Composition agreement: how does it work?

What does a composition agreement entail?

For companies in financial distress, the use of a composition agreement can offer a solution. The aim is to offer creditor(s) an agreement to pay a percentage of the claim in exchange for final discharge.

Although in principle this appears to be disadvantageous for the creditor(s), avoiding bankruptcy means that a higher percentage of the claim can ultimately be repaid.

It is then up to the debtor to persuade the creditor to agree to the agreement by making him an attractive offer. Given that the contents of the composition agreement are not predetermined, shares can also be offered to settle the claim.

Cost savings by foregoing a collection procedure or making a payment arrangement are reasons why the creditor would accept the agreement. Doing so can prevent a possible bankruptcy.

The in-court bankruptcy agreement

If this agreement is reached without the intervention of the court, it is called an extrajudicial agreement. If, however, the agreement is offered when there is a:

suspension of payments;
a statutory debt restructuring scheme or;
a bankruptcy,

then it is called a judicial agreement.

If half of the creditors, who together represent half of the outstanding debts, agree to the composition at the creditors’ meeting, the composition becomes binding for all creditors after ratification by the court.

This ratification by the judge is called homologation. For more information, read ‘the bankruptcy agreement‘.

Extrajudicial composition agreement

The creditors are not obliged to accept the offer in the case of the extrajudicial agreement of creditors. They retain the right to demand the claim in full.

This may result in creditors who do not accept the offer gaining an advantage over creditors who do accept the offer.

It is therefore necessary to present the offer in a manner that is most beneficial to each of the parties. It is also very important for the creditor to have enough information to assess the agreement thoroughly.

Relevant questions for this are:
What are the debts?
What are the debtor’s financial prospects?
Can the debtor itself fulfil the obligations laid down in the agreement?
Or is a third party financing the debts?

In short, a composition agreement that contains the right information can save the company from bankruptcy.

The tax authorities are also often willing to cooperate with the composition agreement. Given that they are preferential creditors, they do say that they want to see double the percentage of the claim reimbursed, compared to the unsecured creditors. This is also included in the guidelines that are part of the collection guideline.

Need an insolvency lawyer? Bring in VIOTTA

Since the content of the agreement is free of form, it is wise to hire a lawyer before concluding the agreement. If you or your company has to deal with bankruptcy or an agreement, we are happy to help. Our lawyers have gained a lot of experience by working on the largest bankruptcies in the Netherlands.