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When a company files a Chapter 11 bankruptcy petition, one of the first things to happen is the formation of a creditors’ committee, to participate in negotiations with the debtor and assist in the development of a reorganization plan. Typically, the 20 or so largest unsecured creditors of the debtor are invited to join the committee, and from that number, a committee of three to seven members is selected. But why might creditors accept or decline an invitation? What are the benefits and drawbacks to serving on a creditors’ committee?

Advantages

Impact

As the creditors’ committee plays an integral role in the unfolding of a Chapter 11 case, serving on the committee allows unsecured creditors to have a significant impact on all stages of the bankruptcy proceedings. Not only does the committee ultimately determine if the case will end in liquidation or reorganization, it also actively participates in developing the reorganization plan, influences the administration of the case, and participates in all major decisions, financial and operational. Having a seat on the committee therefore directly translates into having a voice in the eventual outcome of the case.

Information

Serving on a creditors’ committee is the most effective way for creditors to stay abreast of real-time developments in the case. As it is the committee’s responsibility to keep all other creditors informed about the case’s progress, committee members are the first to receive status reports from professionals working on the case. These reports contain up-to-date information on such matters as case developments, anticipated next steps, the likelihood of reorganization or liquidation of the debtor’s business, and expected distribution amounts to unsecured creditors.

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Image courtesy Drew Leavy on Flickr

Contacts

It may not seem like an obvious place for networking, but a creditors’ committee does have the effect of bringing professionals, often within the same industry, together, and therefore allows creditors to increase their industry contacts and engage in networking. Many business relationships developed within the context of a Chapter 11 creditors’ committee last significantly beyond the conclusion of the case.

Cost management

One of the key functions of a creditors’ committee is to engage attorneys and other experts to provide guidance and advice during the case; compensation for these professionals comes from the debtor’s estate rather than being borne by individual committee members. Although these professionals represent the interests of all creditors and not only those of the committee, it is certainly the case that committee members are the ones who benefit most directly from firsthand access to legal expertise and other services without having to engage their own independent counsel. This can be a help in mitigating some of the other expenses that arise from involvement in a bankruptcy case.

Education

Given the volatility of the economy, it is entirely possible that creditors, particularly within certain industries, may be involved in multiple Chapter 11 filings. Gaining experience in a Chapter 11 case from the inside by serving on a creditors’ committee can therefore be an important advantage. It allows creditors to become fully educated on the details of the process and thus better able to understand their rights and protect their interests in subsequent bankruptcy cases.

Disadvantages

Time commitment

This is typically the single biggest deterrent for most creditors when considering whether to serve on a creditors’ committee. The amount of time required to properly discharge duties as a member of a creditors’ committee can be substantial, given that tasks include meeting several times a month, either in person or by teleconference, and spending independent time keeping up with the progress of the case by reading summary reports. The duration of the case is also a factor; Chapter 11 bankruptcy cases can last anywhere from six months to one or two years, or even longer for more complex cases. Furthermore, it is also important to consider that, in most bankruptcy cases, the claim amounts that most creditors are likely to recoup typically represent only a fraction of what they are owed. Therefore, in purely financial terms, the amount of time invested in serving on a creditors’ committee does not usually yield a significant return.

Fiduciary responsibilities

Members of a creditors’ committee have a duty to act in the best interests of all unsecured creditors that the committee represents, and not only in their own interests or the interest of other committee members. This means that a committee member may not engage in activities that could conflict with other creditors’ interests, such as seeking to independently acquire the debtor’s assets or buying claims. In addition, committee members are bound by confidentiality agreements and may not use any confidential or sensitive information obtained through their participation on the committee for their own gain. Before joining a committee, creditors should therefore carefully consider if they are able and willing to put the needs of the wider group of unsecured creditors before their own specific interests.