Director FAQ: Governance of Distressed Companies

In brief: COVID-19 has caused financial distress for many companies, creating a need for greater board engagement in financial oversight. If a company enters a “zone of insolvency,” directors still have fiduciary duties to shareholders. However, they should not neglect creditors, who are not only valued stakeholders but also potential litigants post-insolvency. The work of a board when their company is in financial distress begins at the earliest signs of distress and continues through the resolution of the issue. Directors should strive to detect the signs of financial distress early on, and then to respond to financial distress and insolvency by promptly assessing the gravity of the situation, ensuring proper reporting, and carefully considering a range of options for recovery. Committees—including audit, finance, and special committees—can help boards accomplish their goals.  

This resource can help your board and key committees to take the following actions: 

  • Fulfill fiduciary duties while the company is in the “zone of insolvency”
  • Identify the signs of financial distress 
  • Ensure proper financial disclosures 
  • Weigh strategic options for recovery   
  • Engage board committees 

Most relevant audiences: board leaders; members of the audit, finance, or special committees; CEO; chief financial officer; and general counsel