A United States Bankruptcy Court has just decided a case indicating the possibility of individual director and officer liability where a bankrupt company had failed to provide advance notice of an intention to reduce staff. The case arose under the so-called WARN Act, a Federal statute applicable to businesses with one hundred or more employees, and under similar state law. These laws require that employees receive prior notice (federally, sixty days) of plant closings or mass layoffs.  Failure to comply results in liability for back pay, interest, penalties and attorney’s fees.

The theory of the case is that officers and directors, in failing to give statutory notice, incur liabilities on behalf of the company itself. Creating such a liability constitutes breach of fiduciary duty to the company, which a bankruptcy trustee can pursue against the officers and directors.  As a planning matter, a company with tight cash flow, particularly forecasting that cash will run out, should count back from that date of expected insolvency to calculate when the requisite statutory notice of layoffs must be given.

Theoretically, even absent a bankruptcy, minority shareholders might ultimately be allowed to assert a derivative claim, against officers and directors who have failed to give appropriate notice and thus incurred unnecessary company liability.  Note: as of today, I am aware of no case so holding.