Business

City Link collapse exposes insolvency flaws, say MPs

Citylink worker Image copyright PA

The collapse of delivery firm City Link has exposed the flaws in the insolvency system, two groups of MPs have said.

A joint report from two parliamentary committees concludes that the current system is too heavily skewed in favour of investors over workers.

It also said City Link took a "deliberate decision" not to inform employees of its likely failure.

About 2,700 people lost their jobs when City Link collapsed over Christmas, and 1,000 contractors also lost out.

"The current insolvency system fails to offer sufficient protection to workers, suppliers and contractors alike," said Adrian Bailey, chairman of the Business Committee.

"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," he added.

The report says that under the current rules it is in the financial interest of a company to break the law and ignore the statutory redundancy consultation process, if the fine for doing so is less than the cost of continuing to trade.

The fine will end up being paid by the taxpayer, it pointed out.


Image copyright Getty Images

Analysis: John Moylan, BBC business correspondent

MPs believe that insolvency law has failed to keep pace with modern employment practices.

As well as direct employees, City Link's workforce included many who were self-employed or contractors. They were often small businesses with staff of their own.

When City Link collapsed, many of them folded too.

But while the firm's employees will receive much of what they were owed - these contractors may end up getting back as little as 2p for every pound.

So MPs say the order in which creditors are paid out in an insolvency needs to change. That would amount to a major shake up in insolvency rules.

Without protection for lenders - companies might find it much harder to get investment.


'We lost everything'

The MPs recommend that the order in which money is paid out in insolvencies should be changed to give precedence to all workers, whether directly employed or not.

"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," the report said.

Irfan Khan was a subcontractor for City Link and lost at least £80,000 from the firm's collapse. He told Radio 5 live's Wake Up to Money that he had no idea that City Link was in difficulty and that he had invested in five new vehicles before Christmas.

"We've lost everything," he said. "It's killed our business."

He said he had been told that he would get back between zero and 2p per pound from what he is owed.

'Brave decision'

Mr Bailey said: "We are dismayed that, although it was clear for some time that there were serious questions over the ability 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.

"There is no doubt that contractors were deliberately deceived as to the true state of the business. City Link and [owner] Better Capital are morally, if not legally, responsible for the difficulties that many of these individuals and small business now find themselves in," he added.

Better Capital says the accusation that it deliberately deceived contractors is "ill-founded". It says that it did not stand to gain financially from trading even after it became clear, on 22 December, that the firm would have to go into administration, which it eventually did on 24 December.

"In our view, 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," Better Capital said in a statement.

The company said that if it had stopped trading on 22 December, many parcels would not have been delivered, resulting in unnecessary financial loss for customers and "very substantial disappointment for families at Christmas".

It could also have resulted in massive financial claims against City Link, possibly more than £10m, the statement added.

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