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

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.


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.


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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Prepared 23 March 2015