For companies in financial difficulty that nonetheless have the potential to continue operating, composition (concordato) is an important alternative to bankruptcy. Redesigned in 2018 with the abolition of the postponement-of-bankruptcy mechanism, composition gives the debtor enterprise room to breathe while also aiming to protect creditors' rights. In this article, we cover what composition is, its process, and its consequences for both debtor and creditor.
Important: This article is for general information only and does not constitute legal advice. Composition is a technical and time-bound process; consult an expert lawyer for your situation.
Composition is a legal institution that allows a debtor who has become — or is at risk of becoming — unable to pay their debts to restructure those debts by agreement with creditors. It is regulated in the third book of the Enforcement and Bankruptcy Law. The aim is to enable the debtor to continue operating while creditors obtain the highest possible collection.
Law No. 7101, which entered into force in 2018, abolished the postponement-of-bankruptcy mechanism and redesigned composition. This reform aimed to offer insolvent companies a way to get back on their feet through restructuring. Today, composition is the principal mechanism that companies in financial difficulty resort to.
The debtor applies to the competent commercial court of first instance with a preliminary composition project. If the conditions are met, the court grants a provisional respite and appoints a provisional composition commissioner. At this stage, a ban on proceedings against the debtor begins.
If, following examinations during the provisional respite, the composition is found to have a prospect of success, the court grants a definite respite. During this period, the debtor's operations continue under the commissioner's supervision.
The composition project is voted on at the creditors' meeting. The majority prescribed by law must accept the project.
The project accepted by the creditors becomes binding upon the court's approval. An approved composition binds all creditors, including those who did not accept it.
A company's declaration of composition is a critical moment for creditors. Steps you should take as a creditor:
Critical for creditors: Remaining passive during the composition process may lead to loss of claims. The correct and timely registration of your claim, meeting strategy and, where necessary, objection are much more effective with professional legal support.
For financially distressed companies, we advise on composition (concordato) applications and process management; for creditors, we advise on objections to composition and registration of claims. Get in touch to assess your situation.
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