The Role of the Creditors’ Committee

Welcome to the world of bankruptcy. This is a place that no creditor wants to be, yet here you are, having agreed to serve on the Creditors’ Committee (Committee). Of course, creditors want to be paid as much of their claim as possible, and by  serving on the Committee you are entitled to all the information that you need to understand what your options are, and you will have an opportunity to negotiate a plan with the debtor.  At all times you retain your own claim and will cast your vote when a plan is proposed. However, as a member of the Committee, you must decide what  is in the best interests of all the creditors.

What Can a Debtor Do Now that it is in Bankruptcy?

The debtor continues to operate during the Chapter 11 and will eventually file a Disclosure Statement and Plan of Reorganization (Plan)  that creditors will vote on. The Committee should negotiate the terms of the Plan before it is filed so that the Committee is satisfied that the debtor is proposing the best Plan possible. A Plan can  provide for payments to creditors over time, or it can be a liquidating Plan, in which all or parts of the debtor’s business are sold and the proceeds are distributed to the creditors. The Committee may find itself in a battle with the debtor over the terms of the Plan or other matters that arise during the Chapter 11.

During the Chapter 11, the debtor will file monthly operating reports that will assist the Committee in monitoring the debtor’s activities. The Committee can also request more frequent reports if necessary.

What Can a Committee Do?

The Committee has to conduct its own investigation to determine what type of Plan it thinks is in the best interest of creditors. The Committee does not have to wait to review the debtor’s Plan to formulate its own plan of action (but cannot file its own Plan for some period of time). Some questions the Committee should consider:

  • What is in the best interest of the creditors?
  • Should there be a payment plan over time or should some or all of the debtor’s assets be sold?
  • Will the debtor be able to increase sales in a way that might increase the promised payout or is the cost of continuing the business more risk than the Committee wants to support?
  • Are there creative solutions, including exchanging debt for equity that are possible?
  • Is a management change necessary? Was there unusual activity prior to the filing that will necessitate a request for the appointment of a trustee?

It is important for the Committee to closely monitor the debtor’s  activities after the bankruptcy filing to make sure that the debtor makes its post-petition payments  and that creditor claims are not increasing. The Committee can review the monthly operating reports and other more frequent reports as determined are appropriate. The Committee is given broad powers by the Bankruptcy Code to oversee and investigate the business of the debtor, both past and current. The Committee can request copies of  documents necessary for its inquiry, ask to speak to employees and, if necessary, depose individuals. The Committee can use the Court’s discovery process to subpoena records of the debtor or third parties if related to the Committee’s duties.

The frequency of Committee meetings will be governed by the events of the debtor and the Committee’s goals. The Committee will take positions on motions filed by the debtor for relief, such as authority to borrow money or to use the cash collateral of a creditor. The Committee may also file its own plan of reorganization if it opposes the debtor’s plan and negotiations do not resolve the disputes. The Committee can also investigate whether there are avoidance actions that need to be filed (such as preferences or fraudulent conveyances) and request authority to file the actions if it appears that the debtor is not going to prosecute such actions. When the debtor has multiple corporate entities, it is especially important to review the intercompany transfers.

A Committee should adopt a set of bylaws to govern its operations.  Usually the majority of votes by members will determine the Committee’s position. The bylaws will establish rules for resolving disputes. For example, the bylaws may address what should happen when there is an issue with one of the members, such as the Committee objecting to  a Committee member’s claim.

The Committee may retain counsel and a financial advisor. These professionals are paid by the debtor, after approval by the court. However, it is in everyone’s interest to work efficiently to keep all professional fees low so as much money as possible will be available for unsecured creditors.

Committee members have a fiduciary duty to the unsecured creditors to oversee the Chapter 11; however, they do not operate the day-to-day business of the debtor. Committees may make recommendations regarding operations, but they are not legally responsible for the operations. If they believe there is mismanagement, the Committee can request that a trustee be appointed to take over the operations.

Serving on a Committee is an opportunity to monitor the debtor’s activities, and ensure that the creditors’ interests remain protected for the best outcome available in a case. It can be a difficult process, but it will be satisfying to know that you participated in getting the highest payout possible for creditors, and you can make a big difference with effective representation.