"I've searched all the parks in all the cities and found no statues of committees.”
– G.K. Chesterton
In the United States, Chapter 11 cases can move with incredible speed and fundamentally alter or eliminate the rights of unsecured creditors or equity holders. In many cases, the debtors and their lenders are highly incentivized, often by incentives they created to manipulate the process, to implement their proposed plan to the detriment of unsecured creditors or equity holders. The U.S. Bankruptcy Code created committees to serve as representatives for the underrepresented. Although committees rarely receive the glory and may never be commemorated with statues in their honor, they serve a critical role in the bankruptcy process.
International creditors of debtors may not understand the Chapter 11 process or may not receive notice of committee formation in a timely fashion. This post briefly explains the Chapter 11 process and advantages to participating in committees in bankruptcy cases.
What is Chapter 11? In the U.S., there are several types of insolvency laws (e.g., Chapters 7, 9, 11 or 15, assignments for the benefit of creditors, foreclosure under the Uniform Commercial Code or receivership laws), which address different scenarios. In Chapter 11, the business typically retains control of operations after a bankruptcy filing and uses the Chapter 11 process to restructure its debt or sell substantially all of its assets as a going concern. This process can take anywhere from a few years to 30 days, with the industry strongly trending toward the latter.
What is a committee of unsecured creditors? A few days after a bankruptcy filing, the Office of the United States Trustee (the government watchdog over bankruptcy cases) will attempt to form a committee of unsecured creditors. The committee is responsible for representing all unsecured creditors in the Chapter 11 process. The U.S. Trustee will send letters to the larger creditors asking if they would like to participate on the committee and will attempt to put several different types of creditors on the committee, such as bondholders, labor unions or trade creditors. The U.S. Trustee will, at least initially, use the information provided by the debtor in the initial filings to determine which creditors should be solicited for committee participation. The debtor may inadvertently or intentionally misstate the amount of your claim, which could affect the U.S. Trustee’s ability or willingness to solicit your involvement. The U.S. Trustee may hold an “in-person” formation meeting or may organize the committee using email and conference calls. In the event the formation meeting is live, there are proxies who will stand for creditors who cannot attend in person. After being formed, the committee typically hires legal and/or financial advisors to represent its interests. The professional fees and costs for these advisors are paid by the debtor. Committees typically meet periodically over the course of the case as needed, often weekly during the early stages and monthly thereafter. The vast majority of the communication happens over email and using conference calls for meetings. In the event the debtor is solvent (i.e. if equity is “in the money”), there could be an equity committee of significant non-insider shareholders. There may also be separate creditors’ committees for other constituent groups that are uniquely unrepresented in a typical case (i.e. a committee of students in cases involving educational institutions).
Why participate on a committee? Committees are important voices in the reorganization process. There are several reasons to serve on a committee that vary widely based upon the facts and circumstances of a particular bankruptcy matter or field of business, including:
- Assisting the debtor in obtaining a better sale price, thereby increasing returns to unsecured creditors;
- Cooperating with the debtor to create a creditor-friendly plan that crams down the secured lenders;
- Identifying potential claims against the debtor’s existing or former management, business partners, lenders or other creditors, which could be a source of recovery for unsecured creditors;
- Working closely with other industry competitors or partners as part of a collaborative process;
- Permitting, subject to appropriate non-disclosure agreements, access to non-public confidential information; and
- Allowing participation in the bankruptcy process without hiring your own advisors (it should be noted, however, that individual unsecured creditors cannot use the process to advantage themselves to the detriment of other unsecured creditors).
There is very little downside to participating in a committee. As a committee member, you will provide guidance to the committee’s legal and financial advisors based upon their recommendations. If you are a significant creditor to a debtor in Chapter 11, you are likely interested in the outcome.
It must be emphasized that the entire formation process usually takes place in the first two weeks of a bankruptcy case and will be based on the information provided by the debtor to the U.S. Trustee. The U.S. Trustee will rarely, if ever, add a member to the Committee after it has been formed.
If a bankruptcy case is filed and you or your company has a substantial claim and you want to be involved, you should proactively reach out to the U.S. Trustee to (a) request information on how to participate in the committee formation process; and (b) advise the U.S. Trustee regarding the actual amount of your claim, even if you did not receive notice of the filing.