ITNet, the Birmingham-based services company, has written off £10m-£11m as a result of its troubled benefits and revenue contract with Hackney Council.
ITNet is bracing itself for a prolonged legal battle with Hackney, as the council prepares to extract itself from a 10-year, £70m contract with the company.
An Audit Commission report into Hackney Council published this month revealed a backlog of 17,000 housing benefit cases and council tax collection rates of just 50% so far this year. It also showed mounting levels of overpayment of housing and council tax benefit and declining levels of debt recovery.
"The current performance is unacceptable and the council has not yet got the capacity to resolve it," the commission said.
In July, Hackney received an independent review of its revenues and benefits service from the Barony Group, which warned there were "material failures by the council to deliver its contractual obligations".
The review said, "Contract termination would be complex, very expensive for all parties and uncertain in financial outcome."
It added, "If ITNet departs the scene, the council would be left with the nearly insuperable problem of running services with reduced resources and considerable specialist skill gaps."
Following the review and Hackney's appointment of a new managing director, the council and ITNet began to negotiate a recovery plan to clear the backlog by 31 January 2001.
Hackney Council said ITNet's failure to sign up to the recovery plan led to the decision on 2 October to sack its contractor.
An ITNet representative said, "We were asked to agree new contract termination rights on the Friday and given a 3pm Monday deadline. We asked for more time to consider but the council refused."
The Audit Commission estimated that bringing the service back in-house could cost between £2.5m and £5m and recommended that Hackney finds an alternative outsourcer for its benefits and revenue service. However, suppliers are likely to demand a substantial premium for taking the contract.