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), by avoiding bankruptcy, 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 creditors’ agreement are free of form, shares can also be offered to settle the claim.

Cost savings by forgoing a collection procedure or making a payment arrangement are reasons for the creditor to accept the agreement. This can prevent a possible bankruptcy.

The in-court bankruptcy agreement

If this agreement is reached without the intervention of the court, it is called a extrajudicial agreement. However, is the agreement offered if there is a:

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

then it is called a judicial settlement.

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‘.

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Extrajudicial composition agreement

The creditors are not obliged to accept the offer in the case of the extrajudicial settlement of creditors. They reserve 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 that the creditor has sufficient information to assess the agreement thoroughly.

Relevant questions for this are the following:

  • What are the debts?
  • What is the debtor’s financial outlook?
  • Can the debtor fulfil the obligations laid down in the agreement himself?
  • 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 creditors’ agreement. Given that these are preferential creditors, they do say that they want to see double the percentage of the claim against the unsecured creditors reimbursed. This is also included in the guidelines that are part of the collection guideline.

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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.

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VIOTTA is a law firm based in Amsterdam and is specialized in advising on the areas of corporate law, mergers and acquisitions, contract law and corporate & commercial dispute resolution. We advise in transactional matters and litigate in commercial disputes. VIOTTA provides legal advises to its clients on Dutch corporate law matters, such as corporate governance, board structures, director’s duties and liabilities, joint ventures and other collaborations. VIOTTA advises purchasers, sellers, management and other stakeholders in domestic and cross border mergers and acquisitions (M&A).

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