Legal Definitions - composition

In legal terms, a composition refers to a formal agreement made between a debtor (an individual or entity that owes money) and two or more of their creditors (those to whom money is owed).

Under this agreement, the creditors collectively agree to accept a payment that is less than the full amount they are owed, in complete satisfaction of the outstanding debts. This arrangement allows the debtor to settle their financial obligations, often avoiding more drastic measures like bankruptcy, while creditors recover at least a portion of what they are due. A key aspect of a composition is that the agreement by each creditor to accept less than full payment serves as the legal basis for the arrangement, binding all participating parties.

Here are some examples to illustrate how a composition works:

• Small Business Recovery: Imagine "The Daily Grind," a local coffee shop, faces severe financial difficulties after a major street renovation project significantly reduces foot traffic for several months. The owner owes money to their coffee bean supplier, their milk and pastry vendors, and a company that leases their espresso machines. Unable to pay all these debts in full, the owner proposes a composition agreement. They offer to pay 60% of the outstanding balance to each of these four creditors over the next 12 months, in exchange for all original debts being considered fully settled. If all four creditors agree, this composition allows The Daily Grind to continue operating and eventually recover, while the creditors receive a substantial portion of their money rather than potentially nothing if the business were to fail completely.

  This illustrates a composition because: A single debtor (The Daily Grind) negotiates with multiple creditors (suppliers, leasing company) to pay a reduced amount, which, upon performance, fully discharges the original, larger debts.

• Individual Debt Settlement: Sarah, an individual, incurs substantial medical bills from two different hospitals and a specialized clinic after an unexpected illness. Despite her health insurance, the remaining out-of-pocket expenses are overwhelming, and she cannot afford to pay them all. With the help of a financial advisor, Sarah approaches all three medical providers. She proposes a composition where she will pay 45% of each bill over 18 months, and in return, the providers will consider her debts fully satisfied. If the hospitals and clinic agree, Sarah can manage her payments, and the medical providers avoid the uncertainty and cost of trying to collect the full amount from someone with limited resources.

  This illustrates a composition because: Sarah (the debtor) reaches a mutual agreement with multiple creditors (the hospitals and clinic) to accept a lower, agreed-upon sum, which, once paid, fully extinguishes her original debt obligations to them.

• Construction Project Challenges: "BuildRight Construction Inc." experiences unforeseen delays and cost overruns on a large commercial project, leading to significant cash flow problems. They owe money to several subcontractors (e.g., plumbing, electrical, roofing) and a major material supplier. To avoid bankruptcy, BuildRight's management meets with these five creditors. They propose a composition agreement where BuildRight will pay 70% of the outstanding balances to each creditor within six months, provided that the creditors agree to release the company from the remaining 30% of the debt. This allows BuildRight to stabilize its finances and continue operations, while the subcontractors and supplier recover a significant portion of their money without lengthy legal battles.

  This illustrates a composition because: BuildRight Construction Inc. (the debtor) negotiates with multiple creditors (subcontractors, material supplier) to settle their debts for a reduced, agreed-upon amount, leading to the full discharge of the original financial obligations once the agreement is fulfilled.