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Abstract: 

The growing use of “bankruptcy directors” has emerged as a notable development in chapter 11 practice, particularly in sponsor-controlled restructurings. These directors — often restructuring professionals appointed shortly before a bankruptcy filing — are frequently tasked with negotiating restructuring transactions, evaluating insider claims, and managing conflicts involving controlling shareholders. Proponents argue that bankruptcy directors enhance board expertise and help address governance conflicts that arise when financially distressed companies are controlled by private equity sponsors or other insiders. Critics contend that the practice can shift investigative authority away from unsecured creditors’ committees, which traditionally serve as the principal watchdog for creditor interests in chapter 11 cases. Drawing on recent empirical research and several prominent restructurings — including Cengage Learning, Nine West, Payless Shoes, and Neiman Marcus — this article examines how bankruptcy directors operate in practice and how their role affects the balance of power between debtor boards and creditor committees. The article concludes that while bankruptcy directors may improve governance in some circumstances, their growing prevalence raises important questions about transparency, independence, and the appropriate allocation of investigative authority in chapter 11 proceedings.

Keywords: Corporate Governance in Chapter 11; Bankruptcy Directors; Displacement of the Creditor Committee; Cengage Learning; Nine West Holdings; Payless Shoes; Neiman Marcus

Affiliations:  1: Herrick, Feinstein LLP.