World Turned Upside Down
In the "insolvency zone," creditors exert a strong pull that often throws CFOs off balance
May 2009, CFO Magazine

Before declaring bankruptcy, companies often enter into a grey area -- known as the zone of insolvency -- which carries significant legal implications for a company and its directors and officers. However, there are several steps companies can take to protect themselves and limit financial loses when entering into this zone.

Adhering to a deliberate and meticulously documented decision-making process puts management on stronger footing. The documentation should include board minutes, as well as a record of what information and analysis were examined to arrive at a decision, says Sam Alberts of White & Case. The documentation advice goes double for any transaction that affects an insider — bonuses, dividends, loans, asset sales. "Plaintiffs see that as fair game," says Alberts.

Many companies indemnify directors and officers in charters and bylaws, which can limit their liability for breaches of the duty of care. "Indemnification basically protects them from the assertion that they acted negligently," says attorney Sam Alberts of White & Case.