Oral evidence: The Impact of closure of City Link on employment, HC 928
Oral evidence, 27 January 2015.
Witness
Jon Moulton, Better Capital, gave evidence.
Chair
Mr Moulton, welcome to this meeting of the Scottish Affairs Select Committee. Today, we are meeting jointly with the BIS Committee. We have taken a particular interest in what happened to the employees of City Link, which, as you are no doubt aware, closed not all that long ago. We were unhappy about the way they seemed to be treated. We have had informal meetings with staff in a couple of locations; we have also had the RMT in; and we have been seeking to have you here, and, obviously, you are here today. We are also trying to get representatives of City Link and the administrators, but unfortunately we have not been able to get all of you on the same day. We appreciate that you were willing to come in at short notice, and that is why we have slotted you in on your own. I understand that we have to check declarations of interest.
Katy Clark
I would like to make a declaration of interest. I refer to the Register of Members’ Interests. In the past, I have received financial donations from the RMT trade union in relation to election campaigns.
Chair
First, can I ask you to introduce yourself and say what you do, to get it on the record?
Jon Moulton
I am Jon Moulton, who normally has a proper voice. I am chairman of the fund entity that owned the shares in City Link.
Chair
You have said previously that Better Capital had to consider the City Link investment for longer than normal. Why was this?
Jon Moulton
The initial investment or the exit?
Chair
The initial investment in City Link.
Jon Moulton
It was a very challenging deal. The company had lost somewhere in excess of £300 million for its prior owners, so it was clearly a very frightening sort of company. We had to believe there was a way forward to cut costs and improve systems and processes to get it to be a profitable company and an investment worth having for our shareholders.
Chair
Presumably, when you invested in it, you thought that all of that could be done.
Jon Moulton
Of course we did.
Chair
Am I right in thinking that with hindsight it was a mistake?
Jon Moulton
I do not think you need to be particularly good at hindsight to recognise that it was a mistake.
Chair
Fine. I just wanted to clarify some of these things.
Caroline Dinenage
Better Capital’s website states that, when you look at potential investments, one of the questions you ask is whether there are “a few controllable steps” to move a business to profit. What did you think those steps were in the case of City Link?
Jon Moulton
They were basically business process steps. The company was run with a very large level of overhead, and we thought we could reduce that quite substantially. We thought we could improve the network of depots. Both those proved to be correct—that we could in fact do so. We thought we could improve the IT systems, which were just horrible, to something much better. We made some progress on that, but ultimately we did not finish it before things came to a head.
Caroline Dinenage
What would you say were the main things that changed between buying City Link in April 2013 and its going into administration in December 2014?
Jon Moulton
Largely, a decline in the market. We were losing customers steadily; we could not retain customers at rates which made it economic to operate. That was the main macro; that was the real negative that was hurting the business.
Caroline Dinenage
But those considerations were not taken into account when you were considering your controllable steps.
Jon Moulton
Certainly not adequately.
Caroline Dinenage
But you feel that the steps that you identified initially as being the controllable ones were controlled sufficiently.
Jon Moulton
I think they were. They were not perfect. We do not pretend we are perfect at managing things, nor do we employ perfect managers, but they did pretty well. These were not done badly. I am sure mistakes were made—in fact I am certain they were—but, on the whole, I would say that people probably deserve scores of seven or eight out of 10.
Katy Clark
One of the changes introduced by Better Capital when you bought City Link was greatly to increase the number of people employed on agency contracts. Is that correct? What we have been told is that it made City Link a toxic brand. Do you think that increasing the number of agency staff damaged the firm’s brand?
Jon Moulton
I do not think it did damage to their brand. On the subject of self-employed versus employed workers, obviously there are pros and cons all over the place. The first thing that was quite striking when we took over was that, on average, self-employed drivers delivered more parcels in a day than the employed. That is not a definitive answer though, because different parts of the country and different densities made it possible for people to achieve more or less. For some parts of the country, the self-employed model was a perfect fit; for other parts of the country it was a very poor fit. If you have a highly dense regular delivery area, an employed person makes much more sense. I do not think it had an impact on the brand; it did not affect the quality of service to any great extent. There were certainly instances where it would have done. Some people went to self-employed—because they had a choice—and then discovered they could not make enough money. That was a problem, because if they decided they did not want to turn up for a day it caused problems in quality; but it did reduce costs overall and it did somewhat improve productivity. The process of going to self‑employed was not terribly brilliantly executed. Its deployment was tried in some areas where it did not work and it had to be reversed.
Chair
To follow up the question of self-employment, it was suggested to us that a lot of this was what has been described to us as bogus self-employment. People working for the company were sacked and then re-engaged as private contractors; they were told they had to buy City Link uniforms and have their vans painted in City Link colours by contractors you specified; and they were told that they could not take parcels for anyone other than City Link, so that to all intents and purposes they were actually still employees. Was using that mechanism simply a means of cutting costs?
Jon Moulton
First of all, I have to make the point that I have never been a member of the board of City Link; I have never been to a board meeting, and I certainly was not engaged in any part of the process—the detail—you are talking about. I simply do not know whether or not you are saying fully the truth. I do not think people were sacked and forced to re‑hire. Some of the other things I am quite confident would be right. People would presumably be stopped from delivering for other carriers. That would be rather difficult to handle. I am not sure that it was true of the entire country. From faint memory, one large Scottish subcontractor operated for several delivery companies. Was it close to employment? Yes, it is. It is a subject which appears in quite a lot of industries. We have an investment in the double-glazing industry where the salesmen largely work for one company, but they choose to be self-employed because they can get more money and a better tax position.
Chair
The question of choice is the key one here. We met a number of employees, as well as representatives of the RMT, who suggested to us that there was really no choice in it at all. People were told they would no longer be employed by the company, and, if they wanted to be paid by the company, they had to undertake a number of steps, which were exclusivity, buying the uniform, and having a van—I understand you need to have the van, but it had to be painted in the company’s colours; and the main advantage to the company was simply in terms of driving down costs. Why I think this was significant is that a lot of these people have now ended up without the protections they would have had under a closure, had they remained employed.
Jon Moulton
Certainly, anybody who becomes a contractor rather than an employee absolutely loses their employment protections. That is the current law, and it is very much in the hands of people like you to deal with whether or not you think it is appropriate. As regards the company, I do not know of any individual fact patterns that match what you are saying, but they may have occurred. If people were told their jobs were terminated but, if they would like to, they could reapply for the job on the following terms, that is not a gross evil. It is not forcing somebody to come back to work. They were being made redundant, and somebody was going to take up that job as a self-employed driver to deliver the parcels. That was what was happening. Nothing more, nothing less. As regards the RMT, they never represented more than about 10% of the work force, and I think it would be unfair to describe them as a great help to the business.
Chair
Leaving aside for the moment our views on the RMT; I was quoting the evidence of the RMT because they seemed to be the only grouping available from whom we could draw evidence. They had gathered it across a fairly wide spread, and there was nothing they said to us that was contradicted by the views of the individual employees in Scotland we were able to speak to.
Jon Moulton
I cannot contradict you; I have no reason to. The RMT may have given you a completely perfect picture; they may not. I really do not know.
Chair
Maybe I should clarify why we are raising these issues with you. You said you had never been to a board meeting. I think we were taking the view, as most of the people involved did, that you were the big, big boss; I don’t think that’s the technical term, but that is, effectively, what you were seen to be. You were, as it were, the driving inspiration running the whole shebang, even though you weren’t hands on, and there was very little likely to be going on at a macro level inside the business in which you were not involved. While I appreciate that you might not have known about the exact circumstances of Jimmy Smith, or any other individual, none the less the strategic direction, in particular the question of changing people from being directly employed to being self‑employed, was likely to have been something driven by yourself.
Jon Moulton
That is simply not true. I really did not drive that process at all. Beneath me, if you would like to regard me as the big cheese at the top, there lies a firm of highly competent people, which is a consultancy firm, and below that lie the operating partners who look after companies and the management of the companies. The plans for the portfolio of companies are derived by the boards of directors of those companies, which include people from one of Better Capital’s arms—yes, definitely—but they are not dominated by it. The plans were derived at a level well below me and realistically not known to me in detail, save as they were reported. Bear in mind that I have never even committed to work full-time for Better Capital, and I don’t.
Pamela Nash
My understanding is that you founded Better Capital. Is that correct?
Jon Moulton
I did.
Pamela Nash
You said you have layers of people below you making these decisions. In the end, you are at the top of that pyramid. While you say you did not know the details of those decisions at the time, if you had been aware of them would you have taken the same decisions, or would you have made a different decision in terms of people switching to being self-employed?
Jon Moulton
I do not think there is anything inherently wrong with people switching to self-employed. In some cases it would have been to their benefit, and in some cases it would have been to their detriment: no question. There would have been a mixture of people. Some would have been very enterprising, worked their nuts off, done 100 hours a week and made a fortune; others would have found themselves with poor runs where they could not make a serious amount of money and they would have been put in a much worse position. I am sure both happened, but it made it a much more variable cost for what is, remember, a very seasonal business. Parcel delivery does not run at a constant level all year; it explodes at the Christmas period, for example, so you need more variable cost than fixed.
Pamela Nash
I appreciate that, but on the costs and benefits to those men, and some women, who were working for City Link, and indeed working for the company while it is in operation, I do not see any benefit to those who are self-employed, in the reality they now face with the company going into administration. Was that taken into consideration when these decisions were being made and the company was not in a strong position?
Jon Moulton
The company was actually in a very strong position at the time you are talking about. This company had £35 million in cash on 1 January last year. This company was not in a weak position at that stage and imagining its own insolvency. It went downhill very rapidly this year, with losses well in excess of £30 million. This was not done against a background of expecting failure; it was against a background in the prior year of rapidly diminishing losses and an optimistic forecast for this year of significant profit. It was not made; it did not happen. I cannot tell you that self-employment is a panacea or a terrible evil; it can be both. It depends on the fact pattern for individual people. If you believe that it was driven simply by a desire to reduce cost, and even if it was, at least it would have meant that the company would have lasted some considerable period longer and preserved jobs for a while. It would have failed earlier, presumably, if the costs had been much higher. In the event, I do not think it saved the company much cost at all.
Pamela Nash
Was the £35 million in cash to which you referred in the form of loans from Better Capital?
Jon Moulton
Yes, overwhelmingly.
Mr Reid
Can you tell us how much Better Capital invested in City Link?
Jon Moulton
£40 million.
Mr Reid
Can you tell us how that investment was structured?
Jon Moulton
Overwhelmingly as secured loan, with a tiny amount of equity.
Mr Reid
How much of it would be a secured loan?
Jon Moulton
Thirty-nine point something.
Mr Reid
What is the advantage of making the investment in that way?
Jon Moulton
It gives the company the ability to do things like negotiating with landlords from a much stronger position, and gives the investor the opportunity to recover some of their money if the company fails.
Mr Reid
Now that the company has failed, how much of that £40 million do you expect to recover?
Jon Moulton
Better Capital is a public company. There is a public company announcement which says that £20 million is about the right number for the expected recovery.
Mr Reid
If £39 million was a secured loan, why is it that you will get only £20 million?
Jon Moulton
Because there are not enough assets to recover the totality. The company has a £5 million first charge to Rentokil, the previous owners. That comes out of the money before it goes to Better Capital, as do a number of other things. There simply are not enough assets to pay everybody out.
Mr Reid
You get back about £20 million of the capital. Have you received any interest payments over the year?
Jon Moulton
Nothing.
Mr Reid
What is the advantage to City Link of the investment? I can see the advantage to Better Capital. What is the advantage to City Link?
Jon Moulton
They had £40 million of cash to use in the business, which they did.
Mr Reid
You, or rather your company Better Capital, wrote to City Link in September pledging to provide finances to keep it going for another year. Is that correct?
Jon Moulton
No, it is not correct. The company was about to sign up for a set of accounts, and the auditors normally require that a company has 12-month forward visibility of being a viable concern. The initial draft letters provided to the fund required the fund firmly to commit that they would put in essentially unlimited amounts of capital to maintain the company for another year, which, bearing in mind the rate of loss, was not something the fund was minded to do. At that stage, it was minded to try to sort out the company and hoped it would do so. A letter was provided, after considerable negotiation with the auditors and directors, stating that there was a current intention. I am afraid they were very narrow words in drafting; it does not mean, “I’ll mean the same tomorrow,” and it is a lot less than, “I love you.” We delivered that letter and, on the basis of it, the auditors qualified the accounts to say the company was not clearly a going concern. The words are freely available on public record for you to look at. We thought that would be a serious blow to the company and we were very sad that we had to put it in that position. In the event, it had almost no impact. People carried on trading with the company regardless of the fact that it had filed pretty dodgy-looking accounts. That is the fact pattern. We had not made any firm commitment. If we had made a firm commitment, we would definitely have honoured it.
Chair
Can I seek further clarification? I have an extract from The Independent, and I am tempted to say that therefore it must be true. It says that the letter you sent said that it was the latter’s—that is, Better Capital’s—“current firm intention to provide finance sufficient to enable the business to continue as a going concern for the next 12 months from the date of approval of the financial statements.” A normal person, I would have thought, would assume that 12 months meant 12 months from the date of the financial statement, which was 9 October, and that you had committed to support it for the next 12 months. I do not quite understand this dancing on the head of a pin about what current intention means.
Jon Moulton
It is dancing on the head of a pin. We had three choices. We could refuse to provide support, in which case the accounts would have been qualified with “Not a going concern,” and the company would almost certainly have gone immediately into bankruptcy. We could have done that. We could have said, “We will provide all the finance whatever happens,” and we would have provided the finance whatever happened. We chose something in the middle and towards the bottom end. “Current intention” is a term of art meaning “not a lot”; it means “today”, and the auditors, therefore, carried on. The quote you’ve got there is not a precise quote from the letter, a copy of which I have in front of me.
Chair
We are working on the basis that because it was in The Independent, it must be true.
Jon Moulton
That is a very dangerous assumption.
Chair
Indeed; I am now learning that. Can you clarify what the use of “current firm intention” in the letter actually was? Maybe the staff could get us a copy of that from you.
Jon Moulton
“Current intention”—delete for a second the word “firm”, which is self-evident—means that it is a view held today. We are not saying that we will hold that view tomorrow. We will be affected by the analysis of what is going on. A much longer letter of the same date went to the directors, which talks about “we acknowledge”, “there could be”, “we’re working with you to try and get it”, “we can’t be sure that we will get it”, “we can’t really give you anything much more than that”, and “we will continue to work with management in seeking to deliver a solvent outcome”. Those were the words the directors got at the time.
Chair
But I would have thought that “current intention” suggests to any normal person that it does not apply just to today. Indeed, we could start subdividing the day. If you say something to me about your intentions, I presume that it’s going to last longer than the time you are actually in the room.
Jon Moulton
There is a considerable difference between intention and undertaking. This is a statement of intention. I am sorry to have to use the words so carefully, but I’m afraid this is a very arcane area. If you use one set of words you get one outcome; if you use another you get another, and so on. There is a very limited number of outcomes. “Current intention” is a statement, which was made honestly, that it is our general intent to provide funding, provided everything checks out reasonably well. That is really the underlying proviso. Subsequently, a vast amount of effort went into this company to see if there was a solvent route forward. We explored selling the company, merging with others, buying others, cutting the company down to size—every route we could see—to try to deliver a solvent outcome. We had periods of exclusivity with potential buyers that did not deliver. We spent several million pounds in the latter part of the year trying to get to a solvent outcome. We failed. No pleasure whatsoever in that.
Chair
I understand you failed, but what I am trying to clarify is whether or not your word is worthless. If you express the view that it is your current intention, I would have thought reasonable people could take a degree of comfort from that. Here is a man with loads of money whose current intention is to see us okay, and we are going to be okay for at least 12 months. What you are saying to us, I think, is that that was absolutely meaningless shortly after it was issued.
Jon Moulton
No, I am not. I am saying that at the date it was issued it was an honest statement. There was an immense amount of work going on to look at a financing for the company. That financing was very unstable. At the date that letter was written, the requirement was believed to be £20 million; a few days later it was believed to be £25 million. A few weeks earlier it had been believed to be £15 million. Facts were changing. We were seeing further erosion of the revenues and further erosion of pricing. Things were getting a great deal worse, and it became clear that £25 million might well turn out to be greatly inadequate.
Chair
But, effectively, for anybody who was looking for assurances, this was worthless.
Jon Moulton
No. What it is is very slightly comforting, and that was what the auditors took out of it and put into the accounts.
Ann McKechin
If this letter of assurance could only be given weight for a short period of time, would it not be expected that, as you made your investigations and found that, in your words, a completely different picture was occurring, you would intimate to that person at the earliest possible opportunity that your statement about an intention to fund was no longer going to be practically applied?
Jon Moulton
The exact state of where we were at all times was conveyed to the board of directors of the company—not to the auditors, but to the board of the company. At no time were they under any misapprehension as to where we stood and what our likely courses of action were.
Ann McKechin
That was stated to them in writing.
Jon Moulton
Yes, definitely, and in numerous meetings too. This was an extremely intense process. We had as many as five streams of work going on at the same time.
Ann McKechin
When you refer to a letter of assurance and say this was your intention, I think the Committee would want to see the text of the letter, because presumably, from what you have described this afternoon, various caveats were attached to that letter which we have not seen. In your opinion, were those caveats very clear, so that they could not have taken any more than, in your words, a very basic degree of comfort?
Jon Moulton
The auditors essentially took no comfort at all: “These conditions, along with the other matters explained in Note 1”, which talks about the company’s liquidity, “indicate the existence of a material uncertainty, which may cast doubt upon the company’s ability to continue as a going concern.” That was what the auditors said after receiving the letter. They did not take much notice of the letter.
Mr Binley
Mr Moulton, I am a businessman. I founded two companies. They employ only 300 people, but I am very proud of them. I am very proud of being a businessman. The actions of your business shocked me in those terms. Can you confirm that you make the point in the letter—because that is what the quote says—that it will continue as a going concern for 12 months from the date of approval of the financial statements? Did your letter actually say that?
Jon Moulton
For the avoidance of doubt, this is not signed by me.
Mr Binley
Whoever signed it, it is your company.
Jon Moulton
No, it is not my company.
Mr Binley
You are involved. Mr Moulton, let’s not mess about. Answer my question.
Jon Moulton
You do not run the country, and I do not run this company.
Mr Binley
But we do run the country.
Jon Moulton
What it says is that it is “currently our firm intention to provide finance, presently estimated at £25 million, sufficient to enable the business to continue as a going concern for the next 12 months”.
Chair
If I may clarify something for the avoidance of doubt, who signed that letter?
Jon Moulton
This letter is signed by an individual called Tim Daines.
Chair
What was the headed paper?
Jon Moulton
It is on the headed paper of BCAP12 GP Ltd—a catchy name.
Chair
I am not familiar with that company. Could that be reasonably taken to have come from you?
Jon Moulton
No, it could not.
Chair
Where did it come from? Is this guy just writing it on his own?
Jon Moulton
It came from a company of which I am a director. That is correct.
Mr Binley
With joint responsibility. Thank you. So it was your firm intention in that particular statement to convince people you traded with. It was your intention—there is no other reason for putting that. You wanted people who were your suppliers to believe that they could continue to supply you for a period of time. That was the firm intention of it, wasn’t it?
Jon Moulton
No, it was not.
Mr Binley
Would you have expected—
Jon Moulton
This letter—
Mr Binley
Hang on, hang on.
Jon Moulton
This letter is addressed “Strictly private and confidential”. It is for the use only of the auditors. Nobody else has seen that letter, or knew of its existence.
Mr Binley
But the point made is that you wished to give the impression that this company could trade and receive supplies from its suppliers for a period of 12 months.
Jon Moulton
Anybody who read the accounts could not form that view.
Mr Binley
Let me tell you, Mr Moulton, that there were very firm rumours in Northampton in November that you were going bust and that people should be wary of trading with you.
Chair
We are going to come to that later, Brian. We want to deal just with this letter at the moment.
Mr Binley
Okay. We’ll just deal with this letter. I do not have a great deal of confidence in some of the language used by auditors. We as businessmen read between the lines. If I had that letter, I would feel that it was the intention of this company to trade, and that money would be available to trade, for 12 months. Is that a fair assumption?
Jon Moulton
If anybody had written you such a letter—and they didn’t—and they did not write one to any of the suppliers of the company either, you might be able to take that assumption; otherwise, you would be grossly unfair to take that assumption.
Mr Binley
Then what was the point of the letter?
Jon Moulton
The point of the letter was to obtain a set of audited accounts for the company, a legal requirement for the company, prepared at the last possible moment, against the background that there were three reasonable outcomes: an undertaking to provide finance, which was not given—clearly not given—and was debated at considerable length with the directors and auditors; we could have gone to the other extreme and given no comfort, in which case we would have had a fully qualified set of accounts and would have ceased trading immediately, when the company had reasonable prospects for going forward. It is up to you where you take the trade-offs in this kind of stuff, but that would have killed all the jobs there and then. Or you can go down the route given here, which is the gentlest of comfort—current intention: plenty of legal background on what that means, if you wish to look at it—addressed to the auditors, not to other people. Nobody was being lured into continuing to supply this company by that letter. Nobody.
Mr Binley
Mr Moulton, I am very glad that my companies did not trade with you.
Chair
To be clear, the provision of this letter stopped the company being closed down at the point the letter was provided.
Jon Moulton
I cannot guarantee that was the case, but I believe it to be so.
Nadhim Zahawi
You needed the accounts to be audited.
Jon Moulton
Yes. Actually, I did not—
Nadhim Zahawi
The company needed it.
Jon Moulton
The company did. Yes.
Nadhim Zahawi
Otherwise, they could not trade.
Jon Moulton
No. The directors would themselves be fined and subject to various sanctions.
Nadhim Zahawi
Ultimately, that letter allowed the accounts to be filed.
Jon Moulton
Yes.
Nadhim Zahawi
Indirectly, the suppliers could be misled, because without filing accounts suppliers would panic; with accounts filed, they would carry on.
Jon Moulton
If they are interested in filed accounts, it is there to be seen.
Nadhim Zahawi
You know what I mean. If the auditors do not sign off the accounts, without your letter the company is shut down. That is what you have said already.
Jon Moulton
It would have been shut down.
Nadhim Zahawi
With the benefit of hindsight, could you have worded the letter differently to reflect more honestly the circumstances, considering that this was a private letter to the auditors?
Jon Moulton
It really is an area of rather arcane art. There are relatively few precedent forms of letter that people accommodate. If you get stuck in with the technical departments of the accountants, you get that. “Current intention” is at the weakest end.
Nadhim Zahawi
I get that, but it is also a fudge to get out a set of accounts that can be interpreted as being okay for 12 months.
Jon Moulton
It could be, but in fairness, I have read to you what it says in the accounts, and they are not—
Nadhim Zahawi
But do you think now, “I shouldn’t have had that letter,” as a director of whatever the company is called? By the way, can the Committee have those letters?
Jon Moulton
Absolutely. As far as I am concerned, I think you can have all of them. I would have to ask the consent of the directors of City Link to release that. I certainly have no objection to it and I doubt very much that they would, to be honest, but I think I should ask them as it is a strictly private and confidential letter.
Nadhim Zahawi
But would you have worded it differently—more honestly?
Jon Moulton
I don’t know about more honestly. I might have put it in much clearer language. At the time we were genuinely working on a refinancing of the company. There is no issue about that. Don’t forget, there is no interest on our part in trading this company on to make losses. I am sure that in Brian’s view it would be so against our own interest. This company was losing 2 million quid a month, or a similar number, so why wouldn’t we want it brought to an end? We are not gaining anything from running out the creditors; we are losing money.
Mike Crockart
In your opinion, what was it that led to the collapse of City Link?
Jon Moulton
At the end of the day, it was too small a company in too difficult an industry.
Mike Crockart
When did it become clear that that was going to happen?
Jon Moulton
That it was absolutely doomed to be the end really became clear late in the autumn. You could argue about the date; you would take a view on that. In technical—
Mike Crockart
In Parliament, we have an issue about when autumn actually is, because an autumn statement tends to be in December, so perhaps you could be a little clearer about what late autumn means.
Jon Moulton
If you look at the time lines, to continue trading the company has to have reasonable prospects of meeting its liabilities as they fall due. It is a different test, unfortunately, from the one in the annual accounts, but that is the test the directors had to do—not me, the directors of the company. At various dates, from the beginning of November until roughly three weeks into November, they were in active discussions to sell the company, with a clear offer on the table, which was subsequently very savagely reneged upon, so no offer came through. We had been looking at refinancing plans continuously—different ways of cutting the company. We had even looked at buying some other companies in the industry to add bulk to the company. The final legs ran out when the last buyer ceased to be on the table, and the last refinancing plan was deemed not achievable, and that actually was on 22 December.
Mike Crockart
None of that answered my question.
Jon Moulton
As a going concern and stand-alone business, I do not think we had much faith in it from some time in November, but it is a matter of opinion. Different people would have had different views.
Mike Crockart
At the point when you wrote the letter, you still felt that it had a future.
Jon Moulton
We still thought we had quite a reasonable chance of doing a refinancing. I cannot give you percentages or anything very meaningful. We were working hard to that end. We had just installed a second management team to work alongside the primary management team to try to come up with a solution that would lead to a solvent end.
Mike Crockart
You understand my question; I am trying to understand what the code means.
Jon Moulton
Can I answer the question?
Mike Crockart
Let me ask the question first. If you are saying that the letter was written in an accepted code between investor and auditor—that the auditor really knows what it means; that “current intention” really means, “Well, you know what, it’s on a really shaky peg”—if that was your intention, surely at the point at which you were writing the letter, you were pretty much writing off the company.
Jon Moulton
We clearly had doubts as to its ability to continue and to be refinanced. We were working to that end, but I’m afraid you have this black, white and grey problem. We definitely had not made a decision that we would not refinance it; we had not made such a decision, or else we wouldn’t have bothered with the bloody letter. Why would we? On the other side, we definitely had not formed the view that it was definitely worth putting the money in. We were trying to work towards putting the money in, and at the date of that letter the work was overwhelmingly in that direction, but it was not convinced, hence the form of the letter. I do not know what the stats are, but I would guess that a very substantial number of companies that get “current intention” letters fail in the next year or so.
Mike Crockart
To jump forward to the point of collapse, at which point there was a rescue bid tabled to try to save City Link, it has been reported to us that one of the reasons the rescue bid failed was that it undervalued City Link assets. Is that your view?
Jon Moulton
First of all, don’t forget that once the administrators are appointed I have absolutely no influence—truly not. The administrator chose to announce the administration, not us; we certainly did not want to announce it on Christmas day, for example. That was forced on us. The administrator dealt with an individual who claimed to represent a consortium. I know a little of this from talking to the administrator subsequently, but I was not around at the time. I do not know what offers he made. I understand there was no cash; it was largely deferred. It was unclear who the backers were. That’s about all I know. The only other thing I know is that the leader of the consortium came from my home town.
Chair
Is that a good or a bad thing?
Jon Moulton
I don’t know. I left it.
Mike Crockart
Let’s not ask which town it is. It has been alleged that it was better for you for the company to continue into administration rather than that any rescue bids should come in, because of the fact that you had the secured loans and would therefore be able to get a significant amount of money from that. Is that the case?
Jon Moulton
Realistically, there would be some level at which that would be true, though somebody who wanted to run this company had to arrive with enough cash to run it. Somebody would have needed, besides whatever they paid us, something like another £25 million of working capital. I do not believe there was anybody around with that. If there had been a credible buyer of the going concern, we had spent three months trying to find one and had failed before the administration. We hired an accounting firm who spoke to all the players in the industry, including some overseas ones, so we were very carefully looking for any kind of rescue route. You did not need to be a genius to work out that this was a public relations disaster waiting to happen. If we could have found a way that would have led to a going concern sale we would have encouraged it, and if there had been a viable one for the administrator—if he had come to us and said, “Look, you’ll get £5 million less”—we would probably have said, “Yes,” but he did not.
Mike Crockart
In your view, with all the work that you did before it went into administration, you would have been very surprised if the administrators had managed to come up with a way of keeping it as a going concern.
Jon Moulton
We would, because once you have appointed an administrator it is hard to see how you reverse the process. As soon as the pipeline is switched off and customers are moved—they will do it in a day—the company has had it the day it happens.
Graeme Morrice
What was the loss City Link made in 2012 and what was the loss that was made in 2013?
Jon Moulton
I do not know the number for 2012 offhand; it was very large, because it was partly not in our ownership. I can give you what is in the statutory accounts, but it does not cover the full year. In the last year it lost about £32 million, and in the year before something slightly less.
Graeme Morrice
The figures for 2013 compared with 2012 show that the loss was much smaller.
Jon Moulton
It depends. Which set of accounts? City Link Ltd?
Chair
I think we will have to check that. The figures we have been given for 2013 showed that City Link made a loss of £14 million, and in 2012 it was £27.5 million.
Jon Moulton
The £27.5 million sounds about right; the £14 million sounds a bit low.
Graeme Morrice
Was the figure for 2013 an anomaly?
Jon Moulton
No; things were improving.
Graeme Morrice
It was clearly an indication or sign of an improvement.
Jon Moulton
The early effects of taking various obvious steps were an improvement in trading.
Graeme Morrice
Why did you not take the view that that would probably continue to be the case and therefore—
Jon Moulton
If 2013 had carried on. Actually, we valued this investment at March 2013 on the assumption that it would be able to drive itself up into profit, so you can tell that our realisation came later that it was not going to. It was losing money heavily in the first quarter of last year, but then it was planned to. What it was not planning to do was lose money heavily in the second, third and fourth quarters, which it absolutely did. The month of December’s accounts have been prepared by the administrator; there was a straightforward loss of £3 million, and that is the busiest month of the year.
Graeme Morrice
You take the view that the failure of City Link was inevitable.
Jon Moulton
At the end it was. We tried every which way to avoid it being an end, because it is in our economic and, believe it or not, our social desires, too, to make sure that the company survives if it possibly can. It is our business. We do turnarounds; we do not do turnarounds that fail, but we do.
Graeme Morrice
At that point, you obviously decided to cut your losses and pull out.
Jon Moulton
The directors were in an impossible position come the 22nd. No buyer. The last buyer had retreated over the weekend, and we decided that we could not fund it adequately because, from where we sat, we were staring at another £25 million at least going in. We would lose the £20 million of security we currently had. It would have been a £45 million-plus decision. With the presentation of that refinancing plan, given to us by a very seasoned and experienced management team, in a mode which bore a startling resemblance to a man reviewing the details of his own hanging, there was just no enthusiasm for the trade-on option. I wish there was.
Graeme Morrice
Clearly, you were disappointed at the underperformance of the funds injected by Better Capital.
Jon Moulton
Yes.
Graeme Morrice
And you regret that.
Jon Moulton
Of course we do. We sincerely regret what has happened. There is no question but that very severe pain has been administered to a lot of employees and contractors. Nobody wanted to do that. Less important in a social manner but important to our business, we have hurt our investors.
Mr Reid
In answer to an earlier question you said that Better Capital expected to recoup about £20 million. What proportion of the total assets of City Link does that amount to?
Jon Moulton
It depends what you mean; forgive me for being just a touch technical. If you mean the assets, that is a number which exists before administration, and a different one exists the day after, because it is the realisable value of the assets. I think we will get back £20 million out of about £34 million or £35 million.
Mr Reid
Where will the other £15 million be?
Jon Moulton
Costs of administration, unsecured creditors prescribed part, and preferred creditors, to the extent that there are some; and £5 million to Rentokil for their prior charge. In fairness, there is still quite material uncertainty to several million pounds as to what the ultimate outcome will be. It is possible we will end up with less or more than £20 million, but not much.
Chair
For the benefit of those of us who perhaps do not have experience in these matters, I was under the impression from what I had been told, and partly from what you indicated earlier, that secured loans had first goes at all the money—these are not technical terms, you will appreciate. In those circumstances, why would anybody like yourselves do anything other than put in secured loans? Why would you ever put equity into a business when you can put in a secured loan that gets your money out first?
Jon Moulton
For some businesses, you absolutely have to have piles of equity in, because people will not deal with you, and regulators require it. Sometimes there is just no choice. Believe me, many of the UK banks tried to work out how you operated without equity. You need equity in the structure. Most of the structures that Better Capital has are dominantly equity. Having said that, most turnaround investments are done using the assets basically as an insurance policy if the business does not work—so the use of secured debt, either from an equity provider like Better Capital or, more commonly, from a loan provider, somebody like one of the banks or the asset-based lending side of an insurance company, would take secured assets into the transaction. It is the safest way of operating in a world where there is massive uncertainty.
Chair
You indicated that of the money that was left—the £35 million or so, without quibbling over the exact amount—you would get only about £20 million, but if you had security over the assets, surely you get yours first. I can understand that the administrators might want to take theirs.
Jon Moulton
For the avoidance of doubt, that is not an immaterial amount of money; in fact it is a lot of money. There are various categories of creditor that are preferred by statute, and then there is Rentokil. That is how it comes out. Being a secured creditor does not put you in front for everything.
Chair
All the briefing we have indicates that it does. We have secured creditors first and the administrators second.
Jon Moulton
No. Administrators are pre‑eminent. They get their money out in full before you see a brass farthing, I assure you.
Chair
That is great reassurance for any administrators who are here.
Jon Moulton
If it is helpful to the Committee, I will happily send you a summary of how the money gets carved out.
Chair
That would probably be helpful.
Katy Clark
When did you start making contingency plans for the fact that the company might not be able to continue?
Jon Moulton
We started looking at contingency planning on or about 22 November. That was the first time we looked at that possibility.
Katy Clark
You will be aware of your legal obligations to consult in good time if you think you may be required to dismiss employees.
Jon Moulton
Absolutely.
Katy Clark
As a constituency MP, I have been involved in quite a number of situations where companies have gone bust, and there have been very complex financial arrangements involving assets being transferred between different companies. At the end of the day, the company has gone bust and it is the state that ends up paying the bill by making redundancy payments. One of the things we are looking at, as members of the BIS Committee, is whether or not this is another of those types of situation, and what lessons can be learned for the future. Will there be enough money left to make redundancy payments to City Link staff, or will the staff have to claim statutory redundancy pay?
Jon Moulton
In many cases, I think they will probably already have claimed statutory redundancy pay. From my understanding of the asset realisations, they will be reliant upon the state paying out, but let me give you a few numbers to play with. I do not know accurately the number that will fall to the state, but I think it is of the order of £4 million—something of that size. During the 18 months that we actually owned this company, it paid something of the order of £75 million between employee pay as you earn, national insurance, VAT and contractors’ payments of the same nature into the Government, so it has not been a bad deal for the Government.
Katy Clark
We are not going into how much tax you may or may not have paid over a long period of time. What we are looking at is how business operates in this country, and whether the regime we have is a good deal for taxpayers in particular, which is why I am asking about redundancy pay, and whether you started the process of consultation early enough, in line with your legal responsibilities. I know that the Scottish Affairs Select Committee has taken evidence in relation to the real situations that the work force are in, whether they are self-employed or not self-employed. I have one example where an employee had been persuaded to go self-employed, was owed £4,500 and was now going bankrupt. If he had known and had notice, it may be that he would have been able to deal with things in a different way. That consultation period is there for a purpose. When was it that you started to consider whether you should start that process?
Jon Moulton
We started to consider that consultation, in line with every other legal duty we had, somewhere round about October. We have taken very extensive legal advice throughout this process from first-class firms. The directors have had independent, expensive advice from a first-class firm.
Katy Clark
And the conclusion is that you believe the state will probably have to pick up a tab of the order of £4 million through statutory redundancy payments, because nothing else will be available to the work force.
Jon Moulton
I think that is correct.
Chair
The state ends up picking up the redundancy payments, but you walk away with a big chunk of your money. Is that a fair summation?
Jon Moulton
Absolutely, and it has been so since the first Companies Act.
Chair
Does that seem reasonable to you?
Jon Moulton
The whole subject matter is one of trade-offs. If the £4 million had been a liability that could not be avoided by an investor, it is less likely that the investment would have been made, so it is a trade-off. Where do you put the line for limited liability? I make the point repeatedly and very clearly: most of these deals are done with a bank holding the secured asset, not the person in my seat. If we had done this with a bank, you would have had somebody from Royal Bank of Scotland to discuss this issue with, rather than an equity player. We would have lost our £20 million and they would have been protecting theirs. It is a matter of policy, I’m afraid; it is not something where I think there is a clear right or wrong. What you want to do is encourage a turnaround culture to try to rescue companies. If you think you are going to make things better by inflicting large amounts of cost on people who do turnarounds, you will end up like France where they do not do it.
Chair
Can I clarify the issue of the £75 million that you mentioned? How much of the PAYE and national insurance was paid by Better Capital?
Jon Moulton
Absolutely none of it.
Chair
How much of it was paid by City Link?
Jon Moulton
All of it.
Chair
They paid the PAYE.
Jon Moulton
Yes, of course they did.
Chair
Did that not come from the employees?
Jon Moulton
Pay as you earn is arguably straight from the employees, or it is arguably a payroll tax. That, as you will be well aware, is a rather narrow distinction.
Chair
No. I don’t think it is a narrow distinction at all. I pay PAYE and it comes off what would otherwise be my salary, so I have paid that. Your employees paid PAYE.
Jon Moulton
I am happy to agree with you that it is trust funds from the employees. I am happy to agree with that; what I am also going to point out, though, regardless of the analysis you put on it, is that the Government still got 75 million quid, and they would not have got it if we had not done that turnaround.
Chair
I understand that, but I think it is fair for us to take on board that it was not as if you paid this £75 million to the Government as a charitable act.
Jon Moulton
Not at all.
Chair
You did it on the basis that you could do it—
Jon Moulton
We did it in the hope of generating profitable investment. Of that, we lost £20 million and you could argue that £20 million went to the Government.
Chair
You might argue that.
Jon Moulton
I would not recommend the argument; I simply make the point you put.
Chair
I think I understand that. On the question of paying tax to the Government, is Better Capital based in the UK?
Jon Moulton
Better Capital is a UK premium listed fund with its operating company based in Guernsey, in common with the vast majority of that industry.
Chair
What is the significance of the base in Guernsey?
Jon Moulton
The significance of the base in Guernsey is that there is no tax at the level of the company; there is only tax at the level of the investor.
Chair
There are tax advantages to the company in being in Guernsey.
Jon Moulton
Absolutely.
Chair
Far from being applauded for paying £75 million to the UK Treasury in tax, which you could not avoid, you could not unreasonably be condemned for basing yourselves in Guernsey and avoiding paying any more tax than you can possibly avoid.
Jon Moulton
It shows an incredibly simplistic view, if I might say so. There are tons of non-private equity vehicles listed in Guernsey for the same things. Infrastructure funds and, for example, the Government’s PFI structures are all located in Guernsey or similar locations, so that you avoid a double tax. If I have a pension fund in the UK that wants to invest in this, they would pay no tax. If I put them through a corporate entity and the corporate entity makes a gain, they pay tax. If you want to call that tax avoidance you can, but it is not; it is merely organising things in a way that people end up where they should be. All the shareholders in Better Capital are liable to whatever taxes they are liable to on any realised gains that come out of the company and on any dividends that come out of the company. There is no evasion of tax; there is an avoidance of double tax.
Chair
There is an avoidance, not an evasion. I understand the distinction. Use of the word “avoid” is very helpful for you. I think part of your defence was that everybody else does it as well. I remember having that dismissed in primary school. The fact that all the other boys did it was not an excuse for me to be doing it, so I do not think it is necessarily the sole argument on which you would rest your case, but, to be fair, you did not do that.
Jon Moulton
It is a bit broader than today, but the subject matter is one that the Government are addressing. They are now putting in place a structure where these kinds of things can be done onshore, and future entities of this nature may very well be done onshore. There won’t be any tax, because what they are doing is moving the investment manager exemption, as it is called, such that it can be operated from the UK—a very sensible move.
Chair
I understand much of that. You yourself now live in Guernsey.
Jon Moulton
I do indeed.
Chair
There are tax advantages to that.
Jon Moulton
There are indeed advantages.
Chair
I thought there might be. Can I clarify two separate points in relation to the issues that Katy was discussing with you? One is the question of redundancy payments, which I think we have clarified will not fall to the Government. The other is the point about lack of notice, for which there is also a potential penalty. Am I right in thinking that, if it is pursued by the employee, that is also likely to be paid by the Government?
Jon Moulton
I think not.
Chair
Who would pay that?
Jon Moulton
For a start, I do not think there is a valid claim to run—I really don’t. I may be wrong, but I do not think there is. If there is, I am afraid that claim will still just fall into the unsecured creditors.
Chair
Can I clarify the question that there is not a valid claim to run? My understanding of the legislation is that people are entitled to a period of notice.
Jon Moulton
They are indeed, and the consultation period is the bit you are really interested in.
Chair
That’s right.
Jon Moulton
So the question is, when does that fall to occur? I think the earliest date when it would have fallen to occur was 22 December, and that would have been open to a degree of debate.
Chair
A few days here and there, but people were dismissed before they had their consultation period.
Jon Moulton
It is very common during—
Chair
I am not disputing whether it is common; I am just trying to clarify the position.
Jon Moulton
In an insolvency, generally speaking, there is no time to consult with the work force.
Chair
That is right, and because they were not consulted adequately in line with legislation—
Jon Moulton
Then they can claim that they haven’t been given notice. That can be a TUPE’d claim on a new employer.
Chair
If in these circumstances there is no new employer, there will be a claim which is to be payable by somebody. Will that come from Government funds?
Jon Moulton
I do not think it will come from Government funds. I’d have to verify that, because you are asking me a question I have not addressed.
Chair
Where might it come from?
Jon Moulton
It would come from nowhere; there is no money to pay it.
Chair
If it comes from nowhere, it won’t be paid.
Jon Moulton
Yes.
Chair
Effectively, the employees will lose out on that money.
Jon Moulton
They would.
Chair
Effectively, that is a charge being levied on the employees, by the absence of a payment.
Jon Moulton
Yes, although you can also legitimately take the view that it is a charge that was being levied in a rather odd way. The purpose of the consultation period was consultation. These are circumstances where no consultation is reasonably possible.
Chair
Can I take you back slightly? You said that in your view—I think I’m quoting this correctly—the company was doomed late in the autumn. You could have started consulting then.
Jon Moulton
You could; if you really want to see a company fail very quickly, you can consult with your staff about redundancy well before the date.
Chair
You had a choice.
Jon Moulton
No. You only have to do it when you have to do it.
Mr Binley
I want to understand whether you were trading legally, because from my perspective you were not. City Link had made a loss and—
Jon Moulton
They would not have done it. You are making an extremely serious accusation.
Mr Binley
Indeed I am, but I have privilege in this place.
Jon Moulton
It is a good job you have, sir.
Mr Binley
Let me proceed with my question, because you are too cool by half. You worry me, sir. From 2008, City Link had not made a profit; they had made a loss every year.
Jon Moulton
Yes.
Mr Binley
In April 2013, you bought the company for £1.
Jon Moulton
Yes.
Mr Binley
You then had a secured situation on the company as a priority for repayment.
Jon Moulton
Yes.
Mr Binley
Does that mean that your company in truth actually made money out of that deal?
Jon Moulton
It would be one hell of an interpretation, requiring a significant lack of intellect, to form that view.
Mr Binley
Don’t be rude, sir.
Jon Moulton
I am going to, because we have lost 20 million quid. That is clear. We are going to get 20 million out of 40.
Mr Binley
How much did you say you lost?
Jon Moulton
We have lost 20 and got 20. We put up 40.
Mr Binley
So you are not a loser.
Jon Moulton
Yes, we are; we have lost 20 million quid: 40 minus 20 equals 20.
Mr Binley
I understand that. Can I suggest to you that at no point was this company trading with a view to trading out of its financial difficulties? At no point.
Jon Moulton
You can put that point to me. It is a complete falsehood.
Mr Binley
Why?
Jon Moulton
Why the hell do you think we bought the damn company?
Mr Binley
I am just trying to work that out. You are a very clever man. You will come out of this in a good situation, but many of the people who trusted you won’t. That is why I am putting the point to you, sir.
Jon Moulton
I am absolutely aware of the number of people who are going to come out of this in a worse state than I am. I have already said so and I have apologised for that situation. It is the nature of the world we live in though, to an extent. 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.
Mr Binley
Can I suggest to you that you made a very, very bad judgment when you went into it in the first place?
Jon Moulton
With the benefit of hindsight, you are entirely correct.
Brian Binley
Thank you very much.
Mike Crockart
To return for a moment to redundancy, you previously worked for Alchemy Partners.
Jon Moulton
I did indeed.
Mike Crockart
In 2011 they made an unsuccessful bid for MG Rover.
Jon Moulton
They did indeed.
Mike Crockart
It went instead to the Phoenix consortium, who presumably did something fairly similar to what you did in buying City Link—securing their money that went into it through the assets and trying to trade out of difficulties. They failed in exactly the same way as you did in City Link.
Jon Moulton
I think there is about an 800-page BIS report.
Mike Crockart
Let me finish the question, first of all, and then we can hear your answer. From my perspective, it is very similar to what has happened just now. Your reaction to that and to the fact that the Government had to step in to meet the redundancy payments in that company was: “Now the rest of us ended up paying redundancy and filling up the pension fund, actually a great deal more than the amounts trousered by the Four. The staff and suppliers lost a lot.” You have just said there was not a clear right or wrong in what happened to City Link through your company. You seem to have changed your view from what happened in 2009.
Jon Moulton
There are some significant distinctions. Here is the first basic one. The deal we had agreed at Alchemy in those days was that BMW would pay us approximately £2 billion. That was to pay for the full redundancy and to top up the pension fund in full. That money was there to be had. The Government of the day chose to intervene. They went out and found themselves the Phoenix Four, subsequently disqualified because of various things you can read about in the BIS report. They only got £1 billion. That is because they did not understand the deal we had done with BMW and asked for the wrong amount of money, and then claimed they got the same one. The fact that the Government ended up putting up, I think, about £850 million that fell on the public purse, on assorted things in Rover directly, and several hundred million subsequently for redeveloping the area, was entirely preventable. If we had bought it in the first place, all those liabilities would have been discharged within days of acquisition. It is a different fact pattern.
Mike Crockart
Your argument is that City Link was more of a basket case than MG Rover.
Jon Moulton
The difference was that it was perhaps more of a basket case, but it certainly did not have a fairy godmother with pockets the size of BMW’s.
Mike Crockart
It is all right for your company to walk away with £20 million and leave the Government with £4 million costs, but not for the same to happen in MG Rover in 2009.
Jon Moulton
I do not think it is vaguely the same fact pattern, as I have just described it. It is a very different fact pattern.
Mike Crockart
It seems very similar from my perspective.
Jon Moulton
There is no question but that the company ended up without money in it, but I would point out that there is a BIS report showing various assets going out of Rover. There have been disciplinary actions against the accountants involved with it. It is a very much murkier picture than anything you are going to find here, however long you ask about it. It just is not the same.
Mike Crockart
There is a BIS report on them already, and we will wait for the insolvency report into this one.
Ann McKechin
Perhaps I may quote an answer received last week from Matthew Hancock, Minister of State, to a question I put about the administration: “The Insolvency Service first received information that a national logistics firm was at risk via email on 9 December and passed this to the Department for Business, Innovation and Skills…on 10 December. Requests for the company name were rejected as the information was commercially sensitive…It is not uncommon for BIS to receive commercially sensitive information about companies or facilities at risk in strict confidence…BIS treats any such information with the utmost discretion.” I am sure you will be aware of the workings of the Insolvency Service. Were you aware that a communication had been sent to the Insolvency Service on the 9th?
Jon Moulton
We were not.