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court generally increases administrative overhead which may ultimately reduce distributions to unsecured creditors.
Funding a chapter 11 case before confirmation is often extremely expensive. The overhead of maintaining the debtors' professionals, financial advisors, committee professionals and investment bankers can be enormous. Thus, the trend has been to appoint an independent liquidating trustee under creditor supervision to reduce these overhead costs. Generally, the creditors, instead of the bankruptcy court, control the engagement of and payments to professionals hired by the liquidating trustee.
Converting the case to a chapter 7 liquidation creates a fee structure controlled by the Bankruptcy Code, which requires continued oversight by the bankruptcy court. Establishing a liquidating trust and compensating the liquidating trustee on an hourly basis for a complex chapter 11 case is generally less expensive than the success-based formula under the Bankruptcy Code. Compensation for a liquidating trustee is a matter of negotiation with prospective trustee candidates, and can be tailored to meet fact-specific circumstances and to reach pre-defined goals of the liquidation.
The contractual provisions governing the liquidating trust can be structured to favor the needs of creditors. The primary goal of the liquidating trust is to maximize recovery for unsecured creditors in the minimum amount of time. It is essential that the creditors articulate identifiable goals when drafting the liquidating trust. A few cost reduction and time saving tips include:
