Overview
Subpart 42.9 establishes the policies and procedures the Federal Government must follow when a contractor files for bankruptcy. It focuses on mandatory notification requirements, inter-agency coordination, and the assessment of potential financial and property risks to ensure the Government’s interests are protected throughout the legal proceedings.
Key Rules
- Mandatory Notification: Contractors are required to notify the Contracting Officer (CO) immediately upon filing a petition for bankruptcy.
- Government Assessment: The Government must determine the impact of the bankruptcy by reviewing all "unclosed" contracts, including those that are physically complete or terminated but not yet formally closed out.
- Prompt Action: The contract administration office is mandated to act quickly to assess the potential impact and safeguard Government property and financial interests.
- Legal Precedence: Agencies must provide all pertinent contract information to legal counsel, as bankruptcy proceedings involve specialized federal laws that intersect with acquisition regulations.
- Threshold for Clause: The FAR clause 52.242-13, Bankruptcy, must be included in all solicitations and contracts that exceed the Simplified Acquisition Threshold (SAT).
Responsibilities
- Contracting Officer (CO):
- Ensures the bankruptcy clause is included in applicable contracts.
- Consults with legal counsel prior to taking any administrative actions regarding the bankruptcy.
- Coordinates with buying activities and other agency offices.
- Contract Administration Office (CAO):
- Conducts the primary assessment of the bankruptcy’s impact on the Government.
- Identifies and reviews all active and unclosed contracts associated with the contractor.
- Legal Counsel:
- Representing the Government’s interests in bankruptcy court.
- Providing legal guidance to the CO before any contract actions are taken.
- Financial and Property Offices:
- Assessing potential claims against the contractor and safeguarding physical Government property (GFE/GFP) currently in the contractor's possession.
Practical Implications
- Risk Mitigation: Bankruptcy does not automatically terminate a contract, but it creates a high-risk environment. The Government must act as a "secured" or "unsecured" creditor depending on the circumstances, making accurate record-keeping of Government-furnished property and outstanding payments critical.
- Proof of Claim: By requiring an assessment of "unclosed" contracts, the FAR ensures the Government can accurately file a "Proof of Claim" in bankruptcy court to recover overpayments, liquidated damages, or unfulfilled obligations.
- Operational Continuity: A contractor in Chapter 11 (reorganization) may continue to perform, whereas Chapter 7 (liquidation) usually necessitates an immediate search for a new source. The CO’s coordination with legal counsel is vital to avoid violating the "automatic stay" typically imposed by bankruptcy courts.
- Subcontractor Risk: While this subpart focuses on the prime contractor, prime bankruptcies often lead to non-payment of subcontractors, which can cause supply chain disruptions that the Government must manage.