City Link and its former parent Better Capital are “morally, if not legally, responsible” for the financial difficulties that some of its creditors now face, a group of MPs looking into the collapse of the company have said.

A report compiled by the Business, Innovation and Skills and Scottish Affairs Committees, which concludes an inquiry into the impact the administration has had, recommended an overhaul of the insolvency regime, including the order in which staff, subcontractors and suppliers are paid.

The 'Impact of the closure of City Link on Employment' report, published this week, recommended that the Insolvency Act is updated to give preference to all of a failed company’s workers, regardless of whether they were directly employed, and reconsider how payments to subcontractors are dealt with.

Currently creditors with a fixed charge over a specific asset, such as land or property, are paid first; followed by the administrator/liquidator, and then staff and suppliers.

It found operators subcontracting for City Link took on additional staff and vehicles following assurances from its senior management in early December that the company was not about to enter administration. It owed trade creditors £30m at the end of January following its collapse on Christmas Eve.

Ian Davidson, chair of the Scottish Affairs Committee, said: “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. Contractors feel they were deliberately deceived as to the true state of the business.”

Redundancy period

The inquiry also found that it is of financial interest for a company to break the law by not abiding by the statutory redundancy period, if the fine for not properly consulting staff is lower than the cost of continuing to trade.

For a company the size of City Link, this would have meant trading for a further 45 days.

It recommended the government “review and clarify" the requirements for consultation on redundancies during an administration.

Giving evidence to the inquiry earlier this year, Jon Moulton, owner of former City Link parent Better Capital, said: "The fact of the matter is that we have lost £20 million. We had no brilliant gain. There was no property angle- nothing being shuffled to one side, nothing taken out the back door. There is no angle on it. We killed ourselves to try to save this company and failed."