Duty to Creditors

The obligation, recognised in many jurisdictions, for directors of a company approaching insolvency to give significant weight to creditors' interests.

Example

Directors stop taking on supplier commitments the company cannot pay once insolvency appears unavoidable.

Important

The point at which it applies and its consequences differ by jurisdiction, and breaches can create personal liability in some countries.

Related terms

• Fiduciary Duty — A legal obligation to act in the interests of another party - for a company director, generally the company and its shareholders as a whole.
• Cash Runway — The number of months a company can operate before running out of cash, calculated as cash divided by monthly net burn.

Lessons that explain it

• A board seat can carry personal legal risk, especially when a company approaches insolvency — Directors can face personal liability for certain failures, and the risks often rise when a company is close to running out of money. Directors' and officers' insurance and indemnities reduce but do not remove that exposure. (11 min)

All 578 terms in the Investing glossary