{"id":177835,"date":"2022-10-28T16:23:33","date_gmt":"2022-10-28T15:23:33","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=177835"},"modified":"2025-07-02T00:38:38","modified_gmt":"2025-07-01T23:38:38","slug":"contract-based-compromise","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/corporations\/contract-based-compromise\/","title":{"rendered":"My Business is Facing Insolvency. What is a Contract-Based Compromise in England?"},"content":{"rendered":"\n

If your company has difficulty meeting its financial obligations, it may be insolvent. While not all solvent companies <\/span>can rescue themselves and avoid liquidation<\/span><\/a>, the law does provide ways for companies to turn around their finances so they can begin trading as usual again. While not the only option, one of the most effective turnaround options is negotiating with your creditors and reaching a contract-based compromise. This article will explain what a contract-based compromise looks like in practice. It will also provide an overview of the essential practical considerations you may wish to consider.\u00a0<\/span><\/p>\n\n\n\n

Contract-Based Compromise <\/span><\/h2>\n\n\n\n

A contract-based compromise \u2014 also called a consensual agreement \u2014 is a private arrangement between you and your creditors to renegotiate the terms of your debt. This differs from court proceedings for insolvent companies, which are governed by a special set of laws. In other words, a contract-based compromise does not involve the courts. Instead, both parties agree to amend the terms of the outstanding financial liabilities so that the company can continue trading. <\/span><\/p>\n\n\n\n

\n

Most contract-based compromises involve the company and its creditor(s) entering a new agreement specified in a contract or deed. As the debtor, you may have to pay the legal fees the creditors incur in creating a new contract.<\/p>\n<\/div>\n\n\n\n

Before we examine some practical considerations, such as which kinds of insolvent companies best suit contract-based compromises, we will look at two hypothetical examples<\/span>, involving a fictional company, Hard Times Co.\u00a0<\/span><\/p>\n\n\n\n

Examples<\/span><\/h3>\n\n\n\n
\n

Example One<\/b><\/p>\n<\/td>

Hard Times Co has had a bad trading year. Invoices sent by trade suppliers have piled up in the past month. In total, Hard Times Co owes \u00a350,000 each to two suppliers of goods it uses to manufacture its products.\u00a0

As the director of Hard Times Co, you approach both suppliers separately and negotiate a payment plan. Rather than pay each supplier \u00a350,000 up front, you will pay them each \u00a310,000 for the next 12 months. This is effectively paying 20% in annual interest.\u00a0 <\/td><\/tr>
\n

Example Two<\/b><\/p>\n<\/td>

Hard Times Co has an overdraft facility with its bank that it has drawn up to the maximum amount of \u00a310,000. The bank is unwilling to extend the overdraft and is also demanding immediate payment. However, the company does not have \u00a310,000 in cash.\u00a0

You go to a bank branch and speak with a client manager. Ultimately, you both agree that Hard Times Co will borrow money under a new debt facility. This is a revolving credit facility at 10% interest per year. You draw \u00a310,000 under the facility to pay off the overdraft facility. The bank will also take security over your company’s assets and has to pay a \u00a31,000 fee. <\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Practical Considerations <\/span><\/h2>\n\n\n\n

Advantages <\/span><\/h3>\n\n\n\n

In most cases, contract-based compromises represent the best option available to companies facing insolvency or already insolvent. This is because they are cheaper, faster, and more flexible than non-contract-based compromises involving the court. <\/span><\/p>\n\n\n\n

The only real disadvantage is that your company is at the mercy of its creditors. <\/span><\/p>\n\n\n\n

Viability <\/span><\/h3>\n\n\n\n

Contract-based compromises are not for all insolvent companies. A contract-based compromise’s defining feature is that all relevant creditors agree to the proposal. Therefore, companies with numerous <\/span>creditors of different classes<\/span><\/a>, such as trade creditors (as in Example One) and bank lenders (as in Example Two), will have a more challenging time getting all to agree. <\/span><\/p>\n\n\n\n

This is because where one creditor feels that they might have to compete against another in the event the company is liquidated, they are more likely to try and act in their own interests. Typically, this involves petitioning a court to initiate formal insolvency proceedings. When a court agrees to a petition, the chance of successfully negotiating a contract-based compromise diminishes. <\/span><\/p>\n\n\n\n

As such, the more advanced a company is in the insolvency process, the less amenable its creditors will be to a compromise. Creditors tend to agree to arrangements with companies they think will be able to honour the arrangement. <\/span><\/p>\n\n\n\n

Finally, businesses are unlikely to alter their position unless it is in their interest. Given that you are in an inferior negotiating position, your business should expect to have to pay for the privilege of your creditor waiving its legal right to bring proceedings. Commonly, this includes:<\/span><\/p>\n\n\n\n