What Is a Creditors' Committee?

What Is a Creditors' Committee?

A creditors' committee is a group of people who represent a company's creditors in a bankruptcy proceeding. As such, a creditors' committee has broad rights and responsibilities, including devising a reorganization plan for bankrupt companies or deciding whether they should be liquidated. The creditors' committee is usually further divided between secured and unsecured creditors.

How a Creditors' Committee Works

The secured creditors' committee consists of lenders that have a first claim on assets that collateralize their loans. Such groups, because of their secured status, are the first creditors to be paid back in bankruptcy proceedings. Members within the unsecured creditors' committee generally have more or less power depending on the amount they are owed. Although the court will take into account the position of the creditors' committee, the bankruptcy trustee has ultimate power in deciding what is fair to all parties.

Serving on a creditors' committee is a significant time commitment, may require extensive travel, and may require decisions that could conflict with one's interests or the interests of one's employer. Such work is unpaid, though expenses may be reimbursed.

The purpose of a creditors' committee is to ensure that unsecured creditors, who may be owed relatively small sums, are still represented in bankruptcy proceedings. A U.S. bankruptcy trustee (appointed in larger cases via Chapter 11 proceedings) is in charge of choosing who will be included in a creditors' committee, selecting from the unsecured creditors who have the 20 largest unsecured claims against the debtor in question.

The purpose is to represent this group of creditors, who would otherwise be underrepresented. Depending on the case, the trustee may also select creditors' committees made up of other claimant groups, such as bondholders, retirees, or even secured creditors.

Requirements of a Creditors' Committee

A creditors' committee serves to represent the interests of unsecured creditors in bankruptcy court proceedings and also in negotiations between the debtor and other groups. A trustee is responsible for selecting an odd number of committee members, who act as fiduciaries representing all creditors, not just their interests.

Creditors' committees may enlist professional advice as part of their work, such as accountants, legal counsel, appraisers, or other professional assistance. Such professional help is paid for by the debtor's estate and not by the creditors.

One of the primary goals of a creditors' committee is to determine whether a debtor company should be liquidated immediately. Such a decision is based on whether breaking up the company would enable the debtor to pay back creditors better than if the company was allowed to remain in operation.

The creditors' committee may also look into the conduct of the debtor and business operations as part of the option of devising a Plan of Reorganization. Creditors' committees may engage in negotiations with debtors and other creditors to form an equitable reorganization plan, including how each party is paid, which debtor assets will be retained or sold, and which obligations and contracts will be satisfied, nullified or altered.