Introduction

Parties to an insolvency proceeding are regularly the insolvency debtor, the insolvency court, the insolvency administrator (or the trustee with the management) as well as the insolvency creditors and creditors with a right to separate satisfaction (absonderungsberechtigte Gläubiger). The principal organ of the insolvency creditors is the creditors’ assembly, through which the creditors jointly exercise their rights vis-à-vis the insolvency debtor, the insolvency court and the insolvency administrator (Sec. 74 German Insolvency Code (Insolvenzordnung, InsO)). Another vital organ ensuring creditors’ autonomy is the creditors’ committee (Gläubigerausschuss), a representative body regularly elected by the creditors’ assembly. The creditors’ committee’s role is comparable with the monitoring bodies of supervisory or advisory board under corporate law and primarily includes supervising and supporting duties vis-à-vis the insolvency administrator. The main provisions regarding the rights and duties of the creditors’ committee are provided for in Sec. 67 – 73 InsO.

By appointing a creditors’ committee, the insolvency creditors can strengthen their influence on the process of the insolvency proceedings. In the majority of insolvency proceedings the creditors are only informed about the current status of the proceeding and decide on specific measures of the insolvency administrator in the initial report meeting, the claims verification meeting and the final meeting of the creditors’ assembly. In contrast, the creditors’ committee ensures that the groups of creditors represented become better and regularly informed about the process of the insolvency proceedings and acts of the insolvency administrator. Furthermore, it grants them the limited possibility to take influence on certain decisions.

Appointment of the creditors’ committee

Unlike the creditors’ community, which comes into existence automatically upon insolvency proceedings being opened and in which every creditor is represented and which only needs to be invited to an assembly, the creditors’ committee must be appointed separately. In this regard, the German Insolvency Code distinguishes between:

• the provisional committee as a compulsory committee according to Sec. 22a para. 1 InsO if certain codified key figures regarding the debtor’s balance sheet total, the turnover and number of employees are met,

• the optional provisional committee according to Sec.  22a para. 2 InsO, which can be appointed upon request of the debtor, a creditor or the preliminary insolvency administrator in the preliminary insolvency proceedings,

• the interim committee according to Sec. 67 para. 1 InsO, which regularly exists in larger proceedings and which can be appointed in particular if the insolvency administrator has to make vital decisions with regard to the insolvency estate prior to the first creditors' assembly taking place, and

• the final creditors’ committee pursuant to Sec. 68 InsO.

The appointment of the final creditors’ committee is resolved upon by the creditors’ assembly. If a creditor’s committee has already been appointed, the creditors’ assembly decides whether it shall be retained. The insolvency court may revoke the creditors’ assembly’s resolution to appoint or retain the creditors’ committee upon request of a creditor with a right to separate satisfaction, a non-subordinated ordinary creditor or the insolvency administrator if the creditors’ assembly’s resolution disregards the common interests of the creditors (Sec. 78 InsO).

Composition of the creditors’ committee

With regard to the composition of the creditors’ committee all relevant groups of creditors, i.e. creditors with a right to separate satisfaction, creditors with the highest claims, small claims creditors and employees, should be taken into account. The actual selection of the creditors’ assembly or the insolvency court, respectively, is subject to their best judgment; thus, they are free to decide upon the precise number of members of the committee and the creditor groups represented therein. Excluded as members of the creditors’ committee are the insolvency administrator and the insolvency debtor itself. Furthermore, the representatives of the individual creditor groups within the final creditors’ committee, unlike within the preliminary creditors’ committee, do not necessarily need to be creditors themselves. Thus, it is possible to appoint external experts. In order to prevent a stalemate the committee should consist of an uneven number of members.

As soon as the creditors’ assembly has approved or appointed a final creditors’ committee in a specific composition, the appointment of individual members may only be revoked for cause. Moreover, a member of the creditors’ committee cannot resign from office without cause, either. In contrast, the creditors’ assembly may at any time appoint additional members. 

Independency of the creditors’ committee

The creditors’ committee is independent of any other organ in the insolvency proceeding. Unlike the creditors’ assembly, the creditors’ committee is not subject to the supervision of the insolvency court. Correspondingly, the insolvency court cannot revoke or correct resolutions of the creditors’ committee and cannot impose administrative sanctions on members of the creditors’ committee. Moreover, the insolvency court cannot demand to be informed about results of a creditors’ committee meeting or even request to be furnished the minutes of the committee meetings. In addition, the creditors’ committee is independent vis-à-vis the creditors’ assembly. Hence, the creditors’ assembly has no right of direction vis-à-vis the creditors’ meeting and cannot resolve upon the revocation or amendment of the decisions made by the creditors’ committees. 

On the other hand, the creditors’ committee has no right to issue instructions vis-à-vis the insolvency administrator. Rather, any misconducts discovered have to be reported to the insolvency court in order to bring about intervention of the court. Furthermore, the creditors’ committee has no influence on the general management except as explicitly provided for by statutory law.

All rights and obligations only refer to the internal relationship between the parties involved in the proceedings, i.e. the committee is not entitled to make binding declarations or establish any debts incumbent on the insolvency estate (Masseverbindlichkeiten). Hence, despite its rights, the creditors’ committee remains a supportive and monitoring body rather than an executive body. Therefore, any acting of either the creditors’ committee or any of its members, in particular regarding contract negotiations or the establishment of any debt incumbent on the insolvency estate by way of entering into corresponding agreements with suppliers, can be ruled out.

Representation of interests

In spite of the fact that the creditors’ committee is independent vis-à-vis the creditors’ assembly, members of the creditors’ committee must act in accordance with the interest of all creditors. Every member of the creditors’ committee, regardless of whether being a creditor itself or elected as a representative of a certain creditor (group), must act without taking instructions and pursuing special interests. Primarily, the creditors’ committee must maintain the interests of all insolvency creditors and put aside personal interests. In the event that a member should pursue individual interests, this would constitute a breach of duty. Likewise, if a member should favor the interests of a specific creditor, this would constitute a severe breach of duty, as well. Especially problematic is the exploitation of an advantage based on advance information obtained due to the position as a member of the creditors’ committee.

Rights and duties of the creditors’ committee

The principle of creditor autonomy, which is essential to the insolvency proceeding, requires that the insolvency administrator is monitored and that the creditors are involved in essential decisions. The legislator provided for a system that combines governmental supervision as well as monitoring by the creditors. First of all, the insolvency administrator is subject to judicial oversight by the insolvency court. Furthermore, Sec. 160 InsO, pursuant to which the insolvency administrator needs the consent of the creditors’ committee for particularly important legal acts, clarifies that the legislator intended to significantly strengthen the participation of the creditors.

Support and monitoring 

The core responsibility of the creditors’ committee is to support and monitor the insolvency administrator. As part of the supervisory duty, the creditors’ committee must inform itself about the state of the business operations, access books and records as well as business documents and monitor the monetary cash and financial transactions. For fulfilling this task, in particular in large proceedings, third-party specialists may be engaged.

Nature and extent of the duty of support as well as the task of supervision follow the necessities and goals of the proceeding. For example, the diligence standards are increased if the debtor company is being continued by an insolvency administrator who does not have industry expertise. Unlike the insolvency court, the creditors’ committee does not only have to monitor the lawfulness of the management measures taken by the insolvency administrator, but also their appropriateness and economic efficiency.

Selection of the insolvency administrator

One of the most important rights of the creditors’ committee concerns participation in the appointment of the insolvency administrator. Thus, pursuant to Sec. 56a InsO the preliminary creditors’ committee has to be granted the possibility to determine requirements regarding the administrator which the insolvency court must take into account when appointing the insolvency administrator. In addition, the insolvency court can only deviate from an unanimous proposal of the provisional creditors’ committee regarding the insolvency administrator to be appointed, if such person is unfit for said office.

Information rights

To allow the creditors’ committee to exercise effective support and control, it has information and notification rights vis-à-vis the insolvency administrator, the insolvency trustee (Sachwalter) and the debtor. Pursuant to Sec. 261 para. 2 InsO the insolvency administrator must inform the creditors’ committee about the status and prospects of an insolvency plan, whereas the insolvency trustee must immediately notify the creditors’ committee upon identifying circumstances which in case of a continuance of the debtor-in-possession proceeding (Eigenverwaltung) can be expected to be detrimental to the creditors. Further, the debtor has an information obligation regarding all aspects relating to the proceeding, Sec. 97 para. 1 sentence 1 InsO. In addition, according to Sec. 258 para. 3 sentence 2 InsO the creditors’ committee is to be notified in advance of the time a closure of the insolvency proceeding comes into effect.

Motion rights

Corresponding with the supporting and monitoring duty, the creditors’ committee has also certain motion rights. For example, according to Sec. 59 para. 1 sentence 2 InsO the creditors’ committee may seek the dismissal of the insolvency administrator based on material grounds. Furthermore, according to Sec. 75 para. 1 no. 2 InsO the committee may apply with the insolvency court to order the calling of a creditors’ assembly.

Approval and ratification reservations

Conversely, the insolvency administrator is bound to obtain the approval of the creditors’ committee regarding certain measures. According to Sec. 160 InsO measures of particular importance to the insolvency proceedings require approval of the creditors’ committee. Such measures are, for example, the sale of the debtor’s company, business or all inventories, the taking out of a loan which would place a substantial burden on the insolvency estate, or the decision to conduct a lawsuit or to enter into a settlement for the conclusion of a lawsuit involving a significant amount in dispute. Other legal acts need to be of the same importance as above examples.

Moreover, there are further approval requirements, for example with regard to the involvement in the distribution to the insolvency creditors (Sec. 187 para. 3 sentence 2 InsO), the rejection of the insolvency plan (Sec. 231 para. 2 InsO) or the continuation of the disposition and distribution after suspension (Sec. 233 InsO). However, in case the insolvency administrator does not abide by an approval requirement, the validity of the measure vis-à-vis third parties is not affected.

Co-determination and participation rights

Furthermore, the creditors’ committee has certain co-determination and participation rights. These include the rights according to Sec. 195, 187 para. 3 sentence 2 InsO regarding distribution, Sec. 149 para. 1 InsO relating to the investment of money and the rights under Sec. 218 para. 3 InsO relating to the preparation of insolvency plans. 

Rights to comment and to be heard

Moreover, the creditors’ committee has certain rights to comment and to be heard, for instance when it comes to the termination of the proceedings (Sec. 214 para. 2 sentence 1 InsO).

Organization and resolutions of the creditors’ committee

The creditors’ committee is entitled to establish its own rules of procedure, which may be reasonable, particularly in large proceedings. This is especially true in light of the fact that apart from the provisions contained in Sec. 72 InsO, the German Insolvency Code does not contain any provisions regarding the organization of the creditor’s committee, such as, e.g. the election of a chairman and his deputy chairman, the convocation of meetings or the way of adopting resolutions.

Resolutions of the creditors’ committee require a simple majority (Sec. 72 InsO). For the effective adoption of resolutions in the creditors’ committee, the majority of the members of the creditors’ committee has to attend.

Within the creditors’ committee the principle of equality of all members applies, i.e. the amount of registered claims is not taken into account. A decision is therefore passed if it receives the majority of the votes cast. In case of a tied vote the motion is deemed to be rejected. Multiple voting rights, for example of the chairman, are prohibited.

Liability

Pursuant to Sec. 71 InsO, members of the creditors’ committee are liable vis-à-vis creditors with a right to separate satisfaction as well as vis-à-vis the insolvency creditors for the culpable breach of statutory provisions but not, however, vis-à-vis the debtor, preferential creditors (Massegläubiger) and creditors entitled to segregation (aussonderungsberechtigte Gläubiger). The liability includes in particular the culpable breach of supporting and monitoring duties. The standard of liability is the diligence of a proper and conscientious committee member. The personal ability and experience of the member must be taken into account. However, the member of the creditors’ committee cannot merely exculpate himself by pointing to lacking the necessary experience. Every member must verify whether he is capable of accepting the office, and accepting the office creates the corresponding obligation to inform oneself.

If several members of the committee are in breach of their duties, they are jointly and severally liable. Usually, insurance coverage comparable to D&O insurance is retained for the members of the creditors’ committee.

Conclusion

As a creditors’ committee can act much faster and more flexibly than the creditors’ assembly, its appointment makes, beside in larger proceedings in which a creditors’ committee is mandatory, anyway, particularly sense in debtor-­in-possession proceedings and in case the debtor’s business is being continued.

The membership in the creditors’ committee leads to a great advantage regarding information in comparison to other creditors. The respective creditors gain a better understanding of the proceeding and, furthermore, often have the opportunity to influence the specific process of the proceeding. On the other hand, membership results in a high liability risk.

As members of the committee are obliged to fulfill their duty independently and free from any particular interests, the risk of a conflict of interests is inherent to the office und cannot be denied.