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Bankruptcy Newsletter

The Chapter 11 Reorganization Process and Creditors' Committees

As the efficient administration of the Chapter 11 debtor’s reorganization plan is crucial to the successful rebirth of the business and to the equitable repayment of creditors, the Bankruptcy Code requires the United States trustee to appoint a creditors’ committee to supervise and manage the reorganization process.

Appointment of an Official Unsecured Creditors’ Committee

As set forth in Section 1102 of the Code, the U.S. trustee must appoint “a committee of creditors holding unsecured claims” as soon as possible after the order for relief under Chapter 11. The committee ordinarily must consist of the creditors holding the seven largest claims against the debtor.

In addition, the U.S. trustee may appoint additional committees of creditors or of equity security holders in the exercise of the U.S. trustee’s own discretion.

Adequate Representation of Unsecured Creditor Interests Involved

Generally, bankruptcy courts have preferred to limit the number and size of creditors’ committees. However, a court may order the U.S. trustee to appoint additional committees “if necessary to assure adequate representation of creditors or equity security holders.”

With the goal of adequate representation in mind, the U.S. trustee should appoint creditors to the committee who reflect the diverse interests of the unsecured creditors involved in the case as a whole. This means that the creditors’ committee should proportionately reflect the debt structure, giving a “voice” to all parties in interest. While the seven largest creditors may very well reflect the various positions of the parties in interest, the trustee’s determination ultimately demands a thorough analysis of all interests involved and a comprehensive examination of the debtor’s financial structure.

The Powers and Duties of a Creditors’ Committee

Under Section 1103 of the Code, creditors’ committees appointed by the U.S. trustee are entitled to retain counsel, accountants, and other professionals to represent their interests, if approved by the court. As fees for professional services will be taken out of the debtor’s estate, the creditors’ committee owes a fiduciary duty to the debtor to avoid excessive costs. For example, the appointment of co-counsel in a case is generally not warranted, unless necessary in a very large and complex case.

Furthermore, a creditors’ committee may:

  • Consult with the trustee or debtor concerning the administration of the case
  • Investigate the acts, conduct and financial condition of the debtor
  • Participate in the formulation of the reorganization plan
  • Request the appointment of a trustee
  • Perform other services in the interest of those represented

Because most Chapter 11 cases permit the debtor to retain control over ordinary course business transactions, creditors’ committees can be necessary instruments in ensuring the proper management of the reorganization plan.

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