A nonprofit corporation’s directors and officers should be mindful of their fiduciary duties while navigating financial hardships and potential insolvency. If a nonprofit corporation is approaching insolvency, becomes insolvent, or elects to file for bankruptcy, particular scrutiny will be given to the officers’ and directors’ actions. Involving legal counsel and financial advisors in the decision-making process and relying on their advice can further protect individual board members from personal liability. Nonprofit board members and officers should consider the following while assessing corporate action as the non-profit corporation navigates potential or actual insolvency:

  1. Whether the action serves the goal of maximizing the corporation’s stated purpose and mission;
  2. Whether the action is predicated upon a fair assessment the debtor’s financial condition;
  3. Whether the action favors certain creditors or constituencies over others in the absence of business considerations or contractual rights that dictate otherwise;
  4. Whether the action is based on a well-informed decision; and
  5. Whether the action benefits the officers and directors of the nonprofit corporation at the expense of the corporation’s mission or other constituencies.

By engaging in such due diligence, the nonprofit board should be better positioned to demonstrate the requisite good faith exercise of its duties, as a defense to any challenge.