The Doctrine of Deepening Insolvency and Its Impact on Lending


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In recent years, bankruptcy trustees, receivers and other plaintiffs in asset recovery actions have aggressively pursued claims against directors and officers, as well as outside professionals of distressed and insolvent entities accountants, auditors, attorneys, lenders and advisors. Until recently, deepening insolvency has proved to be a theory of recovery with some vigor. Deepening insolvency has been described as the fraudulent prolongation of a corporation’s life beyond insolvency, that results in damage to the corporation by increased debt. Recent decisions on deepening insolvency, whether asserted as a separate cause of action or as a theory of damages, indicate that the doctrine is eroding as an independent means of recovery. Nonetheless, secured creditors need to continue to be vigilant in avoiding the risk of a claim for lender liability, including claims that the secured creditor helped conceal the extent of financial difficulties, exerted undue control over the distressed debtor and customers and supported an unrealistic workout.

Date: 2017-11-08 at –

Learning Objectives

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