Inside: To serve or not to serve (on an Official Committee of Unsecured Creditors), that is the question

There are both positives and negatives to serving on a Committee that you must weigh

You are sitting in your office one morning when the phone starts ringing off the hook. You quickly learn that one of your company’s major customers (who you have been shipping on credit) has just filed for bankruptcy protection under Chapter 11, and your company has been listed as one of the debtor’s 20 largest unsecured creditors. In fact, you learn that your company is the debtor’s fourth largest unsecured creditor. You are hearing from many old and current “friends” in the legal and financial advisory fields asking not for your business, but rather for your support in the bankruptcy proceedings. Specifically, you are informed that the U.S. trustee for the district where the bankruptcy was filed will be convening a meeting of the debtor’s 20 largest unsecured creditors within 10 days, and you will likely be offered the opportunity to serve on an Official Committee of Unsecured Creditors (“Committee”) in the case.

What does this mean? You have not had this “opportunity” presented to you before. As general counsel of your company, you must quickly decide whether to serve on the Committee and, if so, who to nominate as your representative, who to recommend and/or endorse as counsel for the Committee, and who to recommend and/or endorse as a financial advisor to the Committee. And perhaps at the top of your list of questions is, “What will this cost in professional fees and lost productivity by the individual(s) you ask to serve on the Committee?”

There are many good reasons to serve on a Committee.

First, and most importantly, your company will have real-time access to information about the debtor’s business, financial status, ability to reorganize, prospects for survival, etc.

Second, as a key member of the Committee, you will have input in the process. If the debtor is an important customer, you will want them to reorganize and survive. If the debtor is contemplating a sale of its assets and/or business, you will have a say on which buyer ultimately may be selected for a transaction. You will see monthly operating reports, cash collateral budgets, and other financial reports/projections to help your company evaluate whether it wants to continue to do business with the debtor and, if so, whether all future shipments will be COD or CIA rather than on historical credit terms. Your company will certainly benefit from your perspective being included in the process.

Third, your company’s history with the debtor will be relevant and will help guide the Committee’s professionals in making better strategic decisions about the debtor’s future including the role, if any, of key officers going forward.

The possible negatives to serving on a Committee include that it is time consuming for those involved — particularly in the first 60 days or so after the bankruptcy case is filed.

Second, it is volunteer work; members are not compensated for their time but may be reimbursed for their out-of-pocket expenses if the debtor’s estate is administratively solvent.

Third, as a Committee member, you will be assuming a fiduciary duty to act in the best interests of all unsecured creditors. Your counsel should make sure that you discharge this duty faithfully, so choose counsel wisely.

The lawyers who are calling you are invariably trying to persuade you to serve on the committee and support them as Committee counsel. They will tell you that their fees are paid from the estate and that your company will not be asked to directly pay any professional fees incurred by the Committee’s retained professionals. While true, the fees and expenses of all retained professionals in a bankruptcy case will be paid from the debtor’s estate as administrative expenses which must be paid before unsecured claims are paid at all. Accordingly, with those fees paid from the “pot” first, there will be less available for payment to unsecured creditors. Further, Committee counsel will not be representing your company, but rather will represent the interests of all unsecured creditors as a class in the case. You will still need to retain your own counsel to protect your company’s particular interests.

The decision whether to serve on a Committee is an important one and one which should be carefully evaluated in each case. The only true mistake you can make is to fail to thoroughly consider the option and the opportunity to have your company serve. 

Contributing Author

Mark A. Berkoff

Mark A. Berkoff chairs the Financial Restructuring and Bankruptcy Practice Group at Neal, Gerber & Eisenberg LLP (Chicago). He regularly represents debtors, creditors’...

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