The joint report from two parliamentary committees in respect of the City Link administration, concluding that the current system is too heavily skewed in favour of investors over workers, demonstrates the difficulty that directors have in the run up to an insolvency process. Neil Smyth, partner in the Restructuring & Corporate Recovery practice at international law firm Taylor Wessing, explains:
"When a company is insolvent, the directors must act in the best interests of all creditors. That will include employees, landlords, suppliers, secured creditors and many others. Undoubtedly the loss of jobs is a very unfortunate consequence of an insolvency process, but - in certain circumstances - keeping a workforce together in the hope of selling a business through an insolvency process will be in the best interest of creditors and, sometimes, that necessitates not telling the employees.
"If legislation forces an insolvent company telling its employees of that prospect, that could erode value for all creditors, including the employees. That is not to say that employees should never be told what is going on, but a carte blanche approach will not work either."