Corporate Bankruptcy: 7 Decisions the Board Makes Before Filing

A corporate bankruptcy is decided in a boardroom weeks before anyone sees a courthouse, and the decisions made there tend to outlast the case. By the time counsel files the petition, the directors have already chosen the chapter, the lender, the exit, and, whether they noticed or not, the people to whom they will later have to explain themselves.

Seven of those decisions belong to the board and cannot be delegated to the lawyers, though the lawyers will draft every one of them.

1. The Board Decides Whether the Corporation Can File at All

In 1945, in Price v. Gurney, the Supreme Court confronted a corporate petition filed without the board's authorization. Its answer was short: "In absence of federal incorporation, that authority finds its source in local law. If the District Court finds that those who purport to act on behalf of the corporation have not been granted authority by local law to institute the proceedings, it has no alternative but to dismiss the petition."

The board resolution authorizing the filing is therefore not a formality. It is the jurisdictional document the petition rests on, and its validity depends on the corporation's charter, its bylaws, any shareholder agreement, and the corporate statute of the state of incorporation. Governing documents that require a supermajority, a lender's consent, or a particular director's vote need to be read before the meeting, not during it.

A resolution that authorizes the filing usually does more than that. It names the officers who may sign the petition and the first-day papers, authorizes the retention of counsel and other professionals, and often authorizes the company to negotiate financing and use cash collateral. A resolution drafted narrowly can leave management returning to the board, in the middle of the first week, for authority it assumed it already had. One drafted too broadly can hand officers powers the directors would not have granted had anyone read the paragraph aloud.

The corporation then appears through licensed counsel. The Supreme Court described that rule in 1993 as "the law for the better part of two centuries," and it applies to every entity that files.

2. Directors Decide Whose Interests the Company Now Serves

As a Delaware corporation approaches insolvency, the directors' duties do not migrate to creditors in any way that lets creditors sue them directly (an idea with obvious appeal to an unpaid lender, and little support in Delaware law). The Delaware Supreme Court held in North American Catholic Educational Programming Foundation v. Gheewalla (2007) that creditors of a corporation that is insolvent, or in the zone of insolvency, have no right to bring direct fiduciary duty claims against its directors. It recognized that creditors of an insolvent corporation may pursue such claims derivatively, on the corporation's behalf.

The practical effect is that once the company is insolvent, the value the board is protecting increasingly belongs to creditors, and a derivative suit is the vehicle by which they can say so. Gheewalla is Delaware law for Delaware corporations. A board of a company organized in Georgia, New York, or anywhere else should ask its counsel what its own state's courts have said.

3. The Board Decides Who Among Its Members Can Be Trusted to Decide

Boards facing a filing often form a special committee of independent directors, and sometimes add a director chosen for restructuring experience, to evaluate transactions in which management or major shareholders have a stake. No provision of the Bankruptcy Code requires it. The reasons are defensive.

A court may appoint a trustee under section 1104(a) for "fraud, dishonesty, incompetence, or gross mismanagement" by current management, and a transaction approved by conflicted insiders is the kind of fact that invites the motion. The same board should read its directors and officers insurance policy before filing rather than after, since whether coverage responds to claims asserted during or after a bankruptcy is a matter of the policy's own terms, and those terms were negotiated in a better year.

The board that files is the board whose earlier decisions the case will examine.

4. The Board Chooses the Chapter, and the Choice Is Mostly About Survival

Chapter 7 liquidates a corporation through a trustee, and a corporation receives no Chapter 7 discharge. Chapter 11 permits reorganization with management in place. For a smaller company, Subchapter V offers a faster Chapter 11 in which only the debtor proposes a plan and the owners can keep their equity without paying dissenting unsecured creditors in full.

Subchapter V is available only to a small business debtor, which currently means qualifying debts of no more than $3,424,000, an amount adjusted April 1, 2025, and it excludes corporations subject to SEC reporting and their affiliates. Congress has been moving legislation to raise that ceiling (the Bankruptcy Threshold Adjustment Act of 2026 cleared the Senate and the House in separate versions), but as of late September 2026 it had not become law, and the board should have counsel confirm the current limit on the day the resolution is signed.

5. The Board Chooses Who Lends to the Company During the Case

A company that cannot operate on its own receipts needs debtor in possession financing, and section 364 arranges the possibilities in ascending order of intrusion: ordinary unsecured credit, court-approved unsecured credit, superpriority or liens on unencumbered assets, and finally a priming lien ahead of existing lenders, permitted only if credit is unavailable otherwise and the existing lienholder is adequately protected.

An existing secured lender may be willing to provide the financing, since new lending can protect its position. The price of that willingness is written into the loan's terms, and any deadlines those terms impose on the case will shape it. A board that signs a DIP term sheet without reading the deadlines has, in a real sense, already chosen its exit.

6. The Board Chooses Between Selling the Business and Proposing a Plan

Section 363(b)(1) permits a sale of estate property outside the ordinary course after notice and a hearing, and section 363(f) permits the sale free and clear of other interests if at least one of five conditions is met, among them the interest holder's consent or a price exceeding the aggregate value of all liens. A plan, by contrast, requires classified claims, a disclosure statement, a vote, and confirmation under section 1129.

A sale can close quickly. A plan distributes value by vote and by the Code's priority rules, and it can leave the company in the hands of its current owners if the numbers allow.

And the board choosing between them is, whether it frames the question this way or not, choosing which group of stakeholders gets the first and best look at the value that remains, a question that the investment bankers answer with a process, the creditors answer with objections, and the court answers, if at all, only after the board has already committed to one road and spent the money to walk it.

7. The Board Decides Whether to Negotiate the Plan Before Filing

Section 1126(b) treats votes cast before the petition as valid if the solicitation complied with applicable nonbankruptcy disclosure law, or, absent such law, followed adequate information as the Code defines it. Section 1125(g) allows solicitation to continue after filing from holders first solicited before it. A prepackaged plan compresses the case by doing the negotiation in advance.

It requires creditors willing to negotiate first. Whether a prepackaged plan survives a major creditor's lawsuit is a question worth asking before the suit is filed.

For Closely Held Companies With a Smaller Board

A corporation with outside directors, a DIP lender, and a sale process needs bankruptcy counsel and financial advisers; a settlement company has no role in that room. Many corporations, though, have one director who is also the only shareholder and the guarantor of a merchant cash advance. For that company, Delancey Street offers a confidential review, without charge, of whether the advances and related business debts can be restructured by agreement before a board resolution is ever drafted. Delancey Street is not a law firm; it neither files petitions nor advises on fiduciary duties, and it involves independently licensed counsel where legal judgment is required. The resolution is a serious document. So is the decision not to need one.