1. How is an Unsecured Creditors Committee ("Committee") formed?

• The Committee is provided for under U.S. Bankruptcy Code §1102. It is the U.S. Trustee’s responsibility to form the Committee as soon as possible after a debtor files for chapter 11 bankruptcy, beginning with sending solicitation letters to the debtor’s “Top 20” (or more) largest unsecured creditors.
• Committee participation is completely voluntary, and individual Committee members are not compensated for their services.
• If there is sufficient interest, the U.S. Trustee will choose a Committee which represents the general unsecured creditors in both type and amount. The Committee is usually comprised of between three and seven members. Creditors who are not listed in the Debtor’s Top 20 list of creditors, but believe they should be, may contact the U.S. Trustee for consideration to become a member of the Committee.
• Once the Committee is formed, the Committee members may elect a chairperson, co-chairpersons, vice chairperson, or a similarly structured arrangement.

2. What are the advantages of becoming a Committee member?

• The Committee can have significant influence upon the debtor’s reorganization or liquidation, and to maximize recoveries for the entire unsecured creditors’ body. Oftentimes, the Committee can negotiate the retention or disposition of the debtor's assets, including subsidiaries, affiliates and even personnel. In addition, the Court may seek the Committee's input in response to certain actions by the debtor.
• Committee members are made privy to the debtor’s confidential information. Such information may be critical to the Committee member's assessment of the debtor's credit risk. Keep in mind that Committee members may not use such information for their own advantage, such as trading claims.
• Committee members and their professional advisors are indemnified from liability, unless their acts fall under gross negligence or intentional misconduct.
• Committee members may resign from the Committee at any time, and such resignation will not affect the status of any valid claim against the debtor’s estate.

3. What are the typical resource commitments of Committee members?

• In many chapter 11 cases, creditors are located in a wide range of locations. As such, Committees typically convene all of their meetings via teleconference calls. Committee members may opt to physically attend meetings at their own discretion and convenience.
• During the initial few months after formation, Committees typically hold weekly or bi-weekly teleconference meetings, each for about one to two hours, including review of reports or analysis. Thereafter, Committee meetings tend to be event-driven, and Committee decisions are often polled via email. Please note that the pace and duration of the meetings are directed by the Committee itself, and subject to the unique issues of each chapter 11 case.
• It is completely your discretion as a Committee member to decide on the extent of your involvement and participation, whether via passive monitoring/ voting to intense examination of the debtor's affairs.

4. What are the Committee’s powers and duties?

• It is the Committee’s duty to represent the interests of the entire unsecured creditors’ body, and not the interests of any individual Committee member.
• As noted in U.S. Bankruptcy Code §1103, the powers and duties of Committees include investigating the debtor’s conduct and financial condition and participating in formulating the debtor’s plan of reorganization or liquidation.

5. Who pays for the Committee’s legal and financial advisors?

• Committees have the right to retain professional advisors, subject to Bankruptcy Court ("Court") approval. The professionals are entitled to reasonable fees and expenses, pursuant to U.S. Bankruptcy Code §§ 327 and 330. These professionals represent the Committee’s interests, and are compensated by the debtor’s chapter 11 estate. As such, the individual Committee members do not pay for such services rendered.
• Please note that individual creditors, including Committee members, may require an attorney to represent their own specific claim. Any costs arising from such representation are borne by the individual creditor.

6. Can more than one person represent one creditor on a Committee?

• A Committee member represents the creditor entity. More than one individual may represent the creditor entity on the Committee, but the creditor entity is only entitled to one vote as a Committee member.

7. What are the disadvantages of becoming a Committee member?

• Depending on the unique circumstances of each chapter 11 bankruptcy, the volunteer-Committee member may devote a significant amount of time, mostly via teleconference calls. However, these calls are set up well in advance, and subject to the Committee members' availability.
• Committee members may have multiple interests in the debtor, of which the interests may conflict with one another. As noted above, the Committee member must act to represent the unsecured creditors’ interests, rather than for the Committee member’s individual interests.

 

Disclaimer: Armory Consulting Co. does not provide legal advice. The information presented above is for informational purposes only. Potential Committee members should consult with their own attorney for legal advice.