Chapter 11 of the Bankruptcy Code provides for reorganization of a corporation or partnership. Under the reorganization plan, the debtor proposes a survival and repayment plan over a period of time. The creditors’ committees, appointed by US Bankruptcy Trustees, have an essential role in Chapter 11 reorganization cases. The creditors’ committee consists of seven of the largest unsecured creditors. In the original meeting of the creditors’ committee, they elect a chairman for the committee and discuss the status of the bankruptcy case without the debtor. In that meeting, they consider what powers should be exercised and fixes a date and venue for future creditors’ committee meetings. The creditors’ committee does not intend to run the actual business or to manage the real assets of the debtor.
The creditors’ committee controls either the debtor in possession or the trustee to protect the interests of all unsecured creditors and negotiate maximum recovery from the debtor, secured debts and other parties involved in the case. Chapter 11 provides certain duties and powers to the creditors’ committee. A creditors’ committee can:
- Evaluate the progress and status of the case, and convey the same to the debtor. Moreover, the debtor is required to file regular financial reports with the bankruptcy court and the bankruptcy trustee with valuable information for the committee.
- Examine the financial condition of the debtor, the functioning of the debtor’s business and the desirability of the continuation of the business.
- Contribute to the development of a plan.
- Request the bankruptcy court to appoint an examiner or a Certified Public Accountant (CPA) to evaluate the business and submit report regarding the viability of the business, competency of management, and any possible fraud.
- Request the bankruptcy court to appoint a trustee to control the real property of the business.
- Request the bankruptcy court to convert the case to Chapter 7 liquidation if there is unreasonable delay in settlement of creditors.
Chapter 11 of the Bankruptcy Code provides that the debtor is bound to act in tune with the creditors’ committee regarding the business transactions and its administration. The creditors’ committee can appoint an attorney, accountant or any other professional to perform its duties and can compensate such professionals from the debtor’s estate.
Service on the creditors’ committee is voluntary. The interference of a creditors’ committee is beneficial in determining the right time for a liquidation process if required. In other cases, the creditors’ committee facilitates to develop a plan to maximize returns to all unsecured creditors.