A misunderstanding over recent amendments to Tennessee’s Business Corporation Act[1] has led drafters of Public Chapter No. 60 to issue a statement emphasizing that corporate directors are not personally liable for a company’s debt.

At issue is the 2015 amendment to Tennessee Code Annotated, Title 48, Chapter 24, Part 1, which adds the following section:

(a) Directors shall cause a dissolved corporation to discharge or make reasonable provision for the payment of claims and make distributions of assets to shareholders after payment or provision for claims.

(b) Directors of a dissolved corporation that has disposed of claims under § 48-24-106 or § 48-24-107 [two provisions related to notice and expiration of claims] shall not be liable for breach of subsection (a) with respect to claims against the dissolved corporation that are barred or satisfied under § 48-24-106 or 48-24-107.

In a recent article, a local attorney suggested that the new amendment eliminated the “safety net” provided by the corporate structure which protected shareholders, directors, and officers from personal liability. As a result, the author states, “creditors can now sue the directors personally because the directors did not ‘cause’ the corporation ‘to discharge or make reasonable provision for the payment of the claims of its creditors.’”

In response, the drafters of the 2015 amendment emphasized that the new law, by its own terms, applies only to corporations engaged in the dissolution process. (Tenn. Code Ann. § 48-24-101 et seq. deals specifically with a corporation’s voluntary dissolution.) The drafters stated,

Unaffected by the 2015 amendment, directors of active Tennessee corporations, just like directors of companies incorporated in other states, will continue to have the benefit of the fundamental shield from personal liability for corporate debts that is established by other Tennessee corporate code provisions and settled case law as they make financial decisions outside of an official dissolution.

According to the drafters, the 2015 amendment merely codifies the previously implied duty for directors of a dissolved corporation, and “creates a safe harbor protection against liability for corporate directors, so long as the directors follow the statutory dissolution procedures.”

Addressing the alarm caused by this misunderstanding of the 2015 amendment, the drafters stated, “Tennessee is a great place to do business.” 

[1] Tenn. Code Ann. § 48-11-101 et seq.