Following the recent collapse of delivery firm City Link, MPs from two government select committees have produced a report exposing the considerable imbalance in protection afforded to workers, as compared to investors, by insolvency legislation.

In particular, politicians have criticised City Link’s deliberate decision to ignore the statutory redundancy consultation process in favour of paying the cheaper fine for breaching such law. The economic advantage in depriving staff of these rights has called into question the protection afforded to the various stakeholders of insolvent companies. Chair of the Business, Innovation and Skills Committee, Adrian Bailey said the current system means that “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.”

Whereas secured investors can recover their money by enforcing or realising their security, workers, whether directly employed or not, are often much lower in the list of priorities when money is paid out in insolvency procedures. Despite serious questions over the ability of City Link to continue trading during December 2014, the committee found that small businesses and self-employed drivers were encouraged to take on additional costs, which they would unlikely recover. Scottish Affairs Committee Chair Ian Davidson said many contractors feel they were “deliberately deceived” as to the true state of the business, adding “City Link and Better Capital are morally, if not legally, responsible for the difficulties that many of these individuals and small businesses find themselves in.” Better Capital, parent company and secured creditor of City Link, claimed it could not have done more than it did.

Chuka Umunna, Shadow Business Secretary, said: “This report is right to emphasise the need for better practice when firms go into administration to ensure workers are not kept in the dark. It is vital that lessons are learned from City Link’s demise.”

Simeon Gilchrist, Insolvency Partner has recently been quoted in an article on this subject which is available to read here.

For further information regarding this topic, please contact Simeon Gilchrist or Sophia Mew. Alternatively, please contact us on t: 020 7691 4000 | e: info@edwincoe.com

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