With bankruptcy filings up by more than 25% in the recent past, and with the promise of many more to come in the near future, an increasing number of businesses and individuals may find themselves listed amongst the largest unsecured creditors of a debtor and with much to lose in a bankruptcy case. As one of the largest creditors, these same businesses and individuals may also find themselves being solicited to serve on “official” unsecured creditors’ committees. While a creditor who is already owed significant amounts of money by a debtor may consider any further time or effort expended in connection with a debtor to be a waste of resources, serving on a creditors’ committee can often be a valuable opportunity to be involved in the direction a debtor’s case and reorganization (or ultimate liquidation) will take and to ensure the maximum recovery for all unsecured creditors, including itself. This article provides a brief overview of what a committee is, who may serve on a committee, what service entails, and some of the pros, cons and other considerations of and for serving on a creditors committee.

What is a committee?

The formation of an official committee of unsecured creditors is provided for under section 1102 of the U.S. Bankruptcy Code. Pursuant to section 1102, the U.S. Trustee is tasked with forming the unsecured creditors’ committee (and any other committees the U.S. Trustee may deem necessary) as soon as possible after a debtor files for chapter 11 relief. Accordingly, the process for choosing and appointing a committee will begin within days after the bankruptcy filing with the U.S. Trustee sending solicitation letters and questionnaires to the largest unsecured creditors identified by the debtor as part of its chapter 11 petition. The solicitation letters will designate a date, time and place for an organizational meeting at which the U.S. Trustee will review the completed questionnaires and choose a committee who represents the general unsecured creditor body in both type and amount. An unsecured creditors’ committee can be comprised of anywhere between three and eleven members, but is usually made up of no less than five and no more than seven members. On occasion, creditors hoping to garner a spot on the committee which were not originally contacted by the U.S. Trustee or listed among the ranks of the largest creditors of a debtor may be able to do so by exhibiting they have expertise and knowledge in the debtor’s particular industry, or by demonstrating that their claims are not adequately represented among the largest creditors designated by the debtor and solicited for committee membership. In some cases, an additional committee representing the debtor’s shareholders or bondholders may also be appointed if the U.S. Trustee and bankruptcy court sees a need and there is sufficient interest to do so.

Once formed, the committees has the right, subject only to bankruptcy court approval, to retain and consult counsel and other professionals of their own choosing to represent the committee as a whole (as opposed to the individual members and their individual interests). Committees will generally retain counsel and/or financial advisors immediately after formation through an expedited interview process. As a statutorily created entity, both the "reasonable" fees and expenses of the professionals selected to represent the committee, and the "reasonable" expenses (but not the fees) incurred by the committee members in serving on the committee, are paid and reimbursed out of the debtor’s estate. In this way, the committee members do not come out of pocket for their service on the committee.

It should be noted, however, that the fees and expenses for the attorneys and professionals retained by each individual member to represent its own specific interests, issues and claims in the bankruptcy case will not be paid for by the debtor’s estate and will be the sole responsibility of the individual member as a single creditor of the debtor (please also note that it is advisable to retain individual counsel in connection with the bankruptcy case even if serving on a committee, since the committee is representative of all creditors and not individual interests which may, from time to time, be adverse to a specific creditor’s interests).

What are the committee’s responsibilities?

Committees can play an integral role in shaping the course of a bankruptcy case. Although the ordinary day-to-day operations of a chapter 11 debtor’s business are normally determined by the debtor’s existing management, a committee can influence both the long-term strategy of the debtor’s business and affect any decisions it made out of the ordinary course of a debtor’s business and which may affect creditors generally.

As mentioned above, the committee’s purpose is to represent the interests of all unsecured creditors of the debtor, and to act as a watchdog for those interests while the bankruptcy case is pending.

In pursuing this purpose, the committee, through its professionals, will need to investigate and become knowledgeable about the debtor’s business and its background, and be involved in the debtor’s decision making. The committee will, therefore, be in a unique position to review the liabilities and assets of the estate and to influence or sometimes take action where necessary. For example, a debtor may not want to dispute a creditor’s claim if they are dependent on that business relationship in the debtor’s on-going business or may resist avoiding a transfer made to an insider. In these situations, the committee may be the only party willing and able to ask such questions or bring such actions derivatively to augment the estate for the benefit of all creditors.

In addition and most importantly, the committee will have the unique role of acting as advisor to the bankruptcy court in the bankruptcy process. For example, bankruptcy courts will often look to the committee any time a debtor seeks court approval to enter into an agreement outside the ordinary course of business or dispose of any assets. Ultimately, and through the discharge of these duties and actions, the committee is integral to the direction and success of a debtor’s bankruptcy case, and will assess and influence whether the debtor reorganizes or liquidates and the distribution that unsecured creditors will receive under either scenario.

The advantages and disadvantages of committee service.

Serving on a bankruptcy committee is a somewhat significant responsibility.

Time Commitment. Serving on a committee may require a considerable amount of time. The time commitment will vary depending on the complexity of the case; however, the typical committee may meet several times a month, usually via telephonic conference for minimum disruption. In any event, the time spent on the committee is going to take time away from other business activities, and in most cases will be time which would not have been spent on an insolvent party from whom you are likely to recoup on a fraction of what you are owed. In addition, since service is voluntary, committee members are not directly compensated for the considerable time they may expend (although committee members do receive reimbursement for expenses as described above).

Acting as a Fiduciary. The committee and its members have a fiduciary duty to act in the best interests of the unsecured creditors as a whole. As such, committee members have a duty they must discharge and for which they are accountable. Specifically, as a fiduciary, committee members are prohibited from using the confidential information gained in their service on the committee to their own advantage or from trading on their claims (or any securities held by such members in the debtor) based on such information. Practically speaking, this would prohibit any such member from taking any action which may appear to be in violation of this duty, including effectively prohibiting any securities or claims trading because of an assumption that such trading was based on insider information. Nevertheless, any committee member may pursue and defend its claim and defend against any claims brought against it by the estate, provided the committee member does not use any confidential information it learns as a member of the committee.

There are, however, significant advantages to serving on a committee:

Providing your opinion. The committee has a fiduciary responsibility to represent the interests of all similarly situated parties, i.e. all the unsecured creditors. As such, a bankruptcy judge relies heavily on the committee’s opinions and recommendations, as opposed to the self-interested view of one creditor. Being a member of the committee enables a creditor to influence how their own claim is treated and their recovery, along with the claims of all creditors.

Sharing costs and cutting down costs. Because the committee will hire its own attorneys and financial advisors, a creditor serving on the committee may often find that its interests are, necessarily, aligned with the entire committee in taking action or objecting to an action. Asserting those positions through the singular voice of the committee and its professionals saves costs to the individual creditor in taking or opposing action on its own. Moreover, while payment from the debtor’s assets will decrease the amount of the estate available to pay creditors in the long run, the cost of those professionals is disbursed evenly among all the creditors which the committee is formed to benefit.

Networking opportunities. Participating on a committee provides a unique opportunity to work with other individuals involved in the same industry. Due to the committee’s access to confidential information and heightened knowledge of case developments, many members view committee service as a way to sustain or strengthen the existing business relationship with the debtor and other committee members, who may provide vital business to the creditor.


While bankruptcy may connote worry and fear, the actual process can provide significant opportunities for the creditor solicited to serve on a committee. Although committee service requires a considerable time commitment accompanied with extensive responsibility, a creditor may find that they have excerpted more control in an environment where creditors often find themselves feeling somewhat helpless. Committee service should be seriously considered in consultation with counsel to discuss the advantages and disadvantages of committee service in a particular situation, but should always be considered.

Authored By:

Malani J. Cademartori