The composition in bankruptcy

The composition

A bankruptcy can end in a number of ways. For example, the judgment in which the bankruptcy was declared can be quashed (on appeal), and a bankruptcy ends by completion or simplified liquidation. Another way in which a bankruptcy can end is by offering a composition. A composition is an agreement between the bankrupt and his creditors. The law has made extensive provisions for the composition, but does not give any stipulations as to the contents of the composition. A lawyer may sometimes be helpful in this case. Usually the bankrupt offers to pay his creditors a certain percentage of their claims as a final settlement. Other agreements however, such as for example a suspension of payment or payment in instalments, are possible as well. A composition only applies for the unsecured creditors. Preferential creditors are always entitled to payment of their entire claim, also in case of a composition.

Lawyer for offering a composition

A composition is offered by the bankrupt to the creditors. The composition is taken to the vote at the verification meeting. Only unsecured creditors with an uncontested claim can vote on the composition. Preferential creditors can only be given the vote by waiving their priority before the vote. They become and will remain unsecured creditors, even if the composition is not accepted. Accepting a composition can be advantageous for creditors, because the percentage of their claim that will be paid when a composition is offered will in many cases be larger than the percentage they receive on liquidation of the bankrupt’s assets. A composition is often financed or co-financed by an external party. Another advantage is that a lengthy and expensive liquidation is avoided thanks to the composition. For the bankrupt, a composition means that after the end of the bankruptcy he can no longer be held to account for the part of his debts that have remained unpaid. All that remains for him is a natural obligation for the unpaid part of the claims. But although a natural obligation is not due and payable, it may under certain circumstances result in an offsettable claim. In many cases, the bankrupt can also continue his enterprise.

The forced composition

A composition is accepted if a majority of creditors appearing at the verification meeting who jointly represent at least half of the total debt burden vote in favour of the composition. If a composition has been accepted, the court will have to confirm the composition; this is called sanctioning. After sanctioning of the composition, it is binding on all unsecured creditors, including those creditors who have voted against the composition. The bankruptcy ends by sanctioning of the composition. The bankrupt can only offer a composition once during the bankruptcy. When the composition is rejected by a majority of the creditors or the sanctioning of the composition is refused, the bankrupt will not be able to offer a composition in the same bankruptcy. In practice, only a minor part of all bankruptcies are ended by a composition.

Preferential creditors

As described above, a composition only binds the unsecured creditors. The rights of preferential creditors are not limited in any way by the composition. This is why an arrangement is often also made with the preferential creditors on formation of a composition. The Tax Authorities will only consent to a composition if they get twice the percentage that the other creditors will receive. The guidelines for this have been laid down in what is called the Collection Guidelines. As the Tax Authorities often represent a major percentage of the preferential debts owed, it is often favourable for the other creditors to consent to this requirement of the Tax Authorities. As the Tax Authorities waive a major part of their claim, the distribution rate for unsecured debtors will considerably increase. The Employee Insurance Agency UWV follows this policy of the Tax Authorities. The other preferential debtors in the bankruptcy will have to agree to a treatment similar to that of the Tax Authorities.

Lawyer for compositions

The insolvency lawyers of AMS have extensive experience with compositions with creditors, in bankruptcy and otherwise, also because of their many years of experience as trustees in bankruptcy. The AMS lawyer assists client in offering a composition or assessing the question whether or not they should accept an offer for a composition.