When a borrower has deleveraged its balance sheet, distressed investors that received both new loans and enough shares to designate a director of, or otherwise exercise control over, the borrower can find themselves in the uncomfortable role of fiduciary to the borrower’s other creditors if the borrower subsequently becomes insolvent. A recent bankruptcy court decision suggests that such insider lenders’ fiduciary duties may actually require them to preserve litigation rights against themselves simply to avoid having the right to repayment of their loans equitably subordinated.
Proactively to the point.