Creditors' committees can play a major role in chapter 11 cases. The committee is appointed by the U.S. Trustee and ordinarily consists of unsecured creditors who hold the 7 largest unsecured claims against the debtor and are willing to serve on the committee, since these creditors would have the largest stake in the outcome of the bankruptcy. Among other things, the committee:
- investigates the debtor's conduct and operation of the business;
- consults with the debtor in possession on the administration of the case;
- and participates in formulating a plan.
A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties. A creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession. Committees have legal standing to be heard on any issue concerning the case and are entitled to information from the debtor about any transactions outside the normal course of business.
The creditors' committee may also investigate the debtor in possession, then, depending on its findings, recommend to the court that a case trustee or examiner be appointed, or that the case should be dismissed or converted to Chapter 7.
The committee serves as a fiduciary to the creditors who are not on the committee, and individual members must remove themselves from the committee if there is a conflict of interest in their role as representatives of class members. Furthermore, the committee must provide information to class members and to solicit and receive input from class members who are not on the committee.
The U.S. Trustee has broad discretion in appointing committees and may appoint additional committees if it is deemed warranted to best represent creditors and equity holders. The U.S. Trustee, not the court, appoints the individual members of all committees with an interest in the bankruptcy estate. However, the court can change the membership or order additional committees if it is necessary to give creditors an adequate representation.
A major factor in determining whether to form additional committees is their cost, since the committees, as well as the professionals, such as attorneys and accountants, hired to carry out their duties, are paid out of the bankruptcy estate as an administrative expense, which has the highest priority for a business debtor and would lessen the amount payable to unsecured creditors. Furthermore, additional committees would hamper negotiations, since there would be more interests to consider.
In addition, there may be other committees that represent other parties in interest that are also appointed by the U.S. Trustee. The most common of these for corporate debtors is a committee that represents equity security holders—stockholders. Although stockholders would be last to receive any distribution—and often, they receive nothing—they, nonetheless, have an interest in the case and have the right to be represented in the reorganization.
However, only for large, complex cases involving a corporate debtor with many shareholders, will an equity committee be formed to represent the interests of the corporate shareholders. The U.S. Trustee picks the 7 largest equity holders listed in the bankruptcy petition who are willing to serve on the committee. However, since equity holders are the last to receive anything, their influence is considerably less than the creditors' committees.
Small Business Cases
In some smaller cases, the U.S. Trustee may be unable to find creditors willing to serve on a creditors' committee, or the committee may not be actively involved in the case. The Bankruptcy Code addresses this issue by treating a small business case somewhat differently than a regular bankruptcy case. A small business case is defined as a case with a small business debtor, who is one that must be engaged in commercial or business activities—other than primarily owning or operating real property—with total non-contingent, liquidated secured and unsecured debts of $2,190,000 or less; and the debtor's case must be one in which the U.S. Trustee has not appointed a creditors' committee, or the court has determined that the creditors' committee is insufficiently active and representative to provide oversight of the debtor.
In a small business case, the debtor in possession must, among other things, attach the most recently prepared balance sheet, statement of operations, cash-flow statement and most recently filed tax return to the petition or provide a statement under oath explaining the absence of such documents. The small business debtor must periodically file with the court reports concerning its profitability and projected cash receipts and disbursements, and must report whether it is in compliance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure and whether it has paid its taxes and filed its tax returns.
Moreover, the U.S. Trustee monitors the small business debtor more closely, to compensate for the lack of oversight by a creditors' committee. Early in the case, the small business debtor must attend an initial interview with the U.S. Trustee at which time the debtor's viability and business plan will be evaluated, and the debtor's obligations, including the debtor's responsibility to file various reports, will be explained. The U.S. Trustee will also monitor the activities of the small business debtor continually to ascertain whether the debtor will be successful under Chapter 11.
Because certain filing deadlines are different and extensions are more difficult to obtain, a case designated as a small business case normally proceeds more quickly than other chapter 11 cases. For example, only the debtor may file a plan during the first 180 days of a small business case. This exclusivity period may be extended by the court, but only to 300 days, and only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable time. When the case is not a small business case, however, the court may extend the exclusivity period for cause up to 18 months.