Introduction to Chapter 11 Unsecured Creditors’ Committees

Official committees of unsecured creditors (Committees) serve an important function in Chapter 11 bankruptcies and can have a major influence on the outcome of any Chapter 11 case.  Committees preserve the rights of unsecured creditors and their responsibilities include (i) monitoring the progress of the case; (ii) providing input on the reorganization process; (iii) reviewing the actions of the debtor and analyzing how such actions may impact the return to unsecured creditors; and (iv) taking positions on matters brought before the Bankruptcy Court

In each Chapter 11 case, the United States Trustee is charged with appointing a Committee and will gauge the interest of unsecured creditors to determine if there is sufficient interest to form a Committee.  The Committee is usually comprised of the debtor’s largest unsecured creditors, although in certain cases specific parties in interest, such as pension funds or a union, may be appointed to the Committee.

Once the Committee is appointed by the United States Trustee, it will normally hold an organization meeting where it will elect a chairperson and will discuss the employment of professionals.

The power and duties of the Committee is set forth in the Bankruptcy Code.  The Committee has the right to receive information from the debtor regarding the management and the financial condition of the debtor.  The Committee also has the right to review actions of the debtor, and if the Committee does not believe that the debtor is providing an appropriate level of scrutiny to a certain action or transaction, the Committee may ask the Bankruptcy Court for approval to investigate, and potentially pursue, claims arising from such transaction.

In most cases, the Committee’s most important function is to negotiate terms of a plan of reorganization with the debtor and other parties in interest.  The Committee may also request that the Bankruptcy Court request the appointment of an examiner to evaluate the business and submit reports on the viability of the business; the appointment of a trustee to manage the property of the debtor; or conversion of the case to a Chapter 7 liquidation case if the Committee does not believe that the debtor can be rehabilitated.

 

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