Officer and Director Duties During Insolvency

As business attorneys in Houston, Texas we are sometimes asked about what duties are owed to creditors of an entity.  During times of solvency, directors and officers owe fiduciary duties to an entity and its owners.  Additionally, during times of solvency, a creditor’s relationship with an entity is a contractual relationship, and a fiduciary relationship does not exist between the officers/directors and the creditors of an entity.

An entity becomes insolvent when it cannot pay its bills as they come due or when its total liabilities exceed its total assets.  When an entity becomes insolvent, the officers and directors owe the entity’s creditors a fiduciary duty because the creditors have essentially become the owners of the entity.  Upon or during insolvency, the officers and directors of an entity have a fiduciary duty to administer the entity’s assets as a trust fund for the creditors.  The officers and directors may not prefer one creditor over another.  Additionally, the officers and directors may not engage in acts of self dealing to the detriment of the entity’s creditors.  Texas recognizes a cause of action by creditors against the officers and directors of an entity for breach of fiduciary duty.