Sometimes, a Texas business hits a rough economic patch and over a certain period begins to lose money to a point where the business loses economic viability. Obviously, in such situations, solvency can become a major problem. To address this situation, a business could choose to file bankruptcy under Chapter 11 and with legal protection, slowly liquidate assets and move toward paying creditors.
In a substantially large number of Chapter 11 cases filed, creditors play a significant role in the proceeding or at least in the beginning of the work toward a filing. A committee of creditors, consisting of the seven largest unsecured claimholders is appointed by the U.S. Bankruptcy trustee. Among the committee’s functions is participation in the formulation of the bankruptcy plan and serving as consultant to the debtor in regard to the administration of the case. Additionally, the committee can also launch an investigation of the debtor’s conduct as well as the daily operations of the business seeking bankruptcy relief.
It may appear that active participation of the company’s largest creditors may leave little room for smaller equity shareholders to stake their claims, especially lacking the resources brought to the table by the creditor committee. However, the Bankruptcy Code also provides provisions to address exactly those concerns.
In similar fashion, the law provides for the creation of an equity security holder committee which collectively represents the interests of the company’s shareholders. The members of this equity committee can provide shareholders at large with meaningful access to the bankruptcy proceedings and subsequently, equal opportunity to defend any shareholder claims in the process. However, the law requires the creation of the creditor committee in every Chapter 11 case. Equity security holder committees are relatively rare, only occurring in bankruptcy cases involving very large companies or corporations.
Source: USCourts.gov, “Reorganization under the Bankruptcy Code,” Accessed on March 19, 2015