FAR 42.902—Procedures.
Plain-English Summary
FAR 42.902 sets out the basic agency procedures to follow when a contractor enters bankruptcy proceedings. It covers immediate notice handling, coordination with legal counsel and other agency offices, identification and review of open, completed, or terminated contracts to estimate the Government’s potential claim, protection of the Government’s financial interests, safeguarding of Government property, and sharing pertinent contract information with Government counsel. It also requires the contracting officer to consult legal counsel whenever possible before taking any action related to the bankruptcy. In practice, this section is about rapid internal coordination and preservation of rights: agencies must move quickly to understand exposure, protect assets, and avoid actions that could weaken the Government’s position in the bankruptcy case. For contractors, the practical significance is that bankruptcy triggers heightened government scrutiny of contract status, unpaid amounts, property issues, and legal strategy.
Key Rules
Distribute bankruptcy notice promptly
When an agency is notified of a contractor’s bankruptcy, it must immediately route the notice to legal counsel and the appropriate internal offices, such as contracting, financial, and property personnel, as well as affected buying activities. The goal is to ensure all stakeholders who may need to act are informed without delay.
Estimate the Government’s claim
The agency must determine the amount of the Government’s potential claim against the contractor. This includes identifying and reviewing all contracts that have not been closed out, including contracts that are physically completed or terminated but still administratively open.
Protect financial interests and property
The agency must take whatever actions are necessary to protect the Government’s financial interests and safeguard Government property. This is a broad protective duty that may include preserving records, securing property, and preventing avoidable loss or dissipation of Government assets.
Provide contract information to counsel
The agency must furnish pertinent contract information to the Government’s legal counsel. This ensures counsel has the facts needed to assess the bankruptcy filing, protect claims, and advise on next steps.
Consult counsel before action
The contracting officer should consult with legal counsel whenever possible before taking any action concerning the contractor’s bankruptcy proceedings. This is a strong procedural safeguard intended to avoid missteps in a legally sensitive environment.
Responsibilities
Agency
Upon notice of bankruptcy, distribute the notice to legal counsel and appropriate offices, determine the Government’s potential claim, take protective actions for financial interests and Government property, and provide pertinent contract information to Government counsel.
Contracting Officer
Consult with legal counsel whenever possible before taking any action related to the contractor’s bankruptcy proceedings and coordinate contract-level actions with the agency’s legal strategy.
Legal Counsel
Receive bankruptcy notices and contract information, advise the agency and contracting officer on legal implications, and help protect the Government’s position in the bankruptcy case.
Contracting, Financial, and Property Offices
Review the bankruptcy notice as appropriate, help assess contract status and financial exposure, and support actions needed to protect Government funds and property.
Affected Buying Activities
Use the bankruptcy notice to identify impacted procurements and coordinate any necessary contract administration or acquisition actions.
Practical Implications
Bankruptcy notice should trigger immediate cross-functional coordination; delays can reduce the Government’s ability to protect claims or property.
A common pitfall is overlooking contracts that are physically complete or terminated but not yet formally closed out; these still matter when estimating the Government’s claim.
Contracting officers should avoid taking unilateral action in a bankruptcy situation without legal review, because bankruptcy law can affect rights, deadlines, and permissible actions.
Agencies should quickly gather complete contract records, payment status, property accountability, and termination/closeout information so counsel can assess exposure accurately.
Protective steps may need to be taken fast, especially where Government-furnished property, progress payments, or other financial interests are at risk.
Official Regulatory Text
(a) When notified of bankruptcy proceedings, agencies shall, as a minimum- (1) Furnish the notice of bankruptcy to legal counsel and other appropriate agency offices ( e.g., contracting, financial, property) and affected buying activities; (2) Determine the amount of the Government’s potential claim against the contractor (in assessing this impact, identify and review any contracts that have not been closed out, including those physically completed or terminated); (3) Take actions necessary to protect the Government’s financial interests and safeguard Government property; and (4) Furnish pertinent contract information to the legal counsel representing the Government. (b) The contracting officer shall consult with legal counsel, whenever possible, prior to taking any action regarding the contractor’s bankruptcy proceedings.