figuresAs you probably saw over the Christmas period, Citylink became the latest high-profile insolvency to hit the headlines. As someone who has spent most of their professional life working in insolvency, I suppose I should be used to it. However, I still find myself surprised at the lack of understanding of the practical and legal situation in the press.

At the beginning of the process, the press tends to have quite an understandable focus on the human impact. In this case, the holiday season timing made the story particularly poignant. I think we can all understand the terrible impact of learning you will be potentially losing your job at Christmas. You cannot help but feel for the staff in this situation.

The situation is there though, and we need to be practical so let’s consider this from the IP’s point of view. I assume that some time was spent looking for a buyer however it is clear that since no purchase was made, that this was not an option. For this reason, a decision would have needed to be made about the best way to take control of the winding up of the company. Purely from a practical point of view Christmas day would mean that the majority of the assets of the company would be in the most viable place to facilitate the process – at the base. Also, the business of Citylink is to deliver parcels and Christmas means an end to the busiest part of the year. As a result, this would mean less disruption to the end user. In addition, a lot of the debtors would have just been through the busiest season of the year and (for this reason) be at their most financially robust, at least for the short term. Harsh as the news was for the employees concerned, sadly it makes a lot of sense in the wider picture.

Another aspect often discussed in the press was the subject of potential asset stripping by the investor Better Capital. The press reported that a figure in the region of £40m had been invested in the ailing Citylink by Better Capital, but this was frequently linked to potential asset stripping. At present, I have yet to see any solid evidence that this was the case. I am sure this will only be resolved in the fullness of time, and I include it here in relation to the press coverage and am not stating this was the case.

The next coverage seemed to focus on the amount Better Capital would see as a return on investment, and the difference between this return and the very little that would be available for the other creditors. In this, there is a real misunderstanding of the priority of payment to creditors.

Firstly I would assume that Better Capital (like any other financial institution) would have required security before it invested. Security is likely to introduce an element of priority to the investor. We need to remind ourselves here that security is an expected part of the financing process and without it very little would take place. Security comes in a number of forms. The most common is a debenture or fixed and floating charge. A fixed charge provides an absolute right to an asset so after the sale costs, the net proceeds are paid to the security holder. (This is not dissimilar to the security rights of a standard mortgage.)

Next in line will be the preferential creditors, commonly the creditors with sums outstanding for wages and holiday pay. In most cases, the Government will have paid this under the redundancy payment scheme and will reclaim these from the company.

Once preferential creditors are settled, the process will move to the prescribed part. I will cut through the rather long-winded, and in all honesty, a little boring formula. But in effect, it is a ring-fenced fund for the unsecured creditors from the available assets. This fund can be up to a maximum of £600,000.

Once this is complete, we return to the floating charge, and if the investor is still owed money they will now receive the balance.

Finally, if we have any funds left there is a payment made to the unsecured creditor – this is separate from the prescribed fund.

Some press reports are suggesting a return of £20m – £23m from the original investment and I would suggest the majority of this will be from the floating charge.

So I hope this has helped shed some light on the combined press coverage on the story of the CityLink failure, and in the cut-throat business of parcel logistics. It is a sad event, and for the employees it is a terrible blow. Although we understand the process must go on, we have nothing but sympathy.