Composition Agreement

In finance, a composition agreement is a contract signed by both a financially insolvent entity and its creditors which provides an alternative to bankruptcy proceedings.

By signing a composition agreement, creditors may agree to accept only partial repayment of the money owed to them, or to allow the entity to repay the debt in installments over an extended period of time.

Composition agreements may be preferable to bankruptcy proceedings if the assets which can be seized from the insolvent entity are insignificant in relation to the debt.

A composition agreement may also be preferable when the insolvent entity is capable of repaying at least a substantial portion of the debt if allowed to continue operating.

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Daniel Dreier is editor and personal finance expert at moneyland.ch.

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