The Role of the Creditors' Committee in Bankruptcy

The Creditors' Committees help ensure that unsecured creditors receive representation in bankruptcy proceedings.  A Creditors' Committee is appointed by the U.S. trustee from unsecured creditors who hold the largest unsecured claims against the debtor.  The role of this Committee is to represent all unsecured creditors in a bankruptcy reorganization case.  The U.S. trustee appoints a Committee in all but small business cases, assuming there are creditors willing to serve. In addition to committees representing general unsecured creditors, in larger cases there may be Committees representing other groups of claimants including:  Retirees, Bondholders, and Secured creditors.

Selection of Members

The Unsecured Creditors' Committee represents the interests of unsecured creditors before the Bankruptcy court and in negotiations with the debtor and other parties. The U.S. Trustee usually selects a committee of approximately seven creditors from among the twenty largest unsecured pre-petition claimants. The Committee members act in a fiduciary capacity and are expected to act in the best interest of all unsecured creditors and not simply the creditor companies that they represent.  Members cannot take advantage of their position on the Committee to gain any advantage over other pre-petition trade creditors.

The Committee is authorized under the U.S. Bankruptcy Code to retain counsel, accountants, appraisers, and other professionals as necessary. The cost of hiring these professionals is paid by the bankrupt debtor's estate, not by the Committee members. 

Initial Creditors' Meeting

The debtor is required to appear at an initial meeting of creditors as scheduled by the U.S. Trustee and testify under oath concerning the debtor's business operations, its assets, and its liabilities.

Selected Creditors' Committee

During of soon after the 341 meeting, the U.S. Trustee may select a Creditors' Committee of between three to eleven members depending on the size and complexity of the bankruptcy. The Committee members or their attorney may consult with the trustee relating to the administration of the debtor's estate.  The Committee may also make recommendations to the trustee, and/or submit to the bankruptcy court any question affecting administration of the estate.   One of the Creditors' Committee's most important tasks involves reviewing and then recommending to other creditors whether they should vote for or against confirmation of the Plan of Reorganization submitted to the bankruptcy court.

Focus of the Creditors' Committee

The initial focus of the Committee should be to determine if it should recommend the immediate liquidation of the debtor company.  The Committee has the right and the duty to request the debtor be liquidated if it can demonstrate that the recovery to creditors would be larger if the debtor company were liquidated than it would be if the debtor were allowed to continue in business and eventually attempt to formulate and present a Plan of Reorganization for a vote by pre petition creditors.

The Committee consults with the debtor in possession on the administration of the case.  The Committee may investigate the debtor's conduct and operation of the business; and can participate in formulating a Plan of Reorganization.  Arguably, its most important task is to assist, to advise, to comment or to participate in the formation of a Plan of Reorganization.

The Committee and its professionals may attempt to negotiate with the debtor and other classes of creditors to create a fair and equitable Plan. Usually, the Creditors' Committee will endorse the debtor's Plan or Reorganization - meaning that the Committee will recommend that other pre petition creditors vote to ratify the Plan. A Plan will specify how the debtor intends to pay the creditors, as well as which assets will be kept, or sold, and which contracts, leases and debts will be satisfied, canceled or modified.

Sometimes, a Committee will recommend that creditors vote to reject the Plan based on their own concerns or based on the advice of their professional advisors if they believe the Plan as proposed by the debtor is inadequate or inequitable. Occasionally, the Committee may even present its own Plan of Reorganization to the Court [except that during the first 120 day period, during which the debtor in possession has the exclusive right to propose a Chapter 11 Plan of Reorganization].

The Committee's recommendation for or against the debtor's Plan is contained in the solicitation of votes sent by the debtor to its pre-petition creditors. Before a Chapter 11 Plan may be approved, the debtor in possession must send its creditors a Court approved disclosure statement and obtain acceptance When a drawee acknowledges in writing on the face of the draft that the buyer will pay the draft at maturity. of the Plan by its pre petition creditors. A class of creditors "accepts" the Plan, if two-thirds in amount, and more than one-half in number vote to accept the payments they will receive under the proposed Plan. If these voting requirements are not met the class has "rejected" the Plan. The Court can confirm a Plan only after creditors have voted on it.

Serving on a Creditors' Committee

There are advantages and disadvantages or Pro's and Con's of agreeing to serve on a creditor's committee including these:

Pro

• You have the ability to impact the direction and the outcome of the bankruptcy filing;

• You have access to information about how the debtor got into trouble;

• You have a good idea about whether it is safe to sell the debtor on open account terms 'post petition';

• If your post petition invoices are 'overlooked' and become past due a call by you to senior management usually results in the oversight being corrected quickly

Con

• Committee membership involves a significant time commitment over an extended period of time [In my case, the record was a seven year commitment];

• It sometimes requires out of town or out of state travel;

• Your duty is to act in the best interest of all unsecured creditors.  Theoretically, this means that you might have to recommend action such as pursuing preferences that would be detrimental to your employer;

• Your employer receives the same rate of return whether you participate as a member of the official committee or not;

• You receive no compensation for your work but usually you are reimbursed for travel expenses;

• Any time spent serving on the Committee is time away from your current responsibilities;

• Your employer may not view your participation as beneficial to it;

One final comment:  Creditors' Committee meetings will be more productive if:

• It remains focused on maximizing recovery to the unsecured creditors;
• If it focuses on getting the Plan or Reorganization prepared, presented, and confirmed asquicklyas possible;  This will result in payments to pre-petition creditors being received sooner rather than later;
• If a chairperson is appointed from among the committee members to keepdiscussionsfocusedandon track;
• If the attorney for the creditor's committee is present at the meetings to offer advice and insights;
• If the committee is unhappy with the performance ofanyofthe professional(s) hired to advise them, theyseprofessionals should be terminatedquicklyand a suitable replacement hired.

Used with the permission of Credit Research Foundation.

Edited by Michael C. Dennis.