How to protect your rights in case of bankruptcy of your contractor?
When relying on a contractor to carry out certain works, it often occurs that the contractor goes bankrupt during or shortly after the construction process. The question then arises: what are your rights against the contractor?
In general, the contractor’s bankruptcy does not terminate the construction agreement, unless:
- the construction agreement has been concluded “intuitu personae” on the part of the contractor;
- the construction agreement contains a “termination on bankruptcy” (ToB) clause; or
- the bankruptcy trustee terminates the construction agreement in accordance with the Belgian insolvency rules.
In order to avoid being bound towards a bankrupt contractor, it is therefore useful to include in your construction agreement an automatic termination clause in case of bankruptcy of your contractor.
Bankruptcy contractor: what about the debts?
As a general rule, all debts incurred prior to the contractor’s bankruptcy are to be considered as “debts within the bankruptcy estate” (“schulden in de boedel”). This means that these debts are subject to the principle of equality between creditors. They will only be paid on a pro rata basis after payment to the preferential creditors. Under Belgian law, principals (“bouwheren”) do not have any legal priority right in case of bankruptcy of their contractor. It is therefore important to oblige your contractor to provide sufficient guarantees as to his solvency and the successful completion of the works before the conclusion of the construction agreement.
Bankruptcy contractor: protection of principals
In some situations, there are special rules to protect principals (“bouwheren”) and the Belgian tax authorities against the bankruptcy of contractors, such as:
- article 12 of the Act of 9 July 1971: this article is for registered contractors who carry out works related to premises intended for housing and who oblige their principal (“bouwheer”) to make one or more advance payments prior to the completion of the works. The principal provides a cash guarantee or a joint and several guarantee granted by a third party equal to an amount of 5% of the contractor’s fee. In case the works are carried out by a non-registered contractor, the contractor must (i) provide a joint and several guarantee granted by a bank that undertakes to pay all necessary funds to complete the works in case of default by the contractor or (ii) guarantee the repayment of all payments made by the principal (“bouwheer”) in case of termination of the contract due to the non-completion of the works.
- article 30bis of the Act of 27 June 1969 (“Wet betreffende maatschappelijke zekerheid der arbeiders”) and article 400 et seq. of the Belgian Income Tax Code (“WIB”): pursuant to these provisions, principals (“bouwheren”) are obliged to verify whether their contractors have social and/or tax debts. In case the contractors have such social and/or tax debts, the principals must deduct 35% and 15% of the contractor’s fee and transfer it to the relevant authorities.
Insurance for construction industry
In June 2017 a new act made it compulsory to have an insurance for the decennial liability for constructors, architects and other professionals in the construction sector. This means they are obliged to take out an insurance covering their decennial liability for structural defects. By doing so, the legislator intends to provide better protection when one of the construction professionals goes bankrupt during the construction process.
The Act applies to (i) architects, constructors and other professionals in the construction sector (including their appointees and subcontractors but with the exception of real estate developers), (ii) who carry out works related to buildings that (iii) require the intervention of an architect and (iv) are mainly intended for residential use. Consequently, the Act is not applicable to offices building, shopping centres or other commercial premises, but only to residential housing, which limits the scope of the Act significantly.
Insurance construction: what does it cover?
The insurance must not cover certain specific types of damages, such as damages due to radioactivity, aesthetic damages, purely immaterial damages or (im)material damages corresponding to an amount of less than 2,500 EUR. The minimum insurance cover must correspond (i) to 500,000 EUR per claim in case the reconstruction cost of the building intended for residential use is higher than 500,000 EUR or (ii) to the reconstruction cost in case the reconstruction cost of the building is less than 500,000 EUR.
Insurance: annual or for every project
The Act provides the possibility to take out an annual insurance or an insurance for every single project. The insurance can be taken out individually or be part of a global insurance taken out for the benefit of all construction professionals involved in a certain project. In such case, the construction professionals must not take out an individual insurance covering their decennial liability.
The Act will enter into force on 1 July 2018.
LienBellinckSenior associate Attorney at Law
Lien Bellinck is a senior associate in our office in Brussels and a member of the Loyens & Loeff Real Estate Practice Group in Belgium. She focuses on all aspects of real estate law.T: +32 2 773 23 36 M: +32 4 99 34 19 88 E: firstname.lastname@example.org