New TN law poses ‘potential financial disaster’ for corporate directors??

Corporate directors and officeholders have been protected from personal liability for bad financial decisions by the corporation, says a Nashville Business Journal blog, but that’s no longer the case under a new state law.

This safety net is gone. Signed into law by Gov. Bill Haslam in late March, Tennessee’s Public Chapter No. 60 now makes the directors of a corporation personally liable for the debts of a business in the event it fails.

(Note: The law was passed as SB144/Hb620, sponsored by Sen. Jack Johnson, R-Franklin, and Rep. Andrew Farmer, R-Sevierville, approved unanimously by both the House and Senate. The bill summary page from the legislative website is HERE.))

On the surface, Public Chapter No. 60 is hardly controversial. The law simply states that each director of a corporation possesses a duty “to cause” the corporation “to discharge or make reasonable provision for the payment of claims to creditors.” The practical effect of this law is potential financial disaster.

In Tennessee, every corporation must have a board of directors of at least one person. In small businesses, the directors are typically the shareholders or their spouses. In public companies, the board members are often prominent business people with financial acumen and experience. With Public Chapter No. 60 in place, these individuals can now be held personally liable for the debts of the corporation – debts that they may not even know exist.

For example: A corporation is struggling financially, and to keep the business alive, payments to creditors are juggled. Creditors who are vital to the business are paid, but other creditors who are not important to the survival of the business are paid sporadically or not at all. When it is clear that the business cannot survive, the corporation files bankruptcy.

As a result of Public Chapter No. 60, the creditors can now sue the directors personally because the directors did not “cause” the corporation “to discharge or make reasonable provision for the payment of the claims of its creditors.”

And this is just one scenario. Public Chapter No. 60 has implications for corporations, big and small.

Note II: In committee, Johnson described the measure as “a lengthy bill that makes a lot of changes” to state law on corporations, drafted by the Tennessee Bar Association with the goal of “modernization” of statutes governing corporations.