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In distressed-company situations, creditors often focus exclusively on remaining assets. Equally important, however, is determining whether management's conduct contributed to losses.

Eight Red Flags That May Warrant Closer Examination

1. Delaying Bankruptcy While Losses Mount: Management may continue operating despite overwhelming insolvency, worsening creditor losses and deepening the company's financial problems.
2. Misleading Financial Information: Financial statements that misrepresent the company's condition can expose directors and officers to significant liability.
3. Illegal Business Activities: Participation in unlawful operations can create substantial exposure for management and potentially increase available remedies for creditors.
4. Repaying Insider Loans: Payments to insiders during financial distress often receive heightened scrutiny.
5. Paying Debt Guaranteed by Management: Directors or officers may improperly prioritize obligations that reduce their own personal exposure.
6. Transfers to Related Parties: Transactions involving affiliated entities can raise concerns regarding fairness and corporate purpose.
7. Personal Benefit Transactions: Management must avoid using corporate assets for personal gain.
8. Self-Dealing Arrangements: Transactions that benefit insiders at the expense of creditors frequently become targets of litigation.

Final Takeaway

The existence of one red flag does not automatically establish wrongdoing. However, patterns of conduct can reveal issues that warrant investigation by bankruptcy professionals and counsel experienced in fiduciary duty litigation.

Read the previous blog post in this series: Can Creditors Recover from Directors and Officers After Bankruptcy?

Next in the series: The Creditor’s Roadmap – Responding to a Distressed Business Partner.

Read the comprehensive article: “Potential Avenues of Recovery Against an Economically Distressed Business” by Andrew W. Owen, Partner.

Andy Owen is an experienced business litigator who represents clients in the commercial mortgage-backed securities industry and both large and small corporate entities in a wide variety of complex business-related disputes. Andy focuses his commercial mortgage-backed securities litigation practice on the default administration on behalf of corporate trustees and master and special servicers of commercial mortgage-backed securitized trusts. He has significant experience in all aspects of workouts, foreclosures, deeds-in-lieu, bankruptcy proceedings, and receiverships involving multimillion-dollar commercial properties such as hotels, office buildings, shopping centers, and apartments. You can contact Andy via email at aowen@calfee.com or by phone at 614.621.7751.

Calfee, Halter & Griswold LLP is a full-service corporate law firm with 170 attorneys and professionals in Cleveland, Columbus, Cincinnati, and Indianapolis. Calfee serves clients in the Midwest, nationally and globally in the areas of Corporate and Finance, Employee Benefits and Executive Compensation, Energy and Utilities, Estate and Succession Planning and Administration, Government Relations and Legislation, Intellectual Property, Labor and Employment, Litigation, and Real Estate Law. Calfee has been recognized as a leading law firm by Chambers USA 2026 in Antitrust, Banking & Finance, Construction, Corporate/M&A, Employee Benefits & Executive Compensation, Energy & Natural Resources, Environment, Government Relations, Insurance, Intellectual Property, Labor & Employment, Litigation: General Commercial, Litigation: White-Collar Crime & Government Investigations, Public Finance, and Real Estate, and by Chambers HNW 2026 in Private Wealth Law. A founding member of Lex Mundi, Calfee offers international representation through a network of independent law firms with access to 22,000 attorneys located in more than 125 countries. Additional information is available at Calfee.com.