23 February 2017

Composition proceedings have been opened against my contractual partner – what now?

Composition proceedings – What is at issue?
Composition proceedings are a legally regulated settlement of debts procedure. They basically serve the financial rehabilitation of the debtor, a natural or legal person.

Therefore, composition proceedings can be a more interesting long-term solution than bankruptcy proceedings for creditors and debtors, often yielding better results for the creditors. However, as a rule, composition proceedings also require that the creditors are willing to forego part of their claims at the beginning of the proceedings.

Who is my contact person after the opening of composition proceedings?
In composition proceedings, the debtor basically retains the right to dispose of his assets and is therefore entitled, after the opening of composition proceedings, to continue his business (with the exception of a few legally regulated exceptions) under the supervision of the commissioner. However, the court may make the validity of certain acts of the debtor subject to the approval of the commissioner or transfer the authority to conduct business to him instead of the debtor.

Basically, therefore, the debtor remains the contact person for his contractual partners even after the opening of composition proceedings. However, the contractual partners are well advised to inquire with the commissioner in case of doubt.

How do composition proceedings affect the rights of creditors?
During the composition moratorium, no enforcement proceedings can be initiated or continued against the debtor. Pending civil and administrative proceedings are basically frozen.

Attachment of debtor’s assets or other safeguards against him are also not possible for non-privileged claims during the composition moratorium.

The periods of limitation and forfeiture are suspended during the composition moratorium, and the interest on all claims that are not secured by pledge will basically stop accruing.

Ultimately, the commissioner may declare that claims not for monetary performance, but for specific performance (so called "Realforderungen") that are directed against the debtor are to be converted into money claims of equivalent value.

Should I continue to fulfil my contractual obligations to my contractual partner after composition proceedings have been opened against him?
Yes. It is, however, conceivable that the debtor would make use of an extraordinary legal right of termination in the case of long-term contracts (so called continuing obligations, e.g., leasing contracts), provided that the continuing obligation would render the rehabilitation more difficult. For this purpose, however, he requires the consent of the commissioner and becomes liable to indemnify his contractual partner.

Deliveries on credit to debtors with financial difficulties?
Since unsuccessful composition proceedings usually lead to bankruptcy proceedings, caution should also be exercised during composition proceedings in the case of deliveries on credit. For further information please refer to the comments in the blog contribution of 31 January 2017.

Finally, legal proceedings which took place during the composition moratorium and which were approved by the composition court or by the creditor committee are no longer open to avoidance actions (so called "actio pauliana").

Our Litigation Team and our Insolvency Law Team will be happy to answer any further questions you may have.

Authors: Thomas Weibel, Claudia Walz, Florian Jenal

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