Over the past year, the Covid-19 pandemic upended many industries. While the construction industry has largely been able to operate throughout the pandemic, albeit with increased and ever-changing restrictions on jobsites, one consequence of these disruptions may be an increase in construction-related bankruptcy filings. Already in 2021, there have been over 70 construction-related bankruptcy filings across the country. For many property owners and real estate developers, these filings create a nightmare scenario where work may slow or even stop entirely.

The Supreme Court rules in a recent decision over different bankruptcy incidents. The first relates to a work contract to supply materials in which a penalty clause for late work is established, and the ability to execute the works under the guarantee provided in the contract if the contractor may not execute them. Having a delay in delivery of the work and having entrusted to another company the repair works, the owner claimed the payment of the amounts and compensation with the guarantee held.

A claim filed by insolvency practitioners requesting the termination of contract of payment in kind, which was entered into between a party under insolvency proceedings and a third party, centred on the giving of a slicer machine in consideration of debt; whether the credit of the defendant was qualified as subordinated as a result of damages resulting from the company’s inability to operation, and for violating the principle of equality among creditors.

The new amendments carried out in the BankruptcyProceedings Act by virtue of the Royal Decree 4/2014,dated March 7, aims to introduce a viable restructuringof corporate debt, trying to streamline BankruptcyProceedings and prevailing primacy of will.

The Supreme Court of Spain has recognized it its Judgment dated September 5th, 2012, the lack of consent in a work contract on which one of the parties applied for the bankruptcy proceedings 10 days after such contract was entered by both parties.

The parties entered into a contract for execution of work by virtue of which the company that few days later applied for the insolvency proceedings, was committed to carry out the works of a building under construction.

Once the bankruptcy proceeding was started, each party issued a claim within the insolvency proceeding.

The Company Court of Alicante, Nº 1, made, in its judgment dated July 20th, 2012, a useful analysis on the different decisions part of the case law in regards to the recognition of pledgesof future receivables and their classification as privileged credit in cases of bankruptcy proceedings, being a very commonly practiced consideration.

In general, a company has two bankruptcy alternatives: liquidation under Chapter 7 and reorganization under Chapter 11.

Under Chapter 7, upon the filing of a bankruptcy petition, a trustee is appointed to gather and sell all of the debtor’s assets as quickly as possible. Once the trustee liquidates all of the assets, it must pay creditors in accordance with the priority scheme mandated by the Bankruptcy Code:

In today’s economy, we continue to see bankruptcies occurring in the construction sector. An owner, contractor, or subcontractor in financial distress can easily delay a project — or worse, jeopardize the project in its entirety. Contractors need to understand their rights in order to minimize their exposure in bankruptcy-related situations.

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