What duties arise for directors toward creditors when a company is insolvent?

• A. Directors must continue to maximize shareholder value even at the expense of creditors.
• B. Directors must avoid worsening insolvency, preserve assets, and consider actions that maximize creditor recovery.
• C. Directors must immediately liquidate all assets regardless of value.
• D. Directors should ignore creditor interests if it harms shareholders.

Answer: (B)

When a company becomes insolvent, directors’ duties shift from maximizing shareholder value to protecting creditors’ interests and minimizing losses to them. The best answer reflects that shift by emphasizing avoiding actions that would worsen insolvency, preserving the company’s assets, and considering steps that could maximize creditor recovery, such as pursuing restructuring, administration, or an orderly wind-down rather than simply burning value in hopes of a quick payoff to shareholders. This approach aligns with the idea that creditors have priority once the company cannot pay its debts, so directors must act to safeguard value for creditors as a whole, rather than pursue moves that harm creditor recoveries. Choices that push for continuing to favor shareholders, force immediate liquidation without regard to value preservation, or ignore creditor interests run counter to these duties and the purpose of insolvency law.