Impact of the closure of City Link on Employment - Business, Innovation and Skills and Scottish Affairs Contents

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.

Our Inquiry

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.[1] 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.[2] 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.[3] 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.[4]


City Link

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 in England.

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.[5]

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.[6]

Better Capital

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.[7]

12. Despite initial optimism from Mr Moulton at the time of the acquisition that City Link was "improving actually quite rapidly",[8] by 2014, the Better Capital Interim Financial Report stated that City Link was a "significant concern".[9]

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.


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 Annex.

1   Oral evidence taken before the Scottish Affairs Committee on 13 January 2015, HC (2014-2015) 928 Back

2   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

3   Scottish Affairs Committee, Tenth Report of Session 2013-14, Zero hours contracts in Scotland: Interim Report, HC 654 Back

4   Business, Innovation and Skills Committee, Sixth Report of Session 2012-13, The Insolvency Service, HC 675  Back

5   Q 578 Back

6   As above Back

7   Q 103 Back

8   Turnaround specialist Jon Moulton aims to deliver the goods with City Link, The Telegraph, 5 May 2013 Back

9   Better Capital PCC Limited, Better Capital Interim Financial Report 2014, November 2014, p 40 Back

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Prepared 23 March 2015