The public policy involved – “free” lawyers for unsecured trade vendor creditors.
Most parties involved in a Chapter 11 Bankruptcy are represented by counsel. The debtor will have counsel (or the case would not have been filed). Of course, the large secured lenders have counsel (practically, they are owed relatively large sums that justify the hiring of specialized counsel). However, unsecured creditors (primarily trade vendors) are each typically owed (relatively) very little. Congress has, as a policy matter, created the concept of the creditors committee to represent the unsecured creditor body as a whole, with its attorneys to be paid by the debtor!
Therefore, if you are a creditor in the case and are among the largest, you can serve on the committee, be able to monitor the case and get the advice of counsel for free to guide collection efforts. Of course, they do not represent you specifically, but they do represent those just like you.
Serving on the committee is a very powerful collection perk of Chapter 11s. Don’t let it pass you buy just because you don’t immediately understand its benefits.
Top Reasons and Benefits of serving on the Creditor’s Committee:
- Free lawyers/accountants (see discussion below)
- Ready access to information regarding the financial condition of the debtor, its assets, liabilities, lawsuits, cash flow, operations, etc.
- Ready access to information regarding the bankruptcy process.
- Power to affect and participate in the debtor’s negotiations with its lenders and other creditors.
- You have a good idea about whether it is safe to sell the debtor on open account terms after the bankruptcy is filed
- 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
Purpose of the Creditors’ Committee
The primary purpose of the Creditors’ Committees is to ensure that unsecured creditors receive some level of competent representation in bankruptcy proceedings. A Creditors’ Committee is appointed by the U.S. trustee from unsecured creditors who hold the 20 largest unsecured claims against the debtor. The duty of this Committee and its members is to represent all unsecured creditors in a bankruptcy reorganization case. The U.S. trustee appoints a Committee in Chapter 11 cases that can afford them (generally not in 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, in some cases, secured creditors.
Selection of Creditors’ Committee 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 an odd number of creditors (3, 5, 7 etc.) 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. Although members cannot take advantage of their position on the Committee to gain any advantage over other pre-petition trade creditors, the fact that a creditor is serving on the committee is not lost on the debtor’s management.
Payment of Committee counsel and other professionals.
As discussed earlier, the Committee is authorized under the U.S. Bankruptcy Code to retain counsel, accountants, appraisers, and other professionals as necessary, all of which are paid for by the debtor’s estate and not by creditor committee members.
Selection of 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 or if the debtor should be liquidated.
Activities of the Creditors’ Committee
An 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 is worth more dead than alive.
The following video discusses this
Purpose of Chapter 11 and Decisions of the Creditors’ Committee
The Committee consults and oversees the debtor’s progress in 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 (or of liquidation).
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. This endorsement has value. 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.
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 of the Plan by its pre petition creditors. The Court can confirm a Plan only after creditors have voted on it.
Top Reasons not to serve on the Committee:
- Committee membership involves a significant time commitment over an extended period of time without compensation (but you are reimbursed for expenses);
- It sometimes requires out of town or out of state travel; and
- 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 you or your employer.