As with any contract, a composition with creditors must be supported by a reflection to be enforceable. The promise of each creditor to accept a proportionate share of the partial payment, as opposed to the full payment of the due portion, is a consideration for the other creditors and the debtor. The abandonment of the debtor`s right to file for bankruptcy is considered a consideration for creditors. 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. No standard form is required for the validity of a composition with creditors. A debtor may enter into individual agreements with any creditor if it is clear that each of them has a common purpose. Not all creditors of a debtor are required to approve a composition.
Those who do not participate are not related to it. A composition with creditors generally benefits a debtor more than bankruptcy, because it achieves the same objective – the use of all or most of a debtor`s debts – without the stigma of bankruptcy. Unlike bankruptcy relief, a composition does not rule out a future bankruptcy for six years. However, creditors are often reluctant to make a composition and those who refuse to do so are not affected by their terms. 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. 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.
Composition, in modern law, an agreement between the creditors of an insolvent debtor to accept an amount less than they are due to obtain an immediate payment.