Role of the Creditors' Committee

Source: Bankruptcy Creditors' Service, Inc.

Official creditors' committees, constituted under 11 U.S.C. Sec. 1102, ordinarily consist of the seven largest creditors who are willing to serve on a committee. In Chicago, larger committees are common. In Kmart's chapter 11 case, the U.S. Trustee was persuaded to appoint two creditors' committees -- one to represent the interests of trade creditors and one to represent the interests of institutional creditors. In the National Steel and Comdisco reorganizations, one committee represents each of those debtors' unsecured creditor constituencies.

Official creditors' committees have the right to employ legal and accounting professionals and financial advisors, at the Debtors' expense. They may investigate the Debtors' business and financial affairs. Importantly, official committees serve as fiduciaries to the general population of creditors they represent. Those committees will also attempt to negotiate the terms of a consensual chapter 11 plan -- almost always subject to the terms of strict confidentiality agreements with the Debtors and other core parties-in-interest. If negotiations break down, the Committee may ask the Bankruptcy Court to replace management with an independent trustee. If the Committee concludes reorganization of the Debtors is impossible, the Committee will urge the Bankruptcy Court to convert the Chapter 11 cases to a liquidation proceeding.

Immediately following the U.S. Trustee's determinations about how many official committees will be appointed and who will be appointed to each committee, the newly formed committees convene their initial meeting. The first order of business is to listen to the U.S. Trustee explain the powers and duties of the committee as a whole and members' individual responsibilities. The Committee will generally elect a chairman. Thereafter, the Committee typically conducts beauty pageants to select their legal and financial advisors.

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