Chapter 11, Section 1104 (c) provides provision for the appointment of an examiner if the court does not order the appointment of a Chapter 11 trustee. An examiner is appointed to conduct an investigation of any allegations such as fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the current or former management of the debtor business. Generally, the appointment of an examiner is based on the interests of its creditors or any equity security holders or any other interests of the real estate. Similarly, the court may appoint an examiner if the debtor’s fixed, liquidated, unsecured debts exceed $5,000,000.
The role of examiner in Chapter 11 bankruptcy is generally more limited than that of a Chapter 11 trustee. Chapter 11 examiner does not have authority to control the debtor’s business. The court directed the Chapter 11 examiner to investigate the acts, conduct, assets, liabilities, business operations, and financial condition of the debtor. Moreover, the examiner is authorized to assess the desirability of the continuance of the business and notify any other matter if found relevant or to formulate a plan.
The examiner is duty bound to prepare a report or a statement regarding any investigation pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity of the management. The examiner should provide a copy or summary of the report or statement to creditors’ committee or equity security holders, or indenture trustee, or any other court designated entities and to the US Trustee. The scope of the examiner’s investigation is limited and distinct, or wide and comprehensive, based on the facts of the bankruptcy case and direction of the court. In other words, each court has authority to decide the duties of an examiner in each bankruptcy case.
In fact, the appointment of an examiner is an intermediate procedure and considered as more economical than the appointment of a trustee. Sometimes, the court may appoint an examiner in certain special situations such as:
- To mediate and help to solve the deadlock in plan negotiations;
- If the debtor fails to submit exact financial statements during the pendency of the bankruptcy case; and
- If the creditor finds that there is incapability in debtor-in-possession management.
Normally, the Bankruptcy Court considers that all legal entities such as partners, individuals, and corporations are eligible for appointment as Chapter 11 examiners. The calculation compensation for an examiner is based on certain factors such as the time and labor involved; the uniqueness and complexity of the questions; and the experience, ability and reputation of the examiner.