Insolvency Legislation and the Procurement Dilemma

Last week, three directors of failed courier firm City Link were charged with not telling the UK’s Business Department in advance that they were planning to make staff redundant. The Insolvency Service said that the Department for Business, Innovation and Skills (BIS) was bringing the prosecution on its behalf.

Former MD David Smith (no relation, and not the CIPS Past President), former CFO Robert Peto and former non-executive director Thomas Wright have all been charged with failing to notify the business secretary (Vince Cable at the time) that they were planning to make staff redundant at the firm before the firm called in administrators on Boxing Day 2014. Around 2000 staff were made redundant, and were only told that was likely on Christmas Eve.

That early warning is required under the Trade Union and Labour Relations (Consolidation) Act 1992, and failing to notify is a criminal act, although this legislation has rarely been used until now. The Act gives employees protection from sudden redundancies; firms have to allow time for consultation. Employers who are planning large scale redundancies of over 100 staff at one location must inform the business secretary a minimum of 90 days in advance.

But opponents of the legislation point out that basically, it is a stupid law, and from a procurement standpoint, we tend to agree.

Let’s just imagine you hear (as you undoubtedly would) that one of your major suppliers had started that consultation period. “It’s OK”, their sales director tells you, trying desperately to sound cool and confident, “it’s only a formality. It is just a precaution; it will probably all be OK. Don’t worry, we will fulfil your orders, no problem”.

How do you respond? Say thanks and carry on regardless? Or dig out your alternative supplier strategy, start searching the on-line directory, and call a few other firms in that industry? Maybe even pull back on the next orders you were about to place with that firm?

Of course you would take that sort of precaution. You must protect your own organisation and your own source of supply. And as soon as you can, you will probably move business away from the risky provider – you don’t want to find orders are unfulfilled if they do collapse. If you are unscrupulous, you might even delay payment, on the grounds that it will take the administrator or anyone who buys the failing firm months to catch up with your receivables, so free credit for your firm!

So the act of announcing the potential administration will almost certainly send the firm into a more rapid decline. Whereas taking another month or two to try and turn things round might just (in a few situations at least) pay off and save the firm.

We can understand where the legislation is coming from, and there were some unimpressive aspects to the collapse of City Link, without a doubt. But it seems that this legislation, if followed to the letter, is likely to lead to a worse situation for staff and businesses in many cases.

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