12.7.1 In every case of the impending or actual bankruptcy of a contractor, the contracting authority should contact the departmental legal adviser and ensure that any proposed action will not prejudice the Crown's legal position. When the bankrupt contractor is a company resident outside Canada, action should be taken in accordance with the bankruptcy law of the country concerned. Legal advice should be obtained locally, if necessary.
12.7.2 As stated in article 4.2, Related requirements, where a contractor has provided contract financial security in the form of a bill of exchange, a government-guaranteed bond, or a letter of credit, the contracting authority is to redeem these securities to satisfy the requirements of the contract. Any excess amounts are returned to the contractor after all federal claims have been satisfied.
12.7.3 When a defaulting contractor has provided financial security in the form of a surety performance bond or a surety payment bond, the bonding company becomes liable, up to the amount of and in accordance with the terms and conditions of the bond. In the case of a performance bond, the bonding company's liability is only to the Crown; under a payment bond, claims may be made on the bonding company by all those who have a direct contract with the principal contractor or a sub-contractor for the supply of labour, material or services.
12.7.4 Claims by Sub-subcontractors. During the course of a construction contract or when it is completed, a second-tier claimant, either a sub-subcontractor or a third level supplier, may make a claim against the prime contractor. When one or more such claims are made against the prime contractor, the posting of a claimant's payment bond by the prime contractor will permit regular payments under the contract while the disputes are being settled between the various parties.
12.7.5 When the contract of a defaulting contractor is secured by surety bonds, the bonding company:
1. when acting under the performance bond, should be paid all amounts to which the contractor would be entitled under the terms of the contract; and
2. when acting under a payment bond, should not be reimbursed for the payment of creditors from any funds held by the contracting authority until the work is substantially complete and the surety has fully discharged its obligations under the bond.
12.7.6 In case of bankruptcy, the claims of the Trustee in Bankruptcy for any amounts due and payable by the contracting authority to the contractor at the date of its bankruptcy are subject to the above conditions.
12.7.7 As required in article 4.2.1 recognition is to be given to miscellaneous, indirect contractual obligations of a contractor and its sub-contractors (including suppliers) that arise from assessments by agencies of the government (e.g., Employment Insurance, Canada Pension Plan contributions, wages due the employees or by agencies of other governments in cases where a precedent of mutual cooperation has been established (e.g., workers' compensation acts)).
12.7.8 Authorities concerned should follow closely any bankruptcy proceedings involving contractors with whom they are involved, promptly submit any claims to the trustee and ensure these are acknowledged.
12.7.9 If the contractor must be removed from the job on account of bankruptcy or other default, action should be taken under the appropriate terms of the contract. If the contract is secured by surety bonds, the contract itself should not be terminated because this would also terminate the existing contractual relationship with the bonding company.
12.7.10 As stated in article 4.2, contracting authorities are reminded of their duty to pursue the rights of the Crown as a creditor under the Bankruptcy Act:
1. the right of secured creditors to realize on their security (sub-section 69(2));
2. the right to prove title to property in the possession of the bankrupt (section 81);
3. the right of creditors to offset money payable by them to the bankrupt against debts owing to them by the bankrupt;
4. payment of debts due the Crown in priority to payment of unsecured creditors of the bankrupt (section 136).
12.7.11 Contracting authorities should obtain a fair reduction in the contract price for less-than-specified performance.