What is a composition agreement?
For companies facing financial distress, a composition agreement can provide an alternative to bankruptcy. It is a negotiated arrangement in which a debtor offers its creditors a partial payment of their claims — often a fixed percentage — in exchange for final discharge of the remaining debt.
Although creditors initially receive less than the full amount owed, they may ultimately recover more than they would in bankruptcy, where the company’s assets are liquidated and the proceeds divided.
The success of a composition agreement depends on the debtor’s ability to make an attractive and credible proposal, sometimes offering not only cash but also shares or other consideration to settle the claim. For creditors, the advantage lies in avoiding lengthy and costly collection procedures, and preserving the possibility of a continued business relationship.
Judicial and extrajudicial composition
There are two types of composition agreements under Dutch practice:
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Extrajudicial composition (out-of-court agreement)
– A voluntary settlement negotiated directly between debtor and creditors.
– Creditors are not obliged to accept the offer.
– Only those who agree are bound by it.
– Typically used to avoid bankruptcy and restore financial stability. -
Judicial composition (in-court agreement)
– Offered during formal proceedings such as suspension of payment or bankruptcy.
– If more than half of the creditors, representing more than half of the total debt, accept the offer, and the court subsequently approves it, the agreement becomes binding on all creditors.
– The court’s approval process is called homologation.
In both situations, success depends on transparency and trust — creditors must have sufficient insight into the debtor’s financial position and prospects to evaluate the proposal.
Tax considerations and creditor position
In practice, even preferential creditors such as the Dutch Tax Authorities may cooperate with a composition agreement, provided that they receive a higher repayment percentage than unsecured creditors (typically double).
A well-prepared and properly documented composition agreement can prevent bankruptcy, reduce losses for creditors, and give the company a viable path forward.
Professional support during restructuring
Because the terms of a composition agreement are not legally fixed, professional guidance is essential. I assist companies in drafting and negotiating such agreements, ensuring that the proposal is legally sound, financially realistic, and persuasive to creditors.
With extensive experience in Dutch restructuring and insolvency law, I help clients develop and present composition agreements that protect their interests and maximise the chances of approval — whether negotiated privately or through formal court proceedings.
Before starting, you will always receive a realistic cost overview within 24 hours, ensuring full transparency throughout the process.
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By VIOTTA.
