Current company insolvency system too heavily skewed

• Report: Impact of the closure of City Link on employment
• Report: Impact of the closure of City Link on employment (PDF, 506 KB)
• Inquiry: Impact of the closure of City Link on employment
• Scottish Affairs Committee

Main costs of insolvency process – and of breaking the law - borne by workers and taxpayer. City Link took "deliberate decision" not to inform employees and contractors of likely collapse.

The Committees accept that there will always be those who lose out when a company goes into administration and cannot cover all of its debts. However, the current system does not represent the appropriate balance, since those who have given secure credit to a company are cushioned from the full impact of an insolvency, because the losses are borne by those who work for a company on a self-employed basis, or as contractors or suppliers.

High human cost

The Committees also say that under the current rules it is clearly in the financial interest 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, especially since this fine will anyway be paid by the taxpayer. However, while the financial calculation is simple, ignoring the consultation period has a high human cost that appears not to have featured in the decision making process at City Link. Employees were denied a reasonable notice period in which to seek alternative employment and instead, at a time of financial uncertainty, have to pursue a court claim for lack of consultation if they wish to be compensated

The Committees were inquiring into the collapse of City Link, which went into administration in December of last year after owners Better Capital failed to find a buyer and declined to provide addition funding to allow City Link to continue trading.  While there were differences of opinion as to whether or not City Link could be made viable, and the desired level of return could be achieved, the Committees regret that Better Capital felt its investors’ interests could only be protected at the expense of the future of City Link and continued employment for its workers.

Committees' recommendations

• Government should 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, since in the period running up to an administration order there is a lack of information about the situation as a whole that allows misunderstanding and rumour to gain traction 
• Government should review the arrangements for information sharing in the event of a company going into administration to ensure that those affected receive timely advice and support. 
• Government should review and clarify the requirements for consultation on redundancies during an administration so that employees understand what they can expect and company directors and insolvency professionals have a clear understanding of their responsibility to employees.
• The incoming Government should bring forward proposals for tackling companies who use or encourage bogus self-employment. We reiterate the call in Zero hours contracts in Scotland: Interim Report for the Government to set out what steps it is taking to prevent workers from being pushed into bogus self-employment. 
• The Government updates the order of payments in the Insolvency Act 1986 to give preference to all of a company’s workers, regardless of whether or not they are directly employed and that consideration is given as to how best to deal with the employees of small sub-contractors and suppliers.

Scottish Affairs Committee Chair's comments

Ian Davidson MP, Chair of the Committee, said:

"At the moment 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. Further, 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. It also creates incentives to use cheap, insecure forms of employment, such as bogus self-employment, which gives a worker all the responsibilities of an employee but none of their rights or protections. Obviously a business crisis is never easy for anyone, and presently directors have a duty to maximise investors’ returns, but the system needs modernising to more fairly reflect the realities of work today.

We are dismayed that, although it was clear for some time that there were serious questions over the ability of City Link to continue trading after December 2014, small businesses and self-employed drivers working for City Link were encouraged to take on additional costs, despite the company being aware that there was a strong possibility that they would not receive payment for a significant part of their work in December. The additional work undertaken by these people has left some of them in serious financial difficulties, with some small firms forced into administration themselves or relying on goodwill from their own creditors to struggle on. Contractors feel they were deliberately deceived as to the true state of the business. City Link and Better Capital are morally, if not legally, responsible for the difficulties that many of these individuals and small business now find themselves in."

Business, Innovation and Skills Chair's comments

Adrian Bailey, Chair of the Business, Innovation and Skills (BIS) Committee, said:

 "Our joint evidence sessions highlighted an issue which former employees of City Link will sadly know only too well – that the current insolvency system fails to offer sufficient protection  to workers, suppliers and contractors alike. Investors and directors are cushioned from the impact of failure while workers, suppliers, and contractors pay the highest price. The balance needs to be shifted so that our insolvency system is no longer skewed in favour of investors and directors.

"It is deeply regrettable that Better Capital felt its investors’ interests would be better served by abandoning City Link and its workers. Contractors, suppliers, and workers were left high and dry - taking a serious financial hit - and are now left to struggle on in the wake of the decisions of Better Capital"

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