The unsecured creditors committee plays an important role in chapter 11 bankruptcy
How can thousands of creditors negotiate with a business that has declared chapter 11 bankruptcy?
They can’t. Chapter 11 bankruptcy cases often involve situations where the business that has declared bankruptcy has hundreds or even thousands of creditors. Clearly, the entire flock of creditors cannot efficiently pursue the debtor in Bankruptcy Court at the same time. Chapter 11 bankruptcy is designed to restructure businesses that have become bogged down by excessive debt; thousands of negotiations with creditors simultaneously would frustrate the rehabilitation of the bankrupt business which usually continues to operate while in bankruptcy.
Forming the Unsecured Creditors Committee
As a result, section 1102 of the Bankruptcy Code authorizes the U.S. Trustee to appoint a committee of unsecured creditors who are responsible for negotiating directly with the debtor in possession on behalf of similarly situated claims. Section 1102 suggests, but does not require, that the creditors committee be comprised of seven creditors who usually represent some of the largest claims. However, a large claim does not necessarily guarantee a creditor a seat at the committee table. Section 1102(b)(1) requires that the committee members be representative of the different types of unsecured claims. The creditors’ committee works on behalf of and owes a fiduciary duty to all unsecured claims. If there is a large contingent of creditors who are vendors, one of the vendors should be given a role on the creditors’ committee.
Duties of the Creditors’ Committee
Essentially, the creditors’ committee is put in place as a watch dog to oversee the debtor in possession and ensure that the business is being run in a way that honors the continuing obligations to unsecured creditors. Consistent with this role, the creditors’ committee can investigate the debtor’s acts and financial condition; work to craft the restructuring plan; if necessary, request the appointment of a trustee; and pursuant to section 1103(c), the creditors’ committee can “perform such other services as are in the interest of those represented.”
In complex chapter 11 cases, the forming a creditors’ committee is a necessary step that prevents the chaos that would surely follow from the debtor attempting to deal with all creditors individually.
Similar Posts:
- Bankruptcy Trustee: How does it work?
- Will All My Property Be Sold If I File For Chapter Seven Bankruptcy?
- Why Bankruptcy Laws Are Important?
- The Chapter 7 Trustee
- Anatomy of a Chapter 13: Part 1
Tags:
Recent Comments