Composition Agreements and Their Conditions

Composition Agreements and Their Conditions

In order to examine composition agreements, as well as their conditions and legal effects, it is first necessary to provide a brief explanation of bankruptcy.

Legal Requirements for Concluding a Composition Agreement

Bankruptcy

Bankruptcy is a legal condition in which a trader or a commercial company becomes unable to pay its debts and is no longer capable of fulfilling its financial obligations. Such persons are legally referred to as bankrupt or insolvent. Bankruptcy regulations apply exclusively to traders. If an ordinary individual is unable to pay their debts, they are legally considered insolvent rather than bankrupt.

Due to the legal classification of commercial companies as traders, bankruptcy rules also apply to them. However, shareholders and managers of commercial companies are not considered traders, and bankruptcy regulations do not apply to them personally. When a person is declared bankrupt, creditors do not have priority over one another in the distribution of assets. In contrast, in cases of insolvency, the creditor who acts first may obtain satisfaction of their claim.

Issuance of a Bankruptcy Judgment and the Competent Court

Bankruptcy is declared by a court judgment, and without such a judgment, bankruptcy is not legally established. The competent court for issuing a bankruptcy ruling is the general court of the trader’s place of residence. Bankruptcy may be declared upon the request of one or more creditors, at the request of the public prosecutor, or upon the declaration of the trader themself.

The Concept of a Composition Agreement

Pursuant to Article 479 of the Commercial Code, a composition agreement is concluded between the bankrupt trader and the body of creditors, provided that the statutory conditions prescribed by law for the parties are met. Such an agreement becomes legally valid only after judicial approval and otherwise has no legal effect.

The legislator’s strict approach is based on the fact that, upon approval of the composition agreement, the trader exits bankruptcy and regains the capacity to perform legal acts. Therefore, the court must be satisfied as to the trader’s good faith and must ascertain that the trader has no fraudulent intent and intends to comply with the provisions of the composition agreement.

Parties to the Composition Agreement

A composition agreement is concluded upon the proposal of the liquidator and the bankrupt trader when at least a majority in number of the creditors, meaning half plus one, who collectively hold at least three quarters of the total verified claims, are present at the meeting. Otherwise, the outcome of the meeting remains suspended.

The composition agreement becomes final if, at the second meeting, the numerical and financial majorities stipulated in Article 480 of the Commercial Code are achieved, and the creditors formally express their consent to the agreement.

Cases in Which a Composition Agreement Is Legally Prohibited

If the trader has been convicted of fraudulent bankruptcy, the conclusion of a composition agreement with such trader is prohibited. An exception applies where there is a reasonable likelihood of the trader’s acquittal by the court. In such cases, the trader’s good faith may be established, and if the absolute majority of creditors consent to the agreement following the court’s decision, no legal obstacle to concluding a composition agreement shall remain.

Legal Effects of Composition Agreements

Under a composition agreement, the trader undertakes to pay the creditors who have consented to the agreement their claims on the specified dates set forth in the agreement. In essence, the creditors grant the bankrupt trader an opportunity to continue commercial activities in exchange for full payment of their claims within the agreed timeframe.

Once approved by the court, the agreement becomes binding on the creditors who have signed it. The proportional shares of creditors who have opposed the agreement are determined, and after the consenting creditors are paid in full, dissenting creditors may seek payment of the remaining portion of their claims from the trader.

Enforcement Guarantees of the Composition Agreement

One or more guarantors may undertake to guarantee the performance of all or part of the composition agreement. In the event that the trader fails to comply with the terms of the agreement, the guarantor or guarantors are obligated to fulfill the obligations toward the creditors. Where multiple guarantors exist, their liability is joint and several.

If the composition agreement is annulled, the liability of the guarantor or guarantors is automatically extinguished, and no further obligation remains upon them.

Procedure for Objecting to a Composition Agreement

Pursuant to Article 485 of the Commercial Code, all creditors who are entitled to participate in the conclusion of a composition agreement have the right to object to it. Such objection must be substantiated and submitted within one week from the date of conclusion of the agreement to both the liquidator and the bankrupt trader.

If these conditions are not met, the objection shall be deemed invalid and shall have no legal effect. However, if, after judicial review, the court upholds the objection, the composition agreement shall be ineffective as to all interested parties.

Frequently Asked Questions Regarding Composition Agreements