Changes to insolvency laws proposed

 These are the conclusions of a highly critical joint report published by Parliament’s Scottish Affairs and Business, Innovation and Skills Committees looking at events surrounding the collapse of delivery company City Link, which went into administration on Christmas Eve 2014.

The report says City Link’s owners Better Capital took a ‘deliberate decision’ not to inform employees and contractors of its likely collapse.

It states: ‘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.’

The report goes on to state that while there will always be those who lose out when a company goes into administration, the current system does not represent the ‘appropriate balance’.

MPs say they are ‘greatly concerned that the existing system incentivises companies to break the law on consultation with employees’ 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.

The report says that 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’.

MPs criticise City Link for encouraging small businesses and self-employed drivers working for the company 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, which has left some in severe financial difficulty.

Ian Davidson MP, chair of the Scottish Affairs 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.’

The report’s recommendations include government backing for 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, saying that lack of information about the situation as a whole allows misunderstanding and rumour to gain traction.

MPs also want the government to 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, and says it should review and clarify the requirements for consultation on redundancies so that employees understand what they can expect and company directors and insolvency professionals have a clear understanding of their responsibility to employees.

The report commends EY, who were City Link’s administrators, for using a range of communication tools, including social media, to try and assist former workers with job searches, but says there is a need to examine the legislation around worker communications to ensure that all relevant government support agencies are able to contract those affected. 

The select committees want the government to update 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.  They say plans to tackle bogus self employment should be brought forward as a matter of urgency.

In a statement, Better Capital described as ‘ill-founded’ the accusation that the company had made a deliberate decision not to inform employees of City Link’s troubles.

It said that making the situation public before 24 December, when there were still hundreds of thousands of deliveries to be made, could have exposed City Link and its unsecured creditors to compensation claims worth up to £10m.

Better Capital said: ‘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.’