If you're serving on a creditors committee, you will be faced with several financial challenges, including the following:

• Paying the professionals. Be clear from the outset how the professionals - your attorney, accountant, etc. - will be paid. There are two options:

  Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

  • In most cases the professionals will be paid directly from the proceeds of the bankrupt estate. The professional has an "administrative priority claim," meaning he or she is paid before all other creditors - secured or unsecured.

  • In some cases, professionals try to create side agreements (which are perfectly legal) that if there is nothing to be paid out, the committee will pay fees. I suggest denying this request. You can always find a professional who is willing to be paid from the estate.

• Handling emergency funding. You can expect the debtor to seek emergency financing to keep the business running. The bank's primary concern in granting the loan is getting replacement liens on post-petition assets. Your responsibility? Keep the bank in line. Banks have been known to grab as much as they can get their hands on. For example, they might try to secure $1 million in assets in return for a loan of $250,000.

• Making decisions. The committee has the right to make decisions about the company and to actually run the company, usually through the bankruptcy trustee. The committee must approve salaries to officers as well as the sale or purchase of any capital equipment. You should make decisions in the interest of all creditors, not just in your company's interest.

• Obtaining new financing. After emergency financing is exhausted, the debtor will probably seek new financing. Pay attention to the potential lenders--especially in four areas:
  • Debtor-in-possession financiers often try to get very favorable agreements in terms of interest rates and collateral, Recommendation? Negotiate aggressively.

  • Financiers also attempt to get a "notice of advance rate." Traditionally a lender will allow the debtor to borrow up to 80% of approved receivables. Under a "notice of advance rate," the lender seeks the right to change this rate at its discretion. Recommendation? Compromise--"We'll give you that right, but you must give us 90 days notice to arrange other financing."

  • Lenders will want liens on prepetition inventory. Recommendation? This is acceptable, as long as the inventory is not already subject to reclamation claims.

  • New financing should also include a "carve out" for professional fees as an incentive to keep these people working for the committee.

Thanks to
John M. Rossini, formerly principal of John M. Rossini & Associates in Woodhaven, New York and now director of credit with Central-National Gottesman, a $3.1 billion forest product agent.

Prior to joining Central-National Gottesman, he held positions at International Paper Company and Ris Paper Company. John holds a BA in Economics from Fordham University and an MBA from Pace University.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.

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