The moment that a debtor files for bankruptcy protection the playing field immediately changes. Old familiar rules are out and the Bankruptcy code is in. The creditor, which initiates aggressive and protective measures from the outset of the case, is most likely to maximize its return. One of the best ways for creditors to participate in such active measures is to join an official creditors’ committee.
Creditors’ committees can play an important role in overseeing the debtor’s reorganization by acting as a watchdog over the debtor. Unsecured creditors will benefit greatly from the strength in numbers that comes with the formation of a committee.
In Chapter 11 cases the unsecured creditors’ committee are appointed by the United States Trustee. Ordinarily the members will include the seven largest claimants in the particular class. The United States Trustee has a list filed by the debtor of the twenty largest unsecured creditors from which to select members of the Official Unsecured Creditors’ Committee. Since secured creditors are normally protected by the value of their collateral, it is not as likely that they will join forces to form a committee although they may elect to do so.
A creditors’ committee is an integral part of the Chapter 11 bankruptcy process and can play a major role in shaping the Chapter 11 case, particularly in negotiating, or even proposing a plan of reorganization for the debtor. It has the right to be heard on any issue in the Chapter 11 case. Normally this means making decisions concerning what the debtor may do outside of the ordinary course of business. Decisions regarding the ordinary day-to-day operations of the debtor are left to debtor’s management, provided there is no abuse, fraud, or other impropriety. A committee may consult with the Debtor and make recommendations concerning the debtor’s business but should not attempt to control the debtor’s financial affairs.
A committee may hire an attorney and any other professionals, as it deems appropriate. All professionals must be approved by the bankruptcy court, and, once approved their fees incurred are paid by the debtor from its assets. The ability to hire counsel whose fees are paid by the debtor is a great advantage to the committee. It ensures proper representation for the creditors and it often promotes cooperation by the debtor.
A creditors’ committee, once formed, should immediately review any cash collateral agreements that the debtor had made and prepare to take a stand the next time such an agreement comes up for review. Cash collateral is a term used for the debtor’s cash, accounts receivable, and other cash equivalents in which a lender has a valid security interest. A lender secured by cash collateral can prohibit the debtor from spending its cash and, in such cases, the debtor may not use its cash without first obtaining a court order. Without cash the debtor cannot operate and so is eager to reach an agreement with the secured lender for the use of cash collateral early in the case. Due to the debtor’s often desperate situation, such secured lenders are able to extract additional collateral and even preferential treatment by the debtor in exchange for its consent to the debtor’s use of cash collateral. The committee must ensure that such a secured lender is not receiving any more than it is entitled to receive under the Bankruptcy Code.
Investigation is one of the most critical functions of a creditors’ committee in a Chapter 11 case. The committee’s counsel may orally examine any of the debtor’s management with respect to the acts, conduct and property of the debtor. Counsel may also request that documents and records be produced.
Any investigation undertaken by a committee should include, at a minimum, a review of the likely distribution that the unsecured creditors would receive in a liquidation. The committee can then determine if creditors will be better served by a reorganization or a liquidation. Potential causes of action available against insiders, including the recovery of preferential and fraudulent transfers, should be evaluated. A review of the debtor’s operating procedures should also be conducted.
A creditors’ committee should participate in the plan negotiations to formulate a plan that is acceptable to all parties. By negotiating during the plan’s formulation, a plan confirmation battle between the debtor and the committee may be avoided.
The debtor may be unwilling to negotiate the terms of its plan and may seek a "cram down" on creditors. The committee must carefully analyze the proposed plan for any unfair treatment of its constituency. It may then object to confirmation of the plan.
The committee should ensure that the disclosure statement, which is mailed to Creditors, contains adequate information to enable them to make a knowledgeable decision on the plan. If the disclosure statement is not adequate the committee may file an objection to it.
The Bankruptcy Code specifically recognizes that a creditors’ committee may propose a plan of reorganization for the debtor. This is a very aggressive move that seeks to take control away from the debtor and put the committee in the driver’s seat. Like a debtor plan, the committee’s plan must be approved by the creditors and the court before it is implemented.
Another powerful right granted a creditor’s committee is the right to request that the court appoint a trustee to replace the debtor’s management. A committee should request the appointment of a trustee if it is satisfied that the debtor’s management is incapable of functioning properly and that the debtor’s assets will be seriously diminished if management is left in place. If the committee is concerned but does not find a trustee necessary, then it may request the appointment of an examiner to keep a more watchful eye on the debtor.
Creditors’ committees may also intervene in adversary proceedings filed within the bankruptcy case to recover preferences received by other creditors. A committee may even, under certain circumstances, bring lawsuits to recover assets for the estate that the debtor has failed to bring.
