Bankruptcies In The Construction Industry Are Increasing ' How To Prepare For The Contractor's Bankruptcy?

• Published date: 24 January 2024
• Subject Matter: Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Construction & Planning
• Law Firm: Castren & Snellman Attorneys
• Author: Ms Elina Pesonen and Jerker Pitk'nen

The construction industry faced increasing difficulties last autumn. By the end of last year, the construction industry had seen over 100 bankruptcies more than the previous year. The house building industry and small companies were hit the worst, but even large operators were in the headlines.

THE CONTRACTOR'S BANKRUPTCY AFFECTS THE EMPLOYER AND SUBCONTRACTING CHAIN SIGNIFICANTLY

It is typical for the construction industry that contractual obligations are assigned to subcontractors further down the contract chains. This phenomenon is also evident in industry statistics concerning bankruptcies. With long contract chains, the main contractor's bankruptcy can easily lead to several liquidity problems in the subcontracting chain, and its spillover effect can even extend to other operators in the industry.

When the contractor undergoes insolvency proceedings, the situation is also difficult for the employer. If the contractor is declared bankrupt, the works may at worst cease immediately, in which case the construction will not be finished or the warranty repairs completed. Securities during the construction and warranty period provide a certain level of security, but they are cold comfort if the works end at an early stage or there are a lot of defects. It is essential that the employer continuously observes the situation on site, for example, by discussing with the contractor's representatives or actors in the subcontracting chain. Following credit information registers is also important.

IMPACTS OF A BANKRUPTCY ON THE CONTINUATION OF A PROJECT

At the beginning of bankruptcy, the estate administrator takes possession of the bankrupt company's assets on behalf of the creditors. In accordance with the Bankruptcy Act, the bankruptcy estate has the right to commit to a contract that the debtor has entered into but not performed, typically also to construction contracts. However, the estate will only commit to contracts with a positive cash flow and easily available workforce, so in practice, the estate can rarely continue construction after the beginning of bankruptcy.

CAN THE EMPLOYER MINIMISE LOSSES?

In case...