4 Payment of creditors
51. Ernst and Young have now published the Administrators'
statement of Proposals, which includes a section on City Link
assets and the likely distribution of funds to creditors. Apart
from a possible recovery of £400,000 from prepayments made
by City Link for IT, property and equipment hire contracts, the
remaining realisable assets held by City Link is its debtor ledger.
Ernst and Young expect to be able to recover about £24 million
from the debtor ledger. [36]
52. Secured creditors are owed a total of £52.7
million. This far exceeds the amount that will be realised from
City Link assets. As a result, unsecured creditors will receive
no payment beyond a small amount from the 'prescribed part'—in
this case £600,000 to be divided between all unsecured creditors.
Payment of staff
53. The Employment Rights Act 1996 provides for the
National Insurance Fund to pay wage arrears, unpaid holiday pay
and redundancy pay to employees of a company which has become
insolvent. Wage arrears are capped at £464 per week for 8
weeks. The National Insurance Fund will then reclaim this money
from the company.
54. When a company is liquidated, debts to employees
for wage arrears, overtime and holiday pay are treated as a preferential
debt. However, while holiday pay is uncapped, the limit for wage
arrears to be treated as a preferential debt is £800. Anything
owed over this amount is treated as an unsecured debt. In practice,
this means that although employees will receive the money they
are owed based on the higher limits set out in the Employment
Rights Act, the National Insurance Fund is likely to receive only
a small part of this payment from the company.
55. The Administrators' statement of Proposals states
that the administrators:
Currently believe all outstanding overtime and commission
owed to employees has or will be paid in full, with the exception
of an estimated 29 employees where their claims exceed the limit
for the claims to be treated as preferential creditors in their
entirety.[37]
56. While
we welcome the fact that the UK Government ensures that employees
can claim the money they are owed if their employer goes into
administration, it is a matter of great concern that, under current
legislation, taxpayers are left to pick up the bill, allowing
private investors to recover more of their investment.
57. While the fact that the majority of employees
will receive the full amount that they are owed by City Link is
to be welcomed, we know from our discussions with staff that it
was not always clear to them that this would be the case. In evidence
to the Scottish Affairs Committee, Steve Hedley told us that his
understanding, from discussion with Ernst and Young was that all
overtime would be paid, while Gordon Martin, Regional Organiser,
RMT, told us that, following discussions with City Link depot
management, his understanding was that:
the directly employed PAYE staff were struggling
to be paid their overtime. While I was with one of the
reps, Mick Ward, on 6 January he got a call about
overtime. I can't call to mind the exact hours,
but he was being told that he was going to be paid a fraction
of it—about 20%.[38]
58. This
lack of clarity over payment of money owing to employees added
an element of uncertainty at an already stressful time. As with
the examples above relating to the provision of information about
support for employees, this added uncertainty created unnecessary
worry and upset for staff.
Payment of contractors
59. Contractors and sub-contractors providing drivers
for City Link have been hit particularly hard by its closure.
As unsecured creditors, they are unlikely to receive the vast
majority of the money they are owed. The Administrators' statement
of Proposals notes that they can expect to receive less than
two pence to the pound. [39]
60. During the busy pre-Christmas period, City Link
management strongly denied rumours that City Link was going to
go into administration. A memo sent by David Smith to his senior
management team, for use when talking to suppliers about concerns,
gave assurances that City Link was not going to go into administration
and would continue to trade.[40]
61. The financial difficulties of City Link contractors
were undoubtedly exacerbated by the fact that they had been encouraged
to take on additional staff and vehicles and work longer hours
in the lead up to Christmas. Gordon Martin told us that, due to
assurances from City Link:
people, through the business, went out and bought additional
vans to put on the road. This is a human tragedy across the
piece. People are thousands of pounds in debt. Who knows how they
are going to pay?[41]
62. We
are dismayed that, although it was clear for some time 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 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. Again, 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.
EMPLOYMENT AND SELF-EMPLOYMENT
63. The RMT raised the issue of bogus self-employment
when they gave evidence to the Committee. Mick Cash told us that
City Link's self-employed drivers were:
tied to the company; they have to wear the uniform
and they have to use the company livery on the vehicles.
[…] That is the way the market is, unfortunately, but they
are employees by any definition, other than the fact that they
have an arrangement in place where they seem to be divorced from
the company but are employed by it.[42]
We accept the RMT analysis that this was direct employment
in everything but name.
64. When asked about the possibility that the self-employment
offered by City Link was actually bogus self-employment, Hunter
Kelly told us that he thought that two years ago HMRC took an
interest and believed that they were valid subcontractors. [43]
65. Jon Moulton told us that self-employment could
be either "a panacea or a terrible evil" and that for
some City Link employees who became self-employed City Link drivers
"in some cases it would have been to their benefit, and
in some cases it would have been to their detriment: no question".[44]
66. David Smith echoed the comments about the potential
benefits of self-employment. He also refuted claims that workers
had been pressured to move from employment to self-employment.
He told us that:
in the year to the end of September only 27 people
went from being employed to being subcontract partners across
the whole country. We were not in the position where we were asking
people to do this. We were really struggling with agency drivers—very
short-term man and van—where quality and cost was poor.
We were trying to recruit both permanent employees and subcontract
partners right throughout 2014.[45]
67. We accept that for some people, self-employment
and the flexibility and control it offers can be a positive thing.
However, as the Scottish Affairs Committee noted in the Zero
hours contracts in Scotland: Interim Report, workers in bogus-self-employment
have few rights—they are not entitled to receive sick pay,
holiday pay or the National Minimum Wage and are responsible for
their own taxation.[46]
The report considered the difficulties faced by those forced into
bogus self-employment and recommended that the Government should
set out the steps it was taking to prevent workers form being
pushed into bogus self-employment.
68. Giving evidence to the Business, Innovation and
Skills Committee, the Secretary of State for Business Innovation
and Skills, said:
Before the City Link issue came up, I had initiated
a thorough investigation of employment status, which we are now
undertaking. […] there is what appears to be a growing number
of people who are not genuinely self-employed but have, in some
sense, fallen through the cracks. We are trying at the moment
to get a handle on […] how, at least through legislation,
we might address that problem. We certainly acknowledge that it
exists. It is a part of this wider debate. […] I would hope
my successor, whoever it is, takes this seriously, because there
is a gap.[47]
69. We
welcome the review initiated by the Secretary of State for Business,
Innovation and Skills into how to tackle the problem of bogus
self-employment. The incoming Government should bring forward
proposals for tackling companies who use or encourage this practice.
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 INSOLVENCY ACT 1986
70. The Insolvency Act 1986 provides some protection
to employees of a company which becomes insolvent. However, changes
to working practices and an increasing reliance in some sectors
on contractors rather than directly employed staff means than
this protection no longer covers all those who work for, and rely
on, a single company for their income.
71. The Secretary of State for Business, Innovation
and Skills suggested that a review of the current legislation
could have unintended consequences, saying that he had previously:
opened up discussions in the Department about whether
we should be changing our bankruptcy and insolvency procedures
to look at preferred creditor status. […] The problem is
if you tilt the balance to one group of creditors it is at the
expense of another, and if there is no more money in the company
then ultimately there are casualties.[48]
72. We
accept that there will always be those who lose out when a company
goes into administration and cannot cover all of its debts. We
do not agree, however, that the current system, where those who
have given secure credit to a company are cushioned from the full
impact of an insolvency because of the losses borne by those who
work for a company on a self-employed basis, or as contractors
or suppliers, represents the appropriate balance.
73. Jon Moulton suggested that, without protection
for lenders in the case of an insolvency, companies would find
it more difficult to get investment. He suggested that, just as
"we do not have limited liability companies by accident in
the UK; we have limited liability companies so that people will
invest in companies"; the rules about secured creditors and
creditor repayment were part of the "the rules by which we
operate the economy" and a factor that allowed companies
to attract investment.[49]
74. Any change
to the priority order for creditor repayments should be carefully
considered to avoid unintended consequences and balance protection
for workers with the need for companies to attract credit and
investors. However, the current order of payments does not reflect
modern employment practices. We recommend that 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 employees and small sub-contractors
and suppliers.
36 Ernst & Young LLP, City Link Limited and
City Link (Properties) No. 1 Limited (Both in Administration)
(together "the Companies") Administrators' statement
of Proposals, 17 February 2015, p 16 Back
37
Ernst & Young LLP, City Link Limited and City Link (Properties)
No. 1 Limited (Both in Administration) (together "the Companies")
Administrators' statement of Proposals, 17 February 2015,
p 12 Back
38
Oral evidence taken before the Scottish Affairs Committee on 13
January 2015, HC (2014-15) 928, Q 23 [Mr G Martin] Back
39
Ernst & Young LLP, City Link Limited and City Link (Properties)
No. 1 Limited (Both in Administration) (together "the Companies")
Administrators' statement of Proposals, 17 February 2015,
p 21 Back
40
Q 713 Back
41
Evidence taken before the Scottish Affairs Committee on 13 January
2015, HC (2014-15) 928, Q 28 [Mr G Martin] Back
42
Oral evidence taken before the Scottish Affairs Committee on 13
January 2015, HC (2014-15) 928, Q 57 Back
43
Q 569 Back
44
Q 116-117 Back
45
Q 677 Back
46
Scottish Affairs Committee, Tenth Report of Session 2013-14, Zero
hours contracts in Scotland: Interim Report, HC 654, para
102 Back
47
Oral evidence taken before the Business, Innovation and Skills
Committee on 25 February 2015, HC (2014-15) 934-i 2015, Q 36 Back
48
Oral evidence taken before the Business, Innovation and Skills
Committee on 25 February 2015, HC (2014-15) 934-i 2015,Q 32 Back
49
Q 385 Back
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