save your company by terminating onerous contracts to cut costs #018
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K2 Business Rescue The Emergency Service for Business
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Published on 10 December 2010 by Tony Groom
Save Your Company by Terminating Onerous Contracts to Cut Costs
Many directors are afraid of terminating contracts and agreements when their
companies are in financial difficulties normally out of a concern that termination will
lead to a cancellation payment that the company cannot afford.
If a company is experiencing fewer orders or lower sales, for example, generally it will
need fewer staff but the worry is that terminating contracts of employment will
trigger costs that include payment to cover the notice period, redundancy
payments and possibly payment of other contractual liabilities. Terminating contracts
with senior staff is often very expensive due to the compensation for their loss of
additional benefits often negotiated as part of their employment package.
Similarly, a reduction in orders may mean that the company only needs two of the
five fork lift trucks it has where terminating a hire purchase, hire or lease arrangement
ahead of the agreed contract period will trigger a termination settlement or a
contract termination liability. Many of the standard hire contracts only discount the
early settlement by 3% per year.
Equally it might now no longer be able to afford the 12-month advertising contract it
agreed six months previously. Even terminating contracts with advisers can be
expensive. One was the provision of human resources support by a national PLC that
had a termination clause requiring 60 months notice.
A company in financial difficulties does not have the surplus cash to meet these
obligations. But while it puts off terminating arrangements that it no longer needs it
continues to bear the costs, which is the reason many companies are in gradual
decline as they slowly run out of money.
K2 Business Rescue The Emergency Service for Business
Call Tony Groom on 0844 8040 540
However, it is often better to cut the cash flow if this reduces costs that mean the
business is viable: profitable with positive cash flow. There are remedies that can be
used if necessary to deal with the crystallised liabilities when a company cannot
afford them
It may be understandable that the business does not terminate the monthly hire or
staff costs if it feels it does not have the money to pay the termination costs, but
equally continuing to pay for the additional fork lift trucks might be at the expense of
other creditors, for example HM Revenue and Customs (HMRC), unless orders return
and sales increase to the point where those additional staff or trucks are needed
again.
The issue is business viability and often this is a false hope. While the company is
carrying the additional costs the business is not viable and too often directors are
putting off dealing with onerous contracts and arrangements.
How can a company deal with this dilemma? Everyone may accept with hindsight
that the early action would have avoided the problem building. However, it is with
good reason that businesses often put off terminating such contracts especially
when they believe they are about to get the order that justifies keeping the
additional capacity.
Actually, the directors need to take steps to deal with this if they wish to avoid
business collapse and running out of cash so that they can no longer trade.
Negotiating terms for informal arrangements with creditors is sensible. It may involve
negotiating terms of payment, such as a Time to Pay (TTP) arrangement with HMRC
for PAYE or VAT arrears, which have been very effective in helping companies out of
insolvency. However, the problem is that the company will have to make payments
out of future trading and if it has not looked at cutting other costs to help it return to
profitability it won’t be able to afford to keep to its TTP arrangement with HMRC.
Many companies leave it far too late to reach informal arrangements that would
have allowed them to terminate contracts before the company finally runs out of
money.
There is a solution that allows companies to terminate contracts and not pay for
them immediately on termination. A Company Voluntary Arrangement (CVA) avoids
liquidation of the business and closing it down. It allows for paying the contract
termination out of profits.
However, it can also be used to compromise the debt, for example by paying less
than 100p in £1. An HMRC TTP is only allowed at 100p in the £1, whereas a CVA
allows for less than that and can be stretched beyond the 12 months maximum the
HMRC normally allows for a TTP where CVAs allowing for payments over five years
are not uncommon.
K2 Business Rescue The Emergency Service for Business
Call Tony Groom on 0844 8040 540
Rescheduling payments through a CVA can mean paying as little as 30p, 40p or 50p
in the £1, as long as the payments are realistic and affordable. CVAs provide a real
opportunity for companies to terminate contracts, including hire agreements,
employment contracts and office leases.
For a company in difficulty enlisting the help of a business turnaround and rescue
adviser to establish whether it has a viable core, produce a plan for stabilising then
rebuilding, and help it to negotiate informal arrangements to pay creditors or formal
ones via a CVA can make all the difference between a business surviving or going
under.
We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.
More Free Resources for Directors and Business Owners in Difficulty www.rescue.co.uk
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