Author: Andrew M. Thaler
Creditors owed money by a company that files chapter 11 bankruptcy might receive a questionnaire asking if they are willing to serve on a Creditors’ Committee and wonder what that means.
A Creditors Committee is a group of creditors selected in chapter 11 reorganization cases to oversee the operations of the Debtor. The Committee serves as a “watchdog” over the debtor’s financial affairs. The Office of the United States Trustee (“UST”), a division of the Department of Justice, sends letters to selected unsecured creditors shortly after the filing of the case to see if they are interested in serving on the Committee. Claims held by fully secured creditors and “insiders” are not eligible to serve on the Committee.
A Creditors Committee is a group of creditors selected in chapter 11 reorganization cases to oversee the operations of the Debtor. The Committee serves as a “watchdog” over the debtor’s financial affairs. The Office of the United States Trustee (“UST”), a division of the Department of Justice, sends letters to selected unsecured creditors shortly after the filing of the case to see if they are interested in serving on the Committee. Claims held by fully secured creditors and “insiders” are not eligible to serve on the Committee.
The UST usually will generally select creditors that have larger claims because they presumably will have greater interest in the outcome of the case. The UST will also seek to have a creditors with diverse claims serve. For example, a Committee might be comprised of creditors that provided a physical product such as inventory, another for raw materials, a service provider, a bank with an unsecured loan, an equipment lessor etc. The Committee will usually consist of 7 members. An odd number is chosen to avoid voting deadlock. Committee members will be asked to hold an organizational meeting at which time they can select a chairman, secretary etc. and counsel to represent the Committee. The Committee can also retain their own accountant. All professionals are paid for by the debtor. Sometimes the Committee might rely on the debtor’s accountant if there is confidence that their work is not tainted by its relationship with the debtor. Committee members are not compensated for their time.
In small cases the UST often has difficulty in finding enough creditors interested in serving on the Committee. Depending on the size of the case, the debtor may or may not be in a position to afford to pay professionals. In such instances it may be difficult to find attorneys and accountants willing to be retained by the Committee.
Where a Committee is formed and functioning, it will have a say in regards to major actions the debtor proposes to take such as selling property out of the ordinary course of business. The Committee will be involved in negotiations with the debtor with regards to a plan of reorganization and is often asked to recommend acceptance of debtor’s plan to other creditors not on the Committee through a Disclosure Statement process which the court oversees. Most debtors will want to work cooperatively with the Committee to obtain its blessing to a proposed plan and other significant actions the debtor might seek bankruptcy court approval.
From the creditors’ perspective, the time commitment often times is not onerous where Committee counsel has been retained to represent the Committee. Counsel will guide the Committee through the process and explain the law to its members. Serving is somewhat akin to being on a Board of Directors. Individual creditors can, if they want, also have their own independent counsel to represent their interest and can give that attorney proxy to attend meetings and otherwise act for that creditor.
Creditors should seek competent counsel familiar with bankruptcy law to represent the Committee.
In small cases the UST often has difficulty in finding enough creditors interested in serving on the Committee. Depending on the size of the case, the debtor may or may not be in a position to afford to pay professionals. In such instances it may be difficult to find attorneys and accountants willing to be retained by the Committee.
Where a Committee is formed and functioning, it will have a say in regards to major actions the debtor proposes to take such as selling property out of the ordinary course of business. The Committee will be involved in negotiations with the debtor with regards to a plan of reorganization and is often asked to recommend acceptance of debtor’s plan to other creditors not on the Committee through a Disclosure Statement process which the court oversees. Most debtors will want to work cooperatively with the Committee to obtain its blessing to a proposed plan and other significant actions the debtor might seek bankruptcy court approval.
From the creditors’ perspective, the time commitment often times is not onerous where Committee counsel has been retained to represent the Committee. Counsel will guide the Committee through the process and explain the law to its members. Serving is somewhat akin to being on a Board of Directors. Individual creditors can, if they want, also have their own independent counsel to represent their interest and can give that attorney proxy to attend meetings and otherwise act for that creditor.
Creditors should seek competent counsel familiar with bankruptcy law to represent the Committee.
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