Since the administration of City Link in December, a group of MPs have been looking closely at how the situation was handled leading up to the administrators' appointment.
The MPs overall view was that employees were not given priority when the company fell into financial difficulty, and were not given enough notice before City Link entered administration on Christmas Eve.
Under current insolvency law, if a company does not follow the statutory redundancy consultation process, they will be fined for this. However MPs have highlighted that in the case of City Link, the risk of ceasing trading was far greater in cost than that of a fine, suggesting the company knowingly failed its employees and contractors.
As for the order of priority and who gets paid when a company becomes insolvent, employees are ranked below banks and secured lenders but above HMRC, trade suppliers, contractors and customers (known as unsecured creditors). MPs now feel employees and contractors should be moved further up the chain.
There is often no good outcome when a large company goes into administration as this will usually mean some or all employees will lose their jobs, customers won’t get paid back and suppliers lose business. The company will still be in financial difficulty regardless of how quickly employees are told.
In the case of City Link, if employees and suppliers had been told a while before the company entered administration, many could have left the company and pulled out of contacts. Millions of packages and Christmas presents may have been undelivered, creating still a gloomy outcome for customers and the business.
If a change to the order of priority was considered, with employees moved to the top and banks pushed further down, where would the incentive be for banks to lend to businesses? If they thought they would get little back in the event of insolvency, would the risk to lend be too great?
Employees should get fair treatment and appropriate consultation rights if a company they work for goes into administration. And for that reason, it is definitely worth looking into. We must all remember though that in this type of situation, not everyone will benefit.
In a report, the group of MPs stated “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.”
The group are calling on the government to change the insolvency process, in order to better protect contractors and agency workers who are considered as unsecured creditors and not employees.
Please see our new infographic for more information on the order of priority - who gets paid when a company goes bust.