Creditors Committee Role in the Bankruptcy Preference Process

The members of the creditors committee are selected by the United States Trustee assigned to the particular bankruptcy.  The creditors committee is charged with representing the interests of the unsecured bankruptcy creditors as a whole.  It is not representing the interests of any one creditor or even one particular grouping of creditors.  The creditors committee can be both an advocate and an adversary for any single bankruptcy creditor.

The creditors committee functions can be grouped into three categories:

  • evaluation and investigation
  • advocacy
  • prosecution

Each of these functions has distinct application for events occurring pre-petition and post petition.

With respect to prepetition transactions of the bankrupt company (the “Debtor”), the creditors committee would investigate whether any of those transactions gives rise to a claim by the Debtor.  Any recovery on that claim might benefit the unsecured bankruptcy creditors since it might provide money that can be distributed.  The following are examples:

  • The creditors committee may conduct a financial analysis of pre-petition transactions of the Debtor, including investigation with respect to the Debtor’s financial statements, bank statements, accounts payable, and analysis of bank account activity during the 90 days before the Bankruptcy and with respect to any transactions with insiders for much longer period;
  • The creditors committee may perform a preliminary and general analysis of potential preference recoveries in the case with respect to other parties, including review of the Debtor’s schedules and statements of financial affairs. In connection with this analysis, the creditors committee is likely to review the Debtor’s historical solvency and capitalization based upon financial information provided by the Debtor.
  • The creditors committee also reviews other financial information of the Debtors, including estimating 503(b)(9) claims.

With respect to post petition transactions, the creditors committee is charged with reviewing post petition transactions of the Debtor, including financing, sale, proposed payments of pre-petition debt and other matters.  Based on that analysis the creditors committee then advocates a position on behalf of the unsecured creditors.

Finally, the creditors committee is charged with preserving, on behalf of the unsecured creditors, unsecured creditors’ rights to collect a dividend from avoidance actions and, in many instances, with prosecuting bankruptcy preference recovery actions.

Remember that any monies collected in the bankruptcy claims process goes back into the pot to be shared among the bankrupt customers creditors. Provided that the priority claims have been taken care of (e.g. the administrative claims and the secured claims), the bankruptcy preference collections are shared among the unsecured creditors (like suppliers), pro rata in proportion to the dollar amount of each unsecured creditors claims.  So the creditors committee has every motivation to see that preference claims are pursued aggressively and as much as possible collected.