Creditors' Committees Obligations Change

Gary W. Burns and Anthony Schnelling. Mr Burns and Mr. Schnelling are senior professionals with Bridge Associates LLC.

The new Bankruptcy Act (the "Act") adds significant responsibilities to Unsecured Creditors' Committees. Creditors' Committee subject to the revised Section 1102(a) will be required to provide access to information to creditors who hold claims of the kind represented by the committee, but have not been appointed to the committee. The Creditors' Committee must also solicit and receive comments from creditors not appointed to the Committee. The Creditors' Committee is also subject to a court order that compels any additional report or disclosure to be made to creditors not appointed to the Committee. What exactly "additional report or disclosure" might be is wholly unclear from the statute.

These new rules are intended to open up communication with all creditors, and keep the playing field level while the information is being received and analyzed. However, at the same time issues are created by this revision that cannot have been completely thought through by the drafters.

Information flow in bankruptcy is a critical and sometimes contentious problem. The Debtor has to develop financial information and evaluate the results. The information may take time to compile and be difficult to gather. Basic financial information expected by the secured creditors and Creditors' Committee may not exist, a fact that the Debtor does not want the creditors to know. The Debtor will develop specific information for each creditor group, and may attempt to limit access to this information until a plan for the business is more fully developed. The sensitivity of the financial information as it is being developed, and becomes available for use by various creditor groups for purposes that may not be consistent with the Debtor's, results in the wariness with which the information is handled.

Creditors' Committee members are routinely asked to sign confidentiality agreements. Use of the financial information by committee members has long been an issue. Because of confidentiality and privilege issues, Creditors' Committees have been reluctant to share information with creditors who were not appointed to the Committee. Under the Act, information provided to the Committee must be made available to all creditors. This will significantly increase the tension of maintaining the appropriate flow of information between Debtor and Committee. Debtors are likely to try to force committees to obtain confidentiality agreements from non-member creditors before providing information required in Section 1102 of the Act.

Much of the information that a committee receives is delivered by the Debtor on a preliminary basis. Information is provided as it is being developed. Decisions are made with respect to the business as additional information is gathered and analyzed. Sensitive business information, such as plant closures and personnel decisions, is typically provided to a committee prior to decisions being finalized and employees being notified. The need to keep certain information confidential, while keeping the committee up to date, will create real problems for the Debtor if the information is available immediately to all creditors. It can be reasonably expected that significant litigation will be a by-product of the issue of information dissemination.

Holders of distressed securities are likely to find information regarding a bankruptcy to be more available than in the past. Trade vendors, sitting on Creditors' Committees, were never eager to share information with distressed security holders. Trade vendors are typically focused on keeping a customer alive and buying product, rather than on a potential sale or liquidation that could allow for a faster and more certain return for distressed security traders. Under the new bankruptcy revisions, distressed security traders will be able to force access to information available to the committee.

This brings up another issue. The availability of nonpublic information that will be required to be distributed raises security law issues. The general security law concept of fair disclosure of material non-public information may also lead to significant litigation. How can anyone be sure that the information available to a committee is being used appropriately by committee members and requesting non-members? Can additional credit be granted by the trade vendor? Can distressed security holders sell their claims? Making information available to all creditors may be facilitated by the careful use of dedicated web sites. Comments and answers to questions can be posted along with the latest financial information. However, the issue of allowing sensitive information, needed by the Creditors' Committee to understand the Debtor's business decisions, to be issued to the public will require careful consideration. Disagreements regarding these issues may well also lead to significant disagreements and further litigation.