenting the rationale for every major transaction helps prove that the board acted reasonably to minimize loss. If the creditor duty is observed through regular professional valuations and legal advice, directors are less likely to face successful claims for wrongful trading.
Conduct Assessment
Courts evaluate the actions of the board against the standard of a reasonably diligent person with the same general knowledge and experience. The creditor duty requires a proactive approach to debt restructuring and a cessation of any activities that dissipate company value without a clear benefit to the lending group.
