Composition Agreement

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Composition Agreement

A Brief Introduction About the Composition Agreement

A composition agreement is a contract agreement created upon a sufficient consideration, amid an insolvent/embarrassed debtor and his creditors, wherein the latter, considering immediate payment, agrees towards accepting a dividend less than the whole sum of their claims, towards being distributed pro-rata.

Who Takes the Composition Agreement?

A composition agreement is usually an agreement that is made between an embarrassed or insolvent debtor as well as two or more of his creditors and that each of the creditors entering into the agreement shall be paid a specified sum, less than the whole of their claims, as well as the creditors, agree towards accepting such payment in satisfaction of their claims.

Purpose of the Composition Agreement

The purpose of an agreement is that it is made by an insolvent or a debtor with two or more creditors. Here the creditors agree to accept one particular partial payment of the total amount of their claims, which shall be divided pro rata amongst them in satisfaction of their claims.

A Composition with Creditors is an agreement amongst many creditors of a debtor, generally a business. However, the agreement usually includes paying a lessened amount over some time. A composition is an arrangement that is made between a debtor and many creditors acting collectively for the bankruptcy of their claims.

Contents of the Composition Agreement

A composition with creditors is an agreement not only made between the debtor as well as the creditors but also is made between the creditors themselves to accept less than what each is owed. It is an agreement which is largely ruled by contract law. There should be a meeting of the minds or mutual acceptance between the debtor and the creditors before a composition is made. A debtor should accept an offer made by the creditors to accept partial payment of the amounts owed for the composition towards being binding.

The creditors should also agree to the amount they would accept in satisfaction of their claims. They depend on mutual concessions of their rights to full payment with the intention of further the common purpose of securing their claims.

How to Draft the Composition Agreement

A composition is an agreement amid a debtor and two or more creditors in which the creditors decide to take a partial payment in satisfaction of their claims.

The composition agreement is subjected more towards contract law principles than debtor-creditor guidelines. Therefore, compositions should satisfy every formal requirement of contract formation, which could vary from state to state, but most of the elementary principles are constant whichever state you are in.

There should be an offer to make a contract, the offer is required to be accepted, and there should be “consideration” (a legal term which means something of value exchanged amid the parties).

No standard form is needed for a composition with creditors to be valid. A debtor could enter individual agreements with every creditor if it is clear that each follows a common purpose. Each creditor of a debtor does not have to agree towards a composition. Those who do not partake are not bound by it.

Like any contract, composition with creditors should be supported by consideration to be enforceable. Each creditor’s promise towards accepting a pro-rata share of the partial payment, in place of full payment of what owes, is a consideration for the other creditors and the debtor. The surrender of debtor’s right towards filing a petition for Bankruptcy is deemed consideration for the creditors.

Negotiation Strategy

An agreement is signed by both a monetarily insolvent entity and its creditors, which provide an alternative to bankruptcy proceedings.

Through signing this agreement, creditors might agree to accept only partial repayment of the money owing to them or to permit the entity to repay the dues in installments over an extended time.

Composition agreements might be preferable towards bankruptcy proceedings if the assets which could be seized from the insolvent body are insignificant concerning the debt.

This agreement  might also be preferable when the insolvent body is capable of repaying at least a considerable portion of the debt if permitted to continue operating.

Benefits and Drawbacks of the Composition Agreement

A composition with creditors generally benefits a debtor more than bankruptcy since it achieves the same end discharge of almost or most of a debtor’s debts without the dishonor of bankruptcy.

One of the drawbacks of a composition is that it only binds the agreeable creditors, therefore creating the possibility for “holdouts” as well as related concerns. The probability of holdouts could also discourage otherwise agreeable creditors from agreeing towards a composition.

What Happens in the Case of Violation?

If there is a case of failure relating to obeying the terms of a composition, then it furnishes a basis for proceedings for breach of the agreement. The debtor is released from the obligation of payment only after he or she has obeyed the payment provisions. All amounts outstanding that are part of composition are extinguished once a composition was terminated.

In case a creditor is secretly paid more or given a partiality, the other creditors could void the agreement since the law guards against the unfair treatment of creditors. The preferred creditor would not be able to enforce or void the agreement(1). The debtor is allowed to recover payments made towards such a creditor on the theory that a debtor is vulnerable to pressure through a creditor who has the control to force the debtor to file bankruptcy through refusing to enter into a composition.

The composition is a special court determined process which allows debtors in monetary difficulty to avoid being declared insolvent (and the connected criminal risks) through an “agreement” proposed by the insolvent corporation and approved by many creditors signifying the majority of the corporation’s unsecured debts.