The judicial composition agreement is the legal procedure allowing a company in financial difficulty to avoid bankruptcy by negotiating, under court supervision, a restructuring or orderly liquidation plan with its creditors. Governed by art. 293 et seq. DEBA/LP, the composition agreement offers an alternative to bankruptcy that can better preserve the value of the company and improve the creditors' recovery rate. PBM Avocats assists executives and creditors in these complex procedures from Geneva and Lausanne.
The Provisional Debt Restructuring Moratorium (art. 293a DEBA/LP)
The composition procedure begins with a moratorium request filed by the debtor (or exceptionally by a creditor with their agreement) before the competent court. The court examines whether the conditions are met: it must appear plausible that the company can be restructured or that its assets can be liquidated under better conditions than in the event of bankruptcy.
If the request is well-founded, the court grants a provisional debt restructuring moratorium of four months (art. 293a DEBA/LP) and appoints a commissioner, who is generally a business restructuring specialist or an experienced lawyer. The moratorium has the immediate effect of suspending all enforcement proceedings and prohibiting the declaration of bankruptcy during its duration. The commissioner supervises the management of the company, draws up a statement of assets and liabilities, and prepares the composition proposal.
The Definitive Debt Restructuring Moratorium and the Role of the Commissioner (art. 295 DEBA/LP)
On the commissioner's report, the court may grant the definitive debt restructuring moratorium for a total duration of up to 24 months (art. 295a DEBA/LP). The commissioner continues their supervisory mission: they must approve important management acts beyond ordinary business. In the event of breach of legal rules or fraudulent conduct by the debtor, the commissioner may request revocation of the moratorium and opening of bankruptcy.
During the moratorium, the company continues its ordinary activity, under the commissioner's supervision. New creditors who deal with the company during the moratorium benefit from special protection: their claims are paid outside the composition agreement (art. 298 para. 2 DEBA/LP).
The Ordinary Composition Agreement (art. 314 et seq. DEBA/LP)
The ordinary composition agreement is a convention between the debtor and its unsecured creditors, approved by the court. It may take the form of:
- A claim waiver composition agreement: creditors agree to reduce their claims to a certain percentage (e.g., 40 cents per franc);
- A grace period composition agreement: creditors grant a deferral or staggered payment of their claims;
- A combination of both.
The composition proposal must obtain the approval of a qualified majority of creditors meeting in assembly (art. 305 DEBA/LP). The court approves the composition agreement if it meets the legal conditions, notably if the dissenting creditors are not inadmissibly prejudiced. Once approved, the composition agreement binds all unsecured creditors, including those who voted against it.
The Asset Assignment Composition Agreement (art. 317 et seq. DEBA/LP)
The asset assignment composition agreement allows the debtor to hand over all or part of their assets to court-appointed liquidators, so that they can proceed with an orderly liquidation and distribute the proceeds to creditors according to their rank. This form is often preferred to bankruptcy because the liquidation can be better organised, assets can be better valued, and certain operational elements can be transferred as a functional unit to a buyer.
Our lawyers intervene both to advise the debtor in drafting the request and negotiating with creditors, and to represent the interests of creditors in composition assemblies and approval procedures.
Frequently Asked Questions About the Judicial Composition Agreement
Which companies may benefit from a composition agreement?
The judicial composition agreement (art. 293 et seq. DEBA/LP) is open to any natural person engaged in commerce and registered in the commercial register, and to any legal entity subject to bankruptcy (SA/AG, Sàrl/GmbH, cooperative, commercial foundation). It is not reserved for large companies: SMEs may also benefit from it. The fundamental condition is that restructuring or orderly liquidation of the company is seriously envisageable, which the debtor must make plausible in their moratorium request.
What is the duration of the debt restructuring moratorium?
The court grants a provisional moratorium of a maximum of four months (art. 293a DEBA/LP), during which the appointed commissioner examines the company's situation and the feasibility of a restructuring plan. This moratorium may be extended up to 24 months in total (art. 295a DEBA/LP) if particular circumstances justify it, notably the complexity of the restructuring or ongoing negotiations with creditors. For the entire duration of the moratorium, individual enforcement proceedings and bankruptcies are suspended.
What does the ordinary composition agreement consist of?
The ordinary composition agreement (art. 314 et seq. DEBA/LP) is a court-approved agreement between the debtor and its creditors, by which they agree either to reduce their claims (claim waiver composition), or to grant an extended payment period (grace period composition), or a combination of both. To be approved, the composition agreement must obtain the consent of a qualified majority of creditors (half by number representing two thirds of the claims, or a quarter by number representing three quarters of the claims, art. 305 DEBA/LP).
What is the asset assignment composition agreement?
The asset assignment composition agreement (art. 317 et seq. DEBA/LP) involves the debtor assigning all (or part) of their assets to court-appointed liquidators for orderly liquidation and distribution of proceeds to creditors according to their rank. Unlike bankruptcy, the composition liquidation can be more flexible and allow for takeovers of all or part of the business activity by third parties. This type of composition agreement is often preferred to bankruptcy as it better preserves assets and can generate a better recovery rate for creditors.
Are secured creditors bound by the composition agreement?
No. Secured creditors (mortgage or chattel mortgage holders) are in principle not bound by the composition agreement for the portion of their claim covered by the value of the security (art. 305 para. 3 DEBA/LP). Only the part of their claim that exceeds the value of the security subjects them to the composition rules as unsecured creditors. This protection of secured creditors is an important element to take into account when negotiating a composition plan.