City Link collapse shows need insolvency for rule change, MPs say

THE COLLAPSE of delivery firm City Link has exposed flaws in the insolvency system that must be overhauled in order to provider better protection to workers, suppliers and contractors, two groups of influential MPs said today.

A joint report by the Business, Innovation and Skills and Scottish Affairs committees said contractors feel they were deliberately deceived by City Link about the true state of the business prior to its collapse and that City Link and its private equity owners, Jon Moulton’s Better Capital, were “morally, if not legally, responsible for the difficulties that many of these individuals and small business now find themselves in”.

Around 2,700 people lost their jobs when the courier company collapsed and administrators from EY were appointed on Christmas Eve.

“It is deeply regrettable that Better Capital felt its investors’ interests would be better served by abandoning City Link and its workers,” said Adrian Bailey, chair of the BIS Committee.

The MPs demanded that the government overhauls the rules governing insolvencies, which are too heavily skewed in favour of directors and investors.

Under the current rules, it is in the financial interests of a company to break the law, and ignore the statutory redundancy consultation period, if the fine for doing so is less than the cost of continuing to trade. MPs also criticised the system for failing to keep pace with current employment practices, whereby direct employees receive greater protection than self-employed workers.

“The rules on insolvency, on everything from how and when information is shared with employees, to the order in which creditors are paid out, are skewed too far to the advantage of investors, directors and management,” said Ian Davidson, chair of the Scottish Affairs Committee.

“The system provides perverse incentives to withhold information or to skip proper consultation processes in contravention of the law and at a high cost to workers struggling to cope with the loss of their livelihoods.”

MPs have called on government to support dialogue between unions, employers and insolvency professionals to develop best practice guidance for the sharing of information with employees and unions when an administration order is under consideration. Government should also review and clarify the requirements for consultation on redundancies during an administration, the report recommends.

In a statement, Better Capital acknowledged many of the wider issues raised in the report but said it was “ill-founded” to suggest it took the deliberate decision to deceive employees and contractors as to the true health of City Link and that it was incorrect to suggest “there was any financial benefit to City Link in continuing to trade between 22 and 24 December, the date when it ceased trading.

“The company took a deliberate and brave decision to trade for the extra two days which it could only do if it did not announce its likely administration,” said Better Capital.

Current legislation on collective redundancies – where an employer proposes to make 20 or more employees redundant – is clear but often difficult, if not impossible, to implement in some insolvencies and has been criticised as “inflexible” by insolvency practitioners.

“Issues about employee consultation near insolvency and the evolution of different forms of employment particularly need legislative change,” Better Capital said.

In a statement, EY, whose partners act as joint administrators for City Link, said any potential changes to the Insolvency Act or rules relating to the Insolvency Act “would be a matter for parliament”.