MPs cite flaws in insolvency process in wake of City Link collapse

A joint report from two parliamentary committees has concluded 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.

Labour MP Adrian Bailey, chairman of the Business Committee, (pictured) said: “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.”

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.

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.

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.

Mr Bailey added: “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 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”.