A creditors’ composition is an arrangement made between a debtor and two or more creditors to settle a debt. The debtor agrees to pay the creditors less than the full amount owed, which is known as a composition. The creditors accept this offer because they prefer to receive some payment rather than none at all. Once the agreement is fulfiled, the debtor is no longer responsible for the entire debt owed to the participating creditors. This type of agreement differs from the preexisting-duty rule, which prohibits a person from using a promise to fulfil an existing obligation to escape a debt. In a creditors’ composition, each creditor agrees to accept less than the full amount owed, providing new consideration for the agreement. While in the past, a composition could also refer to compensating someone for harm done, this is not the common usage today.
A creditors’ composition is an agreement between a debtor and two or more creditors to adjust or discharge a debt for a reduced amount. The debtor will pay the creditors less than what is owed, but it will fully satisfy their claims. For instance, if a debtor owes $10,000 to two creditors, they may agree to pay each creditor $5,000 instead. This agreement releases the debtor from their debts to the participating creditors. It is important to note that this type of agreement is different from the preexisting-duty rule, which prohibits debtors from paying less than what they owe if they already had a legal obligation to pay the full amount. In a creditors’ composition, each creditor willingly accepts less than full payment, creating consideration for the agreement. Historically, a composition with the injured party served as a means to prevent acts of revenge. In Anglo-Saxon societies, for example, a person who caused harm could offer a composition, such as a payment of money or goods, to the injured party as a form of satisfaction instead of facing retaliation or punishment.
A creditors’ composition is a legal process where a debtor proposes a settlement plan to their creditors to repay their debts in a structured manner. It allows the debtor to avoid bankruptcy and provides an opportunity for creditors to receive at least a portion of their outstanding debts.
Any individual or business entity that is facing financial difficulties and is unable to meet their debt obligations can initiate a creditors’ composition.
The benefits of a creditors’ composition include avoiding bankruptcy, negotiating reduced debt amounts, extending repayment terms, and maintaining control over the debtor’s assets and business operations.
The debtor proposes a settlement plan to their creditors, which typically includes a reduced repayment amount and an extended repayment period. Creditors then vote on whether to accept the proposed composition. If a majority of creditors agree, the composition becomes binding on all parties involved.
Most types of debts can be included in a creditors’ composition, including loans, credit card debts, and trade payables. However, certain debts such as child support, alimony, and certain tax obligations may not be eligible for inclusion.
If a creditors’ composition is approved by a majority of creditors, it becomes binding on all creditors, including those who voted against it or did not participate in the voting process.
If a creditors’ composition is not approved, the debtor may need to explore other options such as filing for bankruptcy or negotiating individual settlements with their creditors.
In some cases, a creditors’ composition can be modified if unforeseen circumstances arise. However, any modifications would typically require the consent of the majority of creditors.
Yes, a debtor can usually continue to operate their business during a creditors’ composition, as long as it is in the best interest of both the debtor and the creditors.
In most jurisdictions, a debtor can only use a creditors’ composition once. However, specific rules may vary depending on the applicable laws and regulations.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 16th April 2024.
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