Sec. 125. Composition Defined

A composition by a debtor with his creditors is an arrangement whereby the debtor pays or agrees to pay a certain percentage of the claims to the creditors upon their agreement with him and with each other to accept such amount in satisfaction of the entire debt. Such an arrangement will stand as made.

A debtor in failing circumstances often finds it advisable and possible to come through his financial difficulty by an agreement with his creditors whereby they agree with him and each other that they will accept a certain percentage in satisfaction. This may be upon a cash basis, or part cash and part time, or all upon time payments. This transaction is everywhere upheld and the old debt is wiped out in the new agreement. This is true whether the indebtedness is liquidated or unliquidated.

A composition may be a strictly cash transaction or, as is perhaps more usual, on time at least in part. It may be made with all the creditors or with only a part of them. If the debtor makes fraudulent misrepresentations the creditors are not bound upon the composition. Of course, a composition of creditors, as the definition shows, must be upon full consent of every one involved. No creditor could be made a party to a composition which he did not agree to.

A composition by a debtor with his creditors differs from a compromise or settlement by a debtor with one of his creditors or with all of them in separate agreements. In a composition the debtor and at least two of his creditors are involved and they are all parties to the same agreement. One creditor foregoes a portion of his claim in consideration of the other creditor foregoing a portion of his. The transaction is everywhere upheld, and is frequently met with in commercial life.

In bankruptcy, a bankrupt debtor may offer terms of composition, as discussed in our treatment of bankruptcy.