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Delaware Chancery Court Takes Fresh Look At Zone of Insolvency

By Luis Salazar

Over a decade ago, a Delaware Chancery Court's footnote in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications, 1991 WL 277613 (Del. Ch. 1991), established the “zone of insolvency” as something to be feared by directors and officers and served as a catalyst for countless creditor lawsuits. Claims by creditors committee and trustees against directors and officers for breach of fiduciary duties owed to creditors have since become commonplace.

But in a decision that may have equally great repercussion both in the Boardroom and in bankruptcy cases, the Delaware Chancery Court has revisited zone-of-insolvency case law and limited this ever-expanding legal theory. In Production Resources Group, L.L.C. v. NCT Group, Inc., 2004 WL 2647593 (Del. Ch. 2004), that court has held that the zone-of-insolvency theory does not provide direct claims against directors and officers and was instead intended to protect directors and officers. Further, directors and officers may be wholly protected from these due care and mismanagement claims by virtue of charter exculpation provisions duly adopted pursuant to Delaware Code's Section 102(b)(7).

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