CTP CTP Corporate Governance & Legal Compliance in Distress 1 — Questions and Answers
Question 1: What happens to a board of directors' fiduciary duties when a company enters the 'zone of insolvency'?
- Duties are eliminated entirely
- Duties expand to include creditors as well as shareholders (Correct answer)
- Duties shift exclusively to shareholders only
- Duties transfer to the court-appointed trustee
Correct answer: Duties expand to include creditors as well as shareholders
In the zone of insolvency, directors' fiduciary duties expand to include creditors, as creditors become the primary economic stakeholders of the distressed company.
Question 2: A Chief Restructuring Officer (CRO) is typically appointed to:
- Permanently replace the CEO after restructuring
- Provide independent restructuring expertise and credibility with creditors (Correct answer)
- Represent creditor committee interests on the board
- Manage day-to-day accounting and finance functions
Correct answer: Provide independent restructuring expertise and credibility with creditors
A CRO is brought in to lead the restructuring process, bringing specialized expertise and independence that builds creditor confidence in the turnaround effort.
Question 3: Under the Business Judgment Rule, directors are protected from personal liability when they:
- Maximize shareholder value at all costs
- Make informed, good-faith decisions in the company's best interest (Correct answer)
- Follow creditor instructions during insolvency proceedings
- Defer all major decisions to outside legal counsel
Correct answer: Make informed, good-faith decisions in the company's best interest
The Business Judgment Rule protects directors from personal liability when they act in good faith, on an informed basis, and in what they reasonably believe is the company's best interest.
Question 4: What is a 'special committee' of the board in a distressed restructuring or M&A context?
- A committee that manages day-to-day operations during crisis
- An independent group of directors formed to evaluate transactions with potential conflicts of interest (Correct answer)
- A creditors' committee appointed by the bankruptcy court
- A committee that handles employee relations and retention plans
Correct answer: An independent group of directors formed to evaluate transactions with potential conflicts of interest
A special committee of independent directors evaluates conflict-ridden transactions, ensuring objectivity and providing legal protection for the board.
Question 5: The 'deepening insolvency' doctrine holds that:
- Deeper cost cuts lead to faster turnaround recovery
- Directors can be liable for prolonging a corporation's insolvent existence and increasing creditor losses (Correct answer)
- Secured creditors have deeper claims than unsecured creditors in liquidation
- Deeper restructuring always creates more value than immediate liquidation
Correct answer: Directors can be liable for prolonging a corporation's insolvent existence and increasing creditor losses
The deepening insolvency doctrine (where recognized) imposes liability on directors and professionals who artificially extended a company's corporate life while increasing losses to creditors.
Question 6: Which U.S. government body oversees the appointment of trustees and examiners in bankruptcy cases?
- The Securities and Exchange Commission (SEC)
- The U.S. Trustee Program (Department of Justice) (Correct answer)
- The Federal Reserve Board
- FINRA
Correct answer: The U.S. Trustee Program (Department of Justice)
The U.S. Trustee Program, a component of the Department of Justice, oversees the administration of bankruptcy cases and appoints trustees and examiners.
CTP CTP Corporate Governance & Legal Compliance in Distress 1
What happens to a board of directors' fiduciary duties when a company enters the 'zone of insolvency'?