When there are multiple creditors in Chapter 11 bankruptcy, each creditor has its own interests to protect. However, banding together as a committee is often advantageous to unsecured creditors and helps them maximize the amount they recover.
The Bankruptcy Code specifies that unsecured creditor committees have the right to do the following:
- Investigate the debtor’s financial and business situation
- Monitor the progress of the case, including financial reports provided by the debtor
- Participate in the creation of a plan for the bankrupt business
- Request that an independent third party — a bankruptcy trustee — be appointed to control estate assets
- Request that an expert examiner be appointed to investigate the business
- Request that the case be dismissed or converted to Chapter 7 bankruptcy
Unsecured creditor committees also have the right to negotiate with secured creditors, whose interests can run counter to those of unsecured creditors.
For example, it seems that competing creditor interests are at play in RadioShack’s widely watched Chapter 11 bankruptcy. A committee of the company’s unsecured creditors has asked the court for permission to investigate non-public information that, the committee suspects, could prove that RadioShack’s largest shareholders delayed the bankruptcy filing in order to bolster a hedge fund trading strategy.
The committee suspects that investment firms Lite Speed Management and Standard General, two of RadioShack’s biggest shareholders, delayed the bankruptcy to avoid payouts on credit default swaps or CDS. A CDS is essentially insurance against non-payment of a debt.
The unsecured creditors say the bankruptcy should have been filed in May 2014, and consequently, RadioShack continued to incur $1 million in losses each day.
An article in Reuters has more details on the sale of RadioShack’s assets.
Bankruptcy watchers may want to follow this case as it progresses.