Philip Anker Speaks On Independent Directors

In my view, independent directors can play a necessary role in Chapter 11 cases of corporate debtors. U.S. bankruptcy law does not require that a trustee be appointed whenever a corporation files for reorganization. Instead, the debtor typically remains “in possession” – i.e., officers continue to run the company and directors continue to oversee management (subject to bankruptcy court approval for transactions outside the ordinary course of business). Given that reality, which often promotes the maximizing of enterprise value, independent directors may be needed after a company files for bankruptcy, just as they were before the company filed.

That said, legitimate questions have arisen in several Chapter 11 cases whether so-called “independent” directors were really independent, or had been appointed, often shortly before (or after) the bankruptcy filing, to create a veneer that someone supposedly (but not really) independent would be investigating potential claims against insiders. And even where the newly-appointed directors were truly independent of the insiders, they may have been appointed at the urging of a particular class or group of creditors, raising questions whether they were looking out for the best interests of the estate as a whole or were, instead, beholden to the creditors (or their counsel) that got them appointed.

I am not sure there is a structural fix to the Bankruptcy Code that will work in every case. Instead, when parties in interest in a particular case question the independence of directors, I think the bankruptcy court should (and typically does) examine the facts and circumstances with care. Indeed, I believe that the court should do so even where it is satisfied that the directors are independent, if holders of the fulcrum security in the debtor’s capital structure question the course of action the independent directors favor.