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In recent years, changes in national macroeconomic policies and real estate regulations have led to a steady rise in bankruptcy cases involving real estate companies. As key participants in such projects, construction firms not only hold substantial claims for project payments but also provide significant employment for migrant workers.

Protecting these claims during bankruptcy proceedings affects the core interests of construction companies, the rights of migrant workers, and overall social stability, drawing growing attention from all sectors.

Q: Must construction company claims be confirmed through litigation?

A: There are different scenarios.

1. If a construction company has initiated litigation or arbitration before the real estate company¡¯s bankruptcy and obtained a legally effective judgment, it should file its claims based on the rights confirmed in the judgment.
2. If litigation or arbitration has been initiated before the bankruptcy but remains unresolved, the case will be suspended. After the bankruptcy administrator takes over the debtor¡¯s assets, the construction company may resume the proceedings and file claims based on the final judgment.
3. If no litigation has been initiated before the bankruptcy but the project settlement has been completed, the construction company may file claims based on the settled project payment amount.
4. If project settlement is incomplete or construction is unfinished, the construction company may calculate the project payment based on the settlement method stipulated in the contract and file claims accordingly. For projects under construction, claims should not be limited to progress payments under the contract but rather cover the total cost of completed work.

Q: Does the priority of claim for construction project payments supersede all other claims?

A: The priority compensation right held by construction companies for their projects is a statutory privilege, surpassing employee claims and secured rights such as mortgages. This is often referred to as a ¡°super-priority right¡±. There are also a few points worth noting.

1. Under article 807 of China¡¯s Civil Code, the priority compensation right for construction project payments applies only to specific assets; that is, the construction project undertaken by the company. It does not extend to all assets of the bankrupt entity such as land designated for construction, or projects completed by other contractors.
2. The priority compensation right for construction project payments should not override the rights of property buyers. According to article 2 of the Supreme People¡¯s Court¡¯s Reply on the Priority Compensation Right for Construction Project Payments, once a buyer has paid all or most of the purchase price for a residential property, the contractor¡¯s priority compensation right for the project payment shall not be enforced against the buyer.
3. The scope of a construction company¡¯s priority right is limited to project payments, covering actual expenses such as wages for workers and material costs. It does not include losses incurred due to the employer¡¯s breach of contract. Claims for interest, penalties or damages are treated as ordinary debts and are subject to general distribution.
4. The priority compensation right for construction project payments must be exercised within 18 months, starting from the date the employer is obliged to pay. If the construction contract is terminated after bankruptcy proceedings begin, the timeline starts from the contract termination date.

Q: Does a construction contract terminate on bankruptcy proceedings?

A: When a real estate company enters bankruptcy, the contractor may terminate an unfinished construction contract pursuant to the Civil Code, provided termination conditions are met. Similarly, the bankruptcy administrator has the authority to decide on contract termination. However, the administrator must exercise caution and avoid arbitrary termination, carefully evaluating multiple factors before ending the contract.

1. Construction contracts involve complex rights and obligations, extended timelines and are subject to strict state regulation regarding industry qualifications and project standards. Additionally, factors such as post-completion warranty periods can complicate contract termination during bankruptcy proceedings.
2. In real estate bankruptcy cases, reorganisation is often preferred, as unfinished projects typically constitute core assets. Continuing construction contracts is crucial for advancing bankruptcy proceedings and enhancing asset value. Arbitrary termination may trigger multiple issues, including contractor replacement, retendering, registration, handover and the withdrawal of the original contractor, ultimately harming creditor interests.

Therefore, unless the contractor commits a serious breach or the creditors¡¯ meeting decides otherwise, administrators typically refrain from terminating existing construction contracts. Contractors, however, should carefully assess the legal and operational risks of continuing the project, actively participate in drafting the reorganisation plan, and clearly define their rights before and after bankruptcy to protect their interests in accordance with the law.

Wang Zhiyong is a senior partner at Ronly & Tenwen Partners