In virtually all Chapter 11 bankruptcy cases, a committee of unsecured creditors will be appointed. The committee, which plays a significant role in the bankruptcy process, can have a major impact on the outcome of a case. Here is a closer look at the various aspects of a typical Chapter 11 creditors’ committee, including its function and initial tasks, as well as the selection process:
What is the function of a creditors’ committee?
In Chapter 11 cases, a creditors’ committee is a representative group of creditors created to promote and protect the interests of all unsecured creditors of the debtor in the case. In order to do so, the creditors’ committee investigates the business and financial affairs of the debtor; monitors the debtor’s business operations; and participates in negotiations for the terms of the reorganization plan, which is the ultimate goal of a Chapter 11 case.
A creditors’ committee is a key element of Chapter 11 proceedings, and its views and opinions on the reorganization plan in particular can carry a great deal of weight with other parties in the case, including general unsecured creditors. The creditors’ committee is therefore one of the key players in the case that can most strongly influence its final outcome.
How is the creditors committee selected?
The United States Trustee (UST) is responsible for selecting and appointing the official Chapter 11 creditors’ committee, a process which occurs as soon as reasonably possible after a Chapter 11 case has been launched. Once a debtor has filed a Chapter 11 petition, the usual procedure is for the UST to send a questionnaire to the debtor’s largest unsecured creditors. The questionnaire is often sent to the 20 largest creditors, but it can be sent to as many as 50 creditors in order to draw from a more representative sample. The purpose of the questionnaire is to elicit interest from creditors who may wish to join the creditors’ committee and to filter out any creditors who may have a conflict of interest that would prevent them from properly fulfilling the responsibilities of the committee.
In creating the committee, the UST generally attempts to select creditors who represent a variety of interests, including union members, bondholders, trade vendors, national creditors, and creditors with more local interests. While a creditors’ committee is usually comprised of those creditors with the largest unsecured claims, the UST may choose to appoint smaller creditors who represent a significant creditor constituency or who are disproportionately suffering due to the debtor’s bankruptcy filing. The size and composition of the committee varies depending on the case, but it must be both manageable and sufficiently representative. Most creditors’ committees tend to contain between three and seven members. Occasionally, in smaller Chapter 11 cases where there is insufficient creditor interest, the UST may decline to appoint a committee.
What happens at the first creditors’ meeting?
Once a committee has been selected by the UST, an initial organizational meeting is convened. In most Chapter 11 cases, significant issues must be addressed early in the case, so it is important for this meeting to take place as soon as possible after the committee is appointed.
The selection of a chairperson is usually one of the first orders of business. The chairperson will be responsible for conducting the meetings and facilitating communication with outside professionals, among committee members, and perhaps directly with the debtor. The committee will also discuss how it will be governed and what operating procedures and bylaws it will adopt. At this early stage, it is important for the committee to clearly define its position on key governance questions, such as what rights the chairperson has to make decisions on behalf of the whole committee, what the mechanism will be for settling a tie vote, how to resolve conflicts of interest, and what confidentiality restrictions will apply to any information disclosed by the debtor.
Particular objectives of the creditors’ committee will also be discussed by the members at this first meeting in order to determine what future actions should be set in motion. A number of important questions need to be considered: What does the committee think should be negotiated for the debtor – reorganization or liquidation? Do any specific investigations need to be launched immediately? What particular event caused the debtor to file for bankruptcy? Do any committee members bring knowledge or insight –from a pre-petition ad hoc committee, for example – that would help shape the committee’s goals?
Moreover, members will select outside professionals – or will at least take some preliminary steps to locates ones – who will assist the work of the creditors’ committee and receive compensation from the debtor’s estate. The attorneys who will represent the creditors’ committee in court, as well as in negotiations with the debtor’s attorneys, are usually the first to be selected. Later on, other professionals, such as accountants or financial advisors, may also be necessary.