The Role of Creditors’ Committees in Chapter 11 Cases: A Brief Overview

One of the unique aspects of the corporate chapter 11 reorganization process is the potential appointment of a committee of unsecured creditors, called Creditors’ Committees.  Section 1122 of the Bankruptcy Code permits the U.S. Trustee to establish an unsecured creditors’ committee to represent the overall interests of all unsecured creditors in a chapter 11 bankruptcy case.

To form such a committee, the U.S. Trustee seeks the participation of those unsecured creditors who hold the largest unsecured claim amounts.  The U.S. Trustee will review the responses of those unsecured creditors that are interested on serving on the committee and subsequently create a committee consisting of approximately three to seven members.  Typically, after formation of the committee, legal counsel is appointed to represent and protect the interests of the committee.

An important function of an unsecured creditors’ committee is to monitor the occurrences in the chapter 11 bankruptcy proceedings and assert the interests of the creditors’ committee – whether it be in the form of a motion, objection, claim challenge, etc. – to assure that such action is in the best interest of the bankruptcy estate and unsecured creditors.  Additionally, the committee may investigate the debtor’s conduct throughout the bankruptcy proceedings, consult with the debtor on the administration of the case, and participate in the formulation of plan of reorganization.

In general – and most importantly – an unsecured creditors’ committee is created to ensure that the interests of all unsecured creditors in the bankruptcy proceeding are adequately and substantially represented.  An unsecured creditors’ committee provides an organized, centralized process whereby unsecured creditors can be assured that their claims and interests are being protected throughout the bankruptcy process up until the confirmation of a plan of reorganization, as the committee essentially serves as a fiduciary to those unsecured creditors who are not members of the committee.  The creditors’ committee ultimately serves as a safeguard to the proper management of the business of a debtor-in-possession.

Finally, when determining whether an unsecured creditors’ committee should be appointed, it is important to consider the costs associated the appointment of such a committee.  Because the committee typically employees professionals such as counsel and accountants, payment to such professionals are considered administrative expenses to be paid out of the bankruptcy estate.

Overall, because the committee serves as a “watchdog” for all unsecured creditors in chapter 11 corporate litigation, the benefits of having a committee appointed are numerous and the committee plays an invaluable role in the bankruptcy process.