composition

composition, in modern law, an agreement among the creditors of an insolvent debtor to accept an amount less than they are owed, in order to receive immediate payment. When it appears that a debtor will not be able to satisfy all or even any of his creditors, the latter will often agree to accept equal proportions of what they are owed—for example, 25 cents on the dollar. At this point the initial claims are liquidated. If the debtor does not fulfill the agreement, then the creditors may demand only what is due them under it, rather than the full amount.

It is necessary, however, to distinguish between a composition among creditors and one that falls within jurisdiction of a court. The former is regulated entirely by the creditors, while the latter is supervised by the court. With court supervision, the creditors have a greater protection against fraud and a greater assurance that their interests will be safeguarded. A court-regulated composition requires litigation, however, often saddling the debtor with additional fees that may affect his ability to fulfill the agreement or, indeed, even lower the amount that he is able to agree to. Composition out of court has, therefore, become the preferred procedure.