Creditors’ committee

What it means

A creditors’ committee is the body through which creditors act together in a bankruptcy. The creditors’ meeting elects it from among the unsecured creditors who filed claims, and restructuring has a committee of the same kind.

It is not an advisory body: the insolvency trustee is bound by its instructions and cannot take certain steps without its consent. Where no committee is elected, the court conducting the bankruptcy exercises its powers.

The committee must be distinguished from the creditors’ meeting, which brings together all creditors who have lodged claims and meets only occasionally. Secured creditors also exert influence differently: when assets securing their claim, for example by a lien, are sold, they instruct the trustee themselves, not through the committee.

How it works in practice

The committee oversees how the trustee realises the estate, issues instructions to the trustee and takes a position on keeping the debtor’s business running. Minutes are taken of its sittings, and the trustee reports to it regularly on the course of the proceedings.

Only a creditor who filed a claim properly and on time may vote or be elected, so the composition of the committee is in fact settled during the filing period. A late claim is still taken into account, but it carries no voting rights.

For a client that is a creditor we follow the bankruptcy for accounting and tax reasons as well: an impairment allowance is set up against the lodged claim, and when the proceedings end the claim is written off. Committee membership is worth considering for a large claim, since it means time for meetings and responsibility towards the other creditors.

What to watch out for

A creditor who skips the creditors’ meeting elects no one and learns about the sale of the estate from the Commercial Bulletin. A committee staffed by creditors close to the debtor pushes the trustee towards a quick sale below value, and the proceeds that satisfy every filed claim shrink for the silent creditor as well.

An inactive committee is worse than none: if members do not meet or respond to the trustee’s requests, the proceedings drag on and the bankruptcy costs, which are paid before creditors, keep growing. More of the claim ends up uncollectable, so with candidates it is worth asking whether they actually have time for the committee.