Bankruptcies in the construction industry
A bankruptcy has far-reaching consequences for all parties involved. This also applies for a bankruptcy in the construction industry. The biggest problem in case of a bankruptcy in the construction industry arises when the work has not yet been finished.
Damage for the contractor because of bankruptcy of the client
Depending on the nature of the assignment provided to the contractor, a bankruptcy of the client does not necessarily have to be disastrous for the contractor from a financial point of view, as the contractor may exercise a right of retention in respect of the work under construction. If the right of retention is exercised in a proper and timely manner, there is a fair chance that the damage for the contractor will be limited.
Consequences if the contractor does not exercise the right of retention
If this possibility does not exist and the work is not taken over by another party, the contractor does not have many options other than to ask the trustee in bankruptcy to honour the agreement. In most cases, the trustee in bankruptcy will not do this, and the contractor will then be able to terminate the agreement and present the damage to the trustee in bankruptcy for verification.
Contractor is protected against damage after bankruptcy
Pursuant to the law (Book 3, article 285 DCC) the claim presented has a privileged position in relation to other (unsecured) claims. This only applies if the contractor has personally worked on the execution of the work contracted or is a legal person or a company, of which one or more directors – normally speaking – do so.
Damage for the client because of bankruptcy of the contractor
In case of a bankruptcy of a contractor during the construction of the work, the client nearly always suffers damage. This may be different if the contactor is affiliated with a guarantee fund such as, for example, Bouwgarant. In this case, the work will be completed, provided that the conditions have been met. This also applies for any shortcomings to be remedied after completion. These obligations, as well as others, are guaranteed and performed by a different contractor. A guarantee therefore is in place, in spite of the contractor going bankrupt.
Stringent conditions for guarantee scheme
It is important, though, that the client has strictly observed the conditions for relying on the guarantee scheme, which include inter alia a prohibition on paying the contractor in advance; payments should therefore not be ahead of the state of the work.
Honouring the agreement (Art. 37 Bankruptcy Act)
If the client or the contractor is declared bankrupt, for agreements that have not yet been performed in full it is assumed the trustee in bankruptcy will be given a reasonable period for stating whether or not the agreement concerned will be performed (honoured). What is deemed to be a reasonable period often depends on the circumstances of the case, but it goes without saying that some expeditiousness may be expected. If the trustee in bankruptcy wants to honour the agreement, the law stipulates that he will have to provide security for the performance. This security is often provided by the bank that has an interest in completion of the work.
Failure to honour the agreement; right to terminate
If the trustee in bankruptcy does not honour the agreement, the client will be free to terminate the agreement and to present the damage resulting from the termination to the trustee in bankruptcy as an unsecured claim. In most cases, the claim presented will not be paid, but if the bankrupt also has a claim (e.g. an instalment owed), this claim can be set off against the claim resulting from the termination. For this reason, it may be advisable to terminate the agreement. Among other things, not having a guarantee that was agreed or the completion of the work by a third party at a higher price are also components that fall under damage resulting from termination (termination damage).
Assessment of the work
Not only in case of termination of an agreement as a result of bankruptcy, but also in all other cases in which the work is completed by a third party, it is advisable to make an assessment of the state of the work: the evidence will disappear as a result of completion of the work, and it is difficult to determine at a later time what percentage of the work had been completed and what payment is justified for this. An assessment will provide a starting point for determining the (mutual) claims.