Jump to content

Contractor going bankrupt, does "stock purchase," do they need to do a novation?


govt2310

Recommended Posts

FAR 42.12 covers Novations.  There is an exception for "stock purchases" which are reorganizations by "operation of law."  What if a contractor is going bankrupt, engages in a merger/acquisition where by another company buys all their stock ("a stock purchase"), and then tells the government that a novation is not necessary?  Is this true?

Link to comment
Share on other sites

To Neil Roberts:

FAR 42.1204 talks about an "asset purchase" where there is a "transfer of assets" to another entity.  What if it is not an asset purchase, but instead a "stock purchase"?  Well, FAR 42.1204(b) states that a novation is not required if the change in ownership is the result of a "stock purchase."  But still, I see conflicting information from other sources like articles citing cases from various courts.  

Link to comment
Share on other sites

8 hours ago, govt2310 said:

To Neil Roberts:

FAR 42.1204 talks about an "asset purchase" where there is a "transfer of assets" to another entity.  What if it is not an asset purchase, but instead a "stock purchase"?  Well, FAR 42.1204(b) states that a novation is not required if the change in ownership is the result of a "stock purchase."  But still, I see conflicting information from other sources like articles citing cases from various courts.  

Just because the FAR does not obligate the CO to get a novation doesn't mean the CO can't require it of the contractor.  I assume the contractor brought this to the attention of the Government for some reason.  Is the contractor operating as a wholly owned subsidiary, keeping its original corporate identity, or something else?  If it is keeping its original corporate identity, then absolutely nothing need be done on the contract.  If "something else," then it looks like the contractor is looking for something from the Government, like a contract mod that has the effect or recognizing a successor-in-interest.

Don't confuse RESTRICTIONS on the Government's ability to recognize a putative successor-in-interest (see the anti-assignment acts) with the process of recognizing a legitimate successor-in-interest (e.g., novation agreement, change of name).  FAR 42.1204(b) is exactly on point for the facts you have described.  If you are the Government ACO, you really should discuss with your counsel BEFORE telling the contractor exactly what you need.  The timing of the sale relative to the bankruptcy filing, whether the sale was approved by the bankruptcy court, etc., muddies the waters enough that you should want your contract file to contain enough facts to withstand scrutiny later

Link to comment
Share on other sites

10 hours ago, govt2310 said:

What if a contractor is going bankrupt, engages in a merger/acquisition where by another company buys all their stock ("a stock purchase"), and then tells the government that a novation is not necessary?  Is this true?

As Jacques indicated, a novation may not be required but that does not mean that it is not necessary under the circumstances. 
Also, this matter is complicated by the bankruptcy.  If the contractor has filed for reorganization under Ch 11, it may be designated as a debtor in possession of the assets of the estate.  technical, a debtor in possession is a different legal entity from the bankrupt entity.  Thus, you may have two transfers of the contract, one from the contractor to the debtor in possession and the other from the debtor in possession to the purchaser.  There are other issues with the bankruptcy that need to be fully explored with counsel who is familiar with bankruptcy law to avoid a violation of bankruptcy law by the contracting officer.

Link to comment
Share on other sites

Question: if FAR Part 42 says that a novation is NOT "required" under the circumstances (a "stock purchase" instead of an "asset purchase"), how can the USGOV get the CONTRACTOR to do the novation?  It is my general experience that once contractors see in the FAR that a novation is not "required," they will refuse to do one.  

Link to comment
Share on other sites

42.1204(b) does not require a novation agreement -- however, it suggests that some formal agreement may be appropriate.  If styling it as a novation agreement is the hang-up, then don't call it a novation agreement.

If the original contractor remains in control of the assets and is the party performing the contract, then a novation agreement is not needed.  

The successor-in-interest doesn't have to submit the documentation required by FAR 42.1204(e) unless it is seeking recognition.  It sounds like the successor-in-interest is not seeking recognition as such, so it doesn't have to submit the documentation.  Read the FAR -- that's what it says.

First, stop all payments to the original contractor and refuse any payment requests from the successor-in-interest.

Second, send a show cause notice to both the original contractor and the putative successor-in-interest declaring your intent to terminate the contract for default unless the successor-in-interest enters into an agreement under FAR 42.1204(b) wherein it acknowledges itself as the successor-in-interest.

Third, make the agreement or terminate for default.

The above approach is a possibility based on assumptions I made.  I made assumptions because the original poster has not provided crucial information.

govt2310,

  1. Is the original contractor still a legal entity?
  2. Is the original contractor still performing the work?  Or is a putative successor-in-interest performing the work?  Or has work stopped?
  3. Supplies or services?  Is the work being performed at a Government location?
  4. Are you still making payments to the original contractor?  Or to the putative successor-in-interest?
  5. The phrase "going bankrupt" has no meaning.  Has the original contractor filed actually for bankruptcy?  Have you received a bona fide notice of bankruptcy filing?  Has any judgment been made?
  6. Were any progress payments or other contract financing payments made to the original contractor?
  7. Have you spoken with a competent attorney?

All of these questions need to be answered before you worry about a novation agreement.

 

Link to comment
Share on other sites

While the actions that ji has recommended seem good contracting strategy, they may result in the CO being held in contempt of court.  Under the bankruptcy code, the filing of a petition results in an automatic stay of certain actions against the bankrupt.  For example, 11 U.S.C. 362 says in part:

Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—

(1)  the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
 
Thus, you need to make sure you take actions against a bankrupt only after receiving advice from competent bankruptcy counsel.
Link to comment
Share on other sites

Retreadfed,

The original poster has not declared that a notice of bankruptcy filing has been received, so I do not assume that it has been.  If govt2310 would answer my reasonable questions (incl. no. 5), then we would know and would be in better position to give advice on an novation agreement.  Indeed, if a notice of bankruptcy filing has been received, it might even be wholly improper for a contracting officer to sign a novation agreement.

The advice of a competent attorney is needed.

Link to comment
Share on other sites

15 minutes ago, ji20874 said:

The original poster has not declared that a notice of bankruptcy filing has been received, so I do not assume that it has been. 

You are correct in that, is so often the case at this forum, we do not have all the facts.  In the absence of facts, I try not to engage in assumptions, but  mention possibilities and their consequences.

Link to comment
Share on other sites

Here the answers to the questions posed by ji20874.

  1. Is the original contractor still a legal entity? YES
  2. Is the original contractor still performing the work?  Or is a putative successor-in-interest performing the work?  Or has work stopped? THE ORIGINAL CONTRACTOR IS STILL PERFORMING THE WORK
  3. Supplies or services?  Is the work being performed at a Government location? IT IS SERVICES AND WORK IS PERFORMED OFFSITE
  4. Are you still making payments to the original contractor?  Or to the putative successor-in-interest? STILL MAKING PAYMENTS TO THE ORIGINAL CONTRACTOR
  5. The phrase "going bankrupt" has no meaning.  Has the original contractor filed actually for bankruptcy?  Have you received a bona fide notice of bankruptcy filing?  Has any judgment been made?  NO NOTICE FROM THE KTR ON THE BANKRUPTCY, SO IT IS UNCLEAR TO THE CO WHETHER THE ORIGINAL CONTRACTOR HAS FILED FOR BANKRUPTCY OR NOT
  6. Were any progress payments or other contract financing payments made to the original contractor?  NO 
  7. Have you spoken with a competent attorney?  YES
Link to comment
Share on other sites

If the original contractor is still a legal entity and is still performing the work, then it seems a novation agreement may not be needed (but maybe an agreement, not necessarily styled as a novation agreement, might be sought for matters such as are described in 42.1203(e)).  See FAR 42.1204(b).

Link to comment
Share on other sites

I’m sure some of the posters are aware of this but it also seems others are not.  The decision to submit a novation agreement is the contractors and not the government. In essence the contractor is requesting the government to acknowledge a  successor in interest or name change.  The government has a contract with a company to perform some work.  For whatever reason another company is acquiring the assets used in performance.  The government doesn’t have to do anything.  If the contractor fails to perform, the government can terminate.  Alternatively the government can recognize another contractor to assume performance.  But only if it’s in the governments best interest.

The choice to submit a novation agreement is the contractors and the government is not obligated to accept it and modify the contract.

Link to comment
Share on other sites

In that case the contractor may have exceeded its small business size standard due to its affiliation with the company that bought the company stocks.  You should contact the Procurement Center Representative for your organization and let them know as the original contractor is no longer eligible for small business set asides if they, via their affiliation with the buying company, is no longer a small business.

Link to comment
Share on other sites

2 hours ago, DWGerard1102 said:

In that case the contractor may have exceeded its small business size standard due to its affiliation with the company that bought the company stocks.  

Maybe, but isn't this irrelevant to the instant contract and to the original posting?

2 hours ago, DWGerard1102 said:

You should contact the Procurement Center Representative for your organization and let them know as the original contractor is no longer eligible for small business set asides if they, via their affiliation with the buying company, is no longer a small business.

I tend to disagree -- I am unaware that the contracting officer has any duty to make such a report, or that PCRs pay any attention to contractor self-certifications.

I think the normal process of reps and certs and the normal process of small business size challenges will address whether the firm is still small for future procurements.

Link to comment
Share on other sites

This is getting really off track.   The question is whether a novation agreement is required.  Size status is really irrelevant to the topic at this stage.  In addition nothing has happened so far so why are we questioning whether the company complied with recertification compliance?

Link to comment
Share on other sites

Guest
This topic is now closed to further replies.
×
×
  • Create New...