Insolvency system does nothing to protect workers

A joint report published by Parliament’s Scottish Affairs and Business, Innovation and Skills Committees, says the processes for company insolvency do not offer sufficient protection to workers.

25 Mar 2015| News

The committees were inquiring into City Link, which went into administration in December. Its parent company Better Capital failed to find a buyer and refused to provide the additional funding to keep the company trading. City Link took a “deliberate decision” not to inform employees of its imminent collapse.

The reports concedes that the rules on insolvency are skewed in favour of the directors, management and shareholders, at the expense of the workers.

As in the case of City Link, it is often in the financial interest of a company to break the law and ignore the statutory redundancy consultation period, if the fine for doing so is less than the cost of continuing to trade, especially since this fine will be paid by the taxpayer anyway.

The committee points out that the human cost of this move did not factor into the decision making process at City Link; “Employees were denied a reasonable notice period in which to seek alternative employment and instead, at a time of financial uncertainty, have to pursue a court claim for lack of consultation if they wish to be compensated.”

The rules on insolvency encourage malpractice on the part of employers. Ian Davidson MP, Chair of the Committee, summarises it thus; “[The] system provides perverse incentives to withhold information or to skip proper consultation processes in contravention of the law and at a high cost to workers struggling to cope with the loss of their livelihoods. It also creates incentives to use cheap, insecure forms of employment, such as bogus self-employment, which gives a worker all the responsibilities of an employee but none of their rights or protections”.

He said the committees were “dismayed” by the way City Link left many of its employees with financial difficulties that could have been prevented, including allowing small businesses and self-employed drivers to continue to take on additional costs, despite being aware of the strong likelihood that they wouldn’t be paid for that work.

Adrian Bailey, Chair of the Business, Innovation and Skills (BIS) Committee, said:

“Our joint evidence sessions highlighted an issue which former employees of City Link will sadly know only too well – that the current insolvency system fails to offer sufficient protection to workers, suppliers and contractors alike. 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.

“It is deeply regrettable that Better Capital felt its investors’ interests would be better served by abandoning City Link and its workers. Contractors, suppliers, and workers were left high and dry – taking a serious financial hit – and are now left to struggle on in the wake of the decisions of Better Capital”.

The committee makes several recommendations on how to make the insolvency process fairer and more transparent, including the tackling of bogus self-employment. It recommends that; “Government should support dialogue between unions, employers and insolvency professionals to develop best practice guidance for the sharing of information with employees and unions when an administration order is under consideration”.

It also recommends the Insolvency Act 1986 be updated in order that all of the company’s wooers are given equal preference in the order of payments, regardless of whether they are directly employed by the company.

The report and recommendations can be read in full here.