Preventive Composition (Protective Composition)
Suppose your company is in a situation where its debts are constantly growing, the risks are increasing, and this is affecting its activities and financing possibilities, and there are great difficulties in payment. According to
the Z-Score Method, your company is going to face
bankruptcy in a short time. So, what is the procedure followed in such circumstances? Will you wait for your creditors to submit a request to declare your bankruptcy and share your assets? Or will you precede them and work hard to preserve your business and your company and advance it again? One relatively new possibility in certain legislations is "
Preventive Composition" (also called: "
Protective Composition"). In short, a preventive composition procedure allows a company that is facing financial difficulties but is not yet "insolvent" to utilize a court-led process to reach a settlement and restructure its obligations and assets.
What is Preventive Composition? Definition
The Preventive Composition Procedure (PCP) is a debtor-led, court-supervised procedure and subsequent contract between a debtor and its creditors, which becomes binding on them upon approval by the competent court. If the court accepts the debtor's application, the debtor will be placed under the supervision of a court-appointed expert – or trustee – and all bankruptcy proceedings, other claims and enforcement actions relating to the debtor are automatically stayed. It aims to save the company that is defaulting in paying its debts from bankruptcy, to protect it from the negative effects of it, and to allow the company to continue its activities and achieve its interests, in addition to restoring the rights of creditors.
The procedure allows the debtor an initial period of for example 45 working days from publication of the court's decision to submit a draft preventive composition plan (this period may be extended by application to the court). The draft plan should outline the debtor's proposals along with the likely chances of success and a timeline for implementation which must not exceed a certain number of years (although the period may be extended for another number of years with majority creditor approval).
Conditions for Preventive Composition
In order to be able to use the PCP as a measure against declaring your personal bankruptcy or the bankruptcy of your company, a set of conditions must be met, the most important of which are:
- THE ELIGIBILITY REQUIREMENTS FOR TRADE
Whether you are a businessman or a company, you must have the considered eligibility for trade according to the country laws in which you do business. In terms of age, registration in the official records or keeping commercial books... etc. And your business must be characterized by continuity without interruption, integrity, and honesty - the basis of business is confidence in dealing and goodwill between dealers.
- BY INTERESTED PARTY
The PCP is a procedure intended for your own benefit as a debtor, and creditors have no right to request it. Because only the debtor knows her/his financial condition and when she/he will be unable to pay her/his debts.
- NON-STOPPED PAYMENT
You should apply for PCP to the competent court before you stop paying your debts (i.e., as soon as you face real difficulties in paying them). There are some laws that allow the debtor to submit the PCP after stopping the payment of her/his debts, provided that it is within a specific short period (10 days, 30 days), otherwise the debtor will have to face bankruptcy procedures.
- REAL PROBLEMS WITH PAYMENT
Not with every financial turmoil you face, you will be allowed to ask for PCP. The basis in business is that the trader should face challenges by improving her/his management methods and changing business strategies. Therefore, you can apply for the PCP if your financial business is really disturbed, which will lead to the cessation of paying your debts unless the PCP helps you to overcome this crisis.
- NO PREVIOUS PCP
You may not, as a debtor, submit a second PCP request while you are implementing the first one. Who is unable to implement the first one will not be able to implement the second. On the other hand, creditors cannot request during the execution of the PCP to declare your bankruptcy, because the goal is to help the trader to continue her/his work.
Consequences of an Accepted Preventive Composition Procedure. Implications
Submission of a PCP request and its acceptance by the court has a number of implications, the most important of which are:
- ACTIVITY MANAGEMENT
You remain responsible for managing your money, according to what your business and your commercial interests require. But this will be under the supervision of an expert appointed by the court, so that your money is not wasted in a way that harms the interests of creditors.
- USE OF THE ASSETS
You may not mortgage your assets or transfer their ownership to others, unless the interest and continuity of your business require that, and after taking the permission of the court supervising the PCP that this behavior will be in the interest of the business and will not waste the creditors' rights.
- DEBT MATURITIES
PCP prevents creditors from claiming their debts before their due date. The aim of the PCP is to enable the debtor to rehabilitate her/himself financially, to return to her/his business, and to motivate her/him to achieve success and rise again. Therefore, the previous deadlines set for debt payment remain the same, and the interest also remains in effect for the specified periods of debt payment.
- DEBT CLAIMING PROCEDURES
As soon as the court decides to accept the PCP request, all enforcement procedures (selling the debtor's assets to settle her/his debts) and the lawsuits that creditors initiate against you as a debtor to claim their debts will cease. This is because the laws of the PCP give the debtor an opportunity to continue working, through which she/he has the right to manage her/his money, in a way that serves her/his interests and the interests of the creditors, according to what has been agreed upon.
End of Preventive Composition
Failure to comply with the terms of the composition may lead to nullification and an order by the court to convert the proceedings to
Business Bankruptcy and liquidate the debtor's assets. Further, the composition may be annulled for any fraud by the debtor. Otherwise, the composition ends once the debtor has honored all of its obligations.
⇨ Having read this article, and after learning about the most important conditions and effects of the PCP, do you consider it a good way to face the risk of bankruptcy, or do you have another opinion? Please share your opinion and more information here.
References:
Nomaan A. Raja and Aly Kassam (2020), Managing Financial Difficulties in the United Arab Emirates, Latham & Watkins, Number 2644, P.7.
Essam Al Tamimi (2020), Ten Reasons why you should not consider filing for Bankruptcy, Al Tamimi & Company.
Saleh Al-Barashdi (2018), Preventive Composition Scheme in Oman as a Rescue Scheme: Still a Myth? Arab Law Quarterly, Vol. 32, p.p. 80-97.
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