Invitation from the liquidator: Should we go?

Within 75 days of the commencement order of liquidation proceedings, the liquidator has to invite the registered creditors to a meeting with a purpose of  formation of a creditors' committee.

When a creditor receives such an invitation, it is a common question, whether he should participate, whether it makes sense to travel sometimes hundreds of kilometres to do so and what the whole matter is about.

The committee itself is a 'body' of 3-7 persons elected by at least a third of all creditors (who together hold at least a third of the claims) to act as a link between the liquidator and the creditors and, also in some cases between the creditors and the court.

At the meeting convened by the liquidator it must therefore be first assess whether at least one third of the creditors wish to form a committee and if so, who should be appointed/elected to it. A chairman may be elected by the creditors who have formed the committee from among the members of the committee.

The operation of the committee is determined by the creditors who run it, decisions shall be done for the budget, the financing of its operation, the right of representation, etc. It is important to note that a committee can be formed at a later date and that creditors are free to join and leave, but the above mentioned quota must be guaranteed at all times.

Once the committee is formed, the court, the liquidator and the debtor have to be notified thereon.

When a client asks us what to do at a meeting called to form a creditors' committee, we typically jokingly advise them to be very careful not to become a committee member or even worse, the chairman of the committee. The reason for this is that the committee has many powers, it can exercise control over the liquidator, it has more information about the proceedings than a creditor acting outside the committee, but in our experience, particularly in more complex proceedings with many creditors, the chairman of the committee becomes the creditors' ’problem solver and mediator’ as a full-time job. As the committee is the link to the liquidator, new requests from any creditor might arise every hour, advising the chairman what to ask, what action the committee should take, or what the creditor thinks could be done differently and better. If the liquidator gives a satisfactory answer to the questions asked, they should be processed and shared with the creditors; if the answer is not acceptable, the liquidator should be questioned further.

In our experience, it makes sense to set up a committee where the debtor company has valuable assets and the members of the committee are creditors with claims in high amounts, who wish to secure as large a proportion of the satisfaction of their claim as possible. In such cases, it is a sensible decision to participate, and the often considerable amount of work involved can produce real results.

Just to name a few, let us look at some of the important powers of the committee:

• the debtor's manager and the liquidator must inform the committee on the debtor's assets and financial situation within 8 days after its request,
• if exceeding the scope of the day-to-day operations, the liquidator shall inform the committee at least 15 days in advance on any contracts he intends to conclude or terminate, upon discarding of stocks. The committee shall have the right to comment such actions,
• the liquidator shall provide the committee with quarterly accounts and a report on his activities, the development of the debtor's assets and financial situation and the liquidation costs,
• the liquidator is obliged to obtain the consent of the committee to continue the debtor's business activities.

It is obvious that a committee does have more information and certain consultative powers, so that in the case of major liquidation assets and/or continued operation during liquidation, the committee can help to enforce creditors' rights if sufficient resources (in particular time and money) are devoted to its operation.