What happens if the client goes bankrupt?

In a situation where insolvency is declared by the Client, all parties that had been appointed by the Client but don’t form part of their direct employees, will normally be classed as ‘unsecured creditors’ which means that when it comes to payments they will fall below any secured charge holders such as banks, the fees and expenses of the insolvency process and preferential creditors -including direct employees.

An automatic stay is triggered on all collection actions, legal proceedings and judgment enforcement activities, which will give the debtor time to reorganize or liquidate the business’ assets. Any action taken in violation of the automatic stay can be sanctioned by the court.

As a general rule, even client liquidation does not automatically terminate contracts or excuse contractors from working, but most contracts will include both parties’ right to terminate in circumstances of insolvency. The Construction Act, which covers anything classed as a ‘construction contract’, gives suppliers the right to give seven days’ notice of stopping work if there is an unacceptable delay in payment of invoices which might not always be enforceable immediately but at least provides the legal grounds for refusal of further work.

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