Entering into a composition with creditors

When a company or organization is experiencing financial difficulties, various instruments are available to prevent bankruptcy. Concluding a composition with creditors is one of the possible solutions. Offering a composition agreement to creditors generally takes place in situations where a possible bankruptcy is otherwise unavoidable. By accepting the composition agreement, creditors receive a percentage of the outstanding claim against full and final discharge. Creditors are not obliged to agree to the composition.

Agreeing to the terms

Companies that are faced with acute financial problems due to a high debt burden can try to avoid bankruptcy by means of a composition with creditors. By accepting the composition agreement, the debtor pays a creditor only part of the outstanding claim(s). The remainder will be waived. Under current legislation, the composition agreement must be accepted by practically all creditors. If this does not happen, the composition will most likely fall through, Often resulting in the debtor’s bankruptcy.

Conditions of a composition with creditors

Various conditions are attached to a composition with creditors. Before the composition agreement is approved by the courts: • at least half of the creditors and shareholders (together holding more than 50% of the shares) must support the composition • the company offering the composition must be engaged in profitable business activities • the composition with creditors must offer creditors a more favourable solution than bankruptcy • a composition must be necessary and sufficient in preventing bankruptcy

Creditor does not agree with payment arrangement

The debtor can attempt to reach an agreement with the creditors on a proposal for full and final discharge by means of a composition agreement, which implies that on the one hand, the debtor pays part of the debt and, on the other, that the creditor waives (part of) the debt. The creditor does not have to agree to the proposal. A composition with creditors only comes into effect if all creditors accept the proposal. If this is not the case, there is still the possibility of a compulsory composition agreement. This means that the court establishes a composition agreement and declares this binding on all creditors. If half of the creditors, who together represent at least half of the debt, agree, the composition agreement will be confirmed by the court, meaning that all creditors are bound by the composition agreement.

Court Approval of a Private Composition (Prevention of Insolvency) Act (WHOA)

Whereas a composition with creditors can only be concluded with the consent of practically all creditors, the introduction of the Court Approval of a Private Composition (Prevention of Insolvency) Act offers a company in financial difficulty additional options to prevent bankruptcy. This legislation offers companies more room to restructure debts by entering into a private agreement with creditors and shareholders. This way, creditors who do not agree to a payment arrangement are forced to cooperate under this Act. The court can approve the composition agreement and impose it on creditors subject to conditions. The aim of the WHOA is to increase restructuring options and to reduce the number of bankruptcies.

A successful and acceptable composition

Drawing up and entering into a composition with creditors, as well as determining the content of an agreement under the Court Approval of a Private Composition (Prevention of Insolvency) Act (WHOA) are complex matters. Our specialists in insolvency law and bankruptcy law specialize in finding tailor-made solutions, regardless of the situation. Through committed guidance and expertise, we support companies in drawing up a successful and acceptable composition agreement. For more information, feel free to contact one of our insolvency specialists.