1 Introduction |
1. At 7pm on 24 December 2014, courier
company City Link was placed into administration following several
years of losses and falling revenue. For many of the 2,727 staff
and approximately 1000 contractors who worked for City Link, the
first confirmation that their jobs and livelihoods were at risk
came from reports in the media on Christmas day.
2. The Scottish Affairs Committee, together with
Margaret Curran MP and Ann McKechin MP, held an informal meeting
with employees, contractors and union representatives in Glasgow
in early January to hear from those directly affected by the closure
of City Link. Following this meeting, the Scottish Affairs Committee
agreed to hold an inquiry into the Impact of the closure of
City Link. The Scottish Affairs Committee held an evidence
session with the RMT on 13 January 2015.
As a result of the interest and expertise of members of the Business,
Innovation and Skills Committee, it was agreed that all subsequent
evidence sessions would be joint hearings between the two Committees.
3. On 17 February 2014, Ernst and Young, the administrators
for City Link, published the Administrators' statement of Proposals
setting out the background to the administration, future actions
of the administrators and information on repayment of creditors.
The administrators are also required, by the Company Directors
Disqualification Act 1986, to report to the Department for Business,
Innovation and Skills on the conduct of the directors of City
Link within six months from the administrator's appointment. This
report is due by 24 June 2015. The Department will then decide
whether further investigation or action is required.
4. Our inquiry is not intended to duplicate this
work. Instead, we have focused on the key issues raised in our
early meetings with those affected-what impact did the closure
of City Link have on employees and contractors, are current safeguards
for workers sufficient and was information about the administration
communicated effectively to employees?
5. This inquiry has also been informed by the previous
work of the Scottish Affairs Committee on issues relating to employment
and employee rights, notably the Scottish Affairs Committee Zero
hours contracts in Scotland: Interim Report.
Our inquiry into the closure of City Link has raised similar questions
about the use of alternatives to permanent, guaranteed-hours contracts
(for example self-employment and zero-hours contracts), to strip
protection from employees without offering anything in return.
6. The Business, Innovation and Skills Committee
have previously inquired into the work of the Insolvency Service,
including looking at pre-pack administrations and reforms to the
regulations for insolvency practitioners. Both topics are addressed
in the 2013 Business, Innovation and Skills Committee report,
The Insolvency Service.
7. City Link was a courier company offering a range
of courier services for individuals and businesses, including
next day and international delivery. From 2008 onwards, City Link
made a loss and (with the exception of 2012) revenue fell each
year until it went into administration. At the time of going into
administration, City Link employed 165 staff in Scotland, split
between Aberdeen, Edinburgh, Glasgow, Glenrothes and Motherwell.
City Link had 90 staff in Wales, 23 in Northern Ireland and 2449
8. City Link was founded in 1969. Originally owned
by British Rail subsidiary, Red Star Parcels, it was sold to Securiguard
in 1989, which was in turn bought by Rentokil Initial in 1993.
Better Capital bought City Link in April 2013. A franchise model
was adopted in 1980, but in 2005 Rentokil Initial announced that
they would buy back all the franchises. This process was completed
in 2008, the same year that Rentokil Initial completed the acquisition
of rival courier company Target Express.
9. Former City Link Chief Executive, David Smith,
dates a number of the problems encountered by City Link to this
period. He told us that:
the consolidation of the two businesses did not go
well, and, in fact, the business never made a profit in its entire
time from 2007. I joined the business at the end of 2011.
] It was always a business in distress.
10. Mr Smith went on to list three major problems,
dating from the acquisition of Target Express,
which led to the failure of City Link. He stated that problems
with the integration of the two companies' IT systems and long-term
IT underinvestment, outdated operational processes, and the terms
of the commercial contracts that City Link had entered into between
2010 and 2011, had all contributed to City Link's ongoing losses
and falling revenue.
11. Better Capital is an investment vehicle which
was founded by Jon Moulton in 2009. It specialises in the turnaround
of underperforming businesses. In April 2013, Better Capital bought
City Link from Rentokil Initial for £1, promising an investment
of £40million. Jon Moulton, founder of Better Capital, told
us that Better Capital had considered the City Link investment
for longer than most of their investments because:
It was a very challenging deal. The company had lost
somewhere in excess of £300 million for its prior owners,
so it was clearly a very frightening sort of company. We
had to believe there was a way forward to cut costs and improve systems
and processes to get it to be a profitable company and an investment
worth having for our shareholders.
12. Despite initial optimism from Mr Moulton at the
time of the acquisition that City Link was "improving actually
by 2014, the Better Capital Interim Financial Report stated
that City Link was a "significant concern".
Insolvency and administration
13. The key piece of legislation governing insolvency
and administration is the Insolvency Act 1986. Among other things,
this Act sets out the order in which creditors must be paid, the
obligations of an administrator and the duty of an administrator
to act in the best interests of the body of creditors as a whole.
The Company Directors Disqualification Act 1986 requires administrators
to report on the conduct of a company's directors within six months
from the administrator's appointment.
14. The position of employees during insolvencies
is also governed by the Employment Rights Act 1996 and the Trade
Union and Labour Relations (Consolidation Act) 1992. The Employment
Rights Act provides for certain payments to be made to employees
from the National Insurance Fund to ensure that employees can
receive some of the money they are owed swiftly. The Trade Union
and Labour Relations (Consolidation) Act 1992 does not deal specifically
with insolvency but does contain provisions for employers to consult
on collective redundancies affecting 20 or more employees.
ORDER OF PAYMENT
15. One area of great concern to those affected by
the closure of City Link, in particular small sub-contractors
or sole traders providing drivers for City Link, was the hierarchy
of creditors which governs the order in which they must be paid.
This is set out in the Insolvency Act 1986. The hierarchy for
payment and an explanation of the categories is set out in the
1 Oral evidence taken before the Scottish Affairs Committee
on 13 January 2015, HC (2014-2015) 928 Back
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 Back
Scottish Affairs Committee, Tenth Report of Session 2013-14, Zero
hours contracts in Scotland: Interim Report, HC 654 Back
Business, Innovation and Skills Committee, Sixth Report of Session
2012-13, The Insolvency Service, HC 675 Back
Q 578 Back
As above Back
Q 103 Back
Turnaround specialist Jon Moulton aims to deliver the goods with City Link,
The Telegraph, 5 May 2013 Back
Better Capital PCC Limited, Better Capital Interim Financial Report 2014,
November 2014, p 40 Back