“Deepening Insolvency” – Liability for Wrongful Trading in the United States?

Research output: Contribution to journalArticlepeer-review


When a company approaches insolvency, management and shareholders have an ever increasing incentive to siphon away the company's assets and to gamble with creditors' money by engaging in excessively risky projects. To curtail these incentives, all legal systems have developed strategies to induce insolvent firms to file for formal insolvency proceedings in a timely fashion. US bankruptcy law traditionally uses affirmative incentives by being particularly debtor friendly. Filing for bankruptcy is largely perceived as "filing for bankruptcy protection". By contrast, European legal systems use the "stick" rather than the "carrot" by either imposing on management an explicit duty to file for bankruptcy as soon as the company is deemed to be insolvent pursuant to some test of solvency or by holding directors liable for failure to take timely action when the company approaches insolvency. A recommendation by the High Level Group of Company Law Experts has even put the issue on the medium term agenda for the European legislator. However, the tide seems to be turning in the US with federal courts establishing the doctrine of "deepening insolvency". "Deepening insolvency" holds a defendant liable for conduct which, in attempting to sustain an insolvent company's life, causes the company to incur additional debt, thereby arguably creating an indirect absolute duty to file for bankruptcy. If it can be accommodated within the framework of US corporate and bankruptcy law doctrine, this development would be a significant move towards a more European style strategy similar to the liability for wrongful trading.
Original languageEnglish
Pages (from-to)298-303
JournalThe Company Lawyer
Publication statusPublished - 12 Feb 2009


  • Deepening insolvency
  • Wrongful trading
  • Corporate insolvency


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