Do Surety Bonds Last Forever?

  • 3 min read

So, can a surety bond be extended after bankruptcy? There’s an interesting case working its way through the courts about a surety bond that was issued by a company that’s involved in bankruptcy. And the legal question at hand is whether it is executory of the contract for surety. And part of it is because there are three parties to a contract. The principal is the obligee and the surety. And if one of those parties becomes insolvent or bankrupt, does that end the contract? And part of the question is whether or not that contract still has important parts of it that are not fulfilled. 

An executor or contract is one where there are still important parts of that contract that need to be completed. Things that are still remaining are important. And in this case, there was a company that went bankrupt, and the surety claimed that the bond was over. The surety bond provides that the debtor will pay premiums and the insurance company will provide the bonds. 

But the company went bankrupt. The debtor sought first-day relief to continue the bond program, describing it as a critical service that must continue for the debtor to remain a going concern. The bankruptcy court approved the continuation of the program, and the debtor continued to make payments. So the bankrupt company kept making its payments. The bond company said no, these bonds are non-assumable, non-assignable, and financial accommodation, so they can be revoked. So that’s the argument. Does the bond continue through bankruptcy even if you’re paying the premiums? 

The takeaway from this is that if you are a company that’s relying on a bond as a third-party obligee, the principal, you must consider what would happen if they went bankrupt. And in this case, if the case law prevails, you’d still be protected as long as those bond premiums continue to be paid. But you may want to have backup collateral. You may want to have a backup facility, in case, the bond is invalid. You’re relying on it for performance for quality of workmanship, warranty of service, or whatever that bond is providing you as coverage or indemnification. As an obligee. The bankruptcy of one of your vendors, clients, or somebody you’re relying on couldn’t validate a bond because it’s a three-party bond that could have an adverse financial impact on your company. 

So get good legal advice from an attorney. Figure out what your financial imperatives are for getting a surety bond. And just make sure that your relationship with the principal issuing you the bond is such that if for some reason that bond is invalidated, you have some kind of backup or you filed the case law to know that the surety bond will remain intact.

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