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What is an Unsecured Creditors’ Committee?
An Unsecured Creditors’ Committee is created to ensure that the interests of all unsecured creditors in a Chapter 11 bankruptcy proceeding are adequately and substantially represented. The Committee provides an organized, centralized process whereby unsecured creditors can be assured that their claims and interests are being protected throughout the bankruptcy process, as the committee essentially serves as a fiduciary to those unsecured creditors who are not members of the committee.
What does it mean to be named a top 20 unsecured creditor? What are the next steps?
A debtor filing for Chapter 11 must file with the Court a list of its 20 largest unsecured creditors. The United States Trustee is charged with gauging if there is sufficient interest to form an Unsecured Creditors’ Committee. The United States Trustee will do so by providing unsecured creditors with a questionnaire, which is to be filled out and returned if the recipient is interested in serving on the committee. Generally, if three or more of the Debtor’s 20 largest unsecured creditors express an interested in serving on a Committee, the U.S. Trustee will appoint the Committee.
What are powers and duties of the Committee?
The Committee of Unsecured Creditors has certain well-defined rights under the Bankruptcy Code, including the right to:
- consult with the Debtor regarding the administration of the bankruptcy case,
- investigate the pre- and post-petition activity of the Debtor
- appear and be heard in all matters presented to the Bankruptcy Court during the course of the administration of the case
- participate in the formulation of the Debtor’s Plan of Reorganization
The Committee has the right to retain professionals to help perform these functions, such as attorneys, accountants, appraisers, etc. There are no out-of-pocket costs to the members of the Committees for this representation. The fees of all professionals retained by the Committee are paid by the Bankruptcy Estate.
Do Committees make a difference?
In a study of Chapter 11 cases published in the Commercial Law Journal, the author concluded that Chapter 11 Plans in cases where there was an Unsecured Creditors’ Committee were significantly more likely to be successfully implemented. *
The success, or failure, or a Chapter 11 case depends on the Debtor and its management. Whether there will be a confirmed Plan, and the size of the payout to unsecured creditors in any such Plan, depends upon the liquidation value of the Debtor’s assets, the amount of secured and priority debt, and whether the continued operation of the business can generate sufficient cash flow to service secured and priority debt with something extra for the unsecured creditors.
* Susan Jensen-Conklin, Do Confirmed Chapter 11 Plans Consummate? The Results of a story and Analysis of the Law, Commercial Law Journal, Volume 97, page 297 (Fall, 1992)