In a Chapter 11 case, the creditors’ committee is given broad powers to oversee and investigate the past and current business of the debtor (§ 1102, Bankruptcy Code). The committee can make document requests, speak with the debtor’s employees, depose the debtor’s management and board of directors, subpoena records, and generally use any appropriate form of discovery for its inquiry.

It is key for the creditors’ committee to understand the true causes of the debtor’s Chapter 11 filing and how or if the debtor’s problems can be fixed by use of the Chapter 11 process to maximize recovery for unsecured creditors. In addition to understanding how Chapter 11 can be used to preserve, restore, or increase a company’s value, creditors’ committees must also investigate and understand the debtor’s prepetition business and the financial issues confronting the debtor that led to the debtor’s distress.

Few debtors accept blame for the mistakes, lack of vision, or failure of management or the board of directors to act in a timely manner. Therefore, committee counsel must ascertain the root cause of the debtor’s financial failure and ensure that the debtor is taking the necessary steps to effectively rehabilitate itself before the company’s going concern value dissipates and liquidation become inevitable.

Click here to view the full article