A contract entered into by an insolvent debtor or under financial pressure with two or more creditors, in which creditors agree to accept a certain partial payment of the total amount of their debts, which will be prorated among themselves in order to fully exploit their claims. However, it is necessary to distinguish between a composition among creditors and a composition that falls within the jurisdiction of a court. The former is fully regulated by creditors, while the latter is overseen by the court. With judicial review, creditors have better protection against fraud and greater certainty that their interests will be protected. However, a court-regulated composition requires litigation, but it is often plagued by additional costs that may affect its ability to comply with the agreement, or even reduce the amount it can accept. Out-of-court composition has therefore become the preferred procedure. A composition with creditors is an agreement not only between the debtor and the creditors, but also between the creditors themselves to accept less than everyone owes. It is a contract and such an agreement is largely governed by contract law. There must be a meeting of minds or mutual consent between the debtor and the creditors before creating a composition.
A debtor must accept an offer from creditors to accept partial payment of the unpaid amounts in order for the composition to be binding. Creditors themselves must also accept the amount they accept to satisfy their debts. They rely on reciprocal concessions of their full payment rights in order to achieve the common goal of guaranteeing their claims. Another feature of Dentons` restructuring and insolvency work is our expertise in the company`s voluntary agreements. As an arrangement, our lawyers use this agreement for restructuring projects to focus on the compromise of unsecured debts of creditors and thus avoid the appointment of a director or liquidator. Failure to comply with the terms of a composition forms the basis of an action for violation of the agreement. The debtor is not exempt from the payment obligation until he has complied with the payment rules. All debts that are part of a composition are erased as soon as a composition has been terminated. If a creditor secretly pays more or obtains a preference, other creditors can cancel the agreement because the law protects against the undue treatment of creditors. The preferred creditor cannot enforce the agreement or invalidate it. The debtor is entitled to recover payments made to such a creditor under the theory that a debtor is threatened by pressure from a creditor entitled to compel the debtor to go bankrupt by refusing to enter into a composition.
A composition with creditors differs in several respects from a transfer to creditors. It is created contractually, contrary to the common law or the law. Only creditors who consent are bound, while an assignment voluntarily assumes the debts discharged by the creditors.