Does Canadian Law Adequately Protect Creditors of Financially Distressed Corporations?

Abstract

There is no direct duty owed by directors who are the human agents of corporations to creditors as this duty is owed to the corporation alone. The courts have recognized that a duty of care may be owed to creditors. However, the scope of this duty of care is limited due to the broad interpretation the Canadian courts have accorded the business judgment rule. This makes it difficult or almost impossible for creditors to challenge the acts of directors so long as the directors claim to have acted reasonably and in the best interest of the corporation. This paper argues that although the courts have attempted to establish a broad and flexible principle to accommodate creditors, the principles are either too vague or insufficient to adequately protect creditors of financially distressed corporations.