MPs from two select committees said the system was too heavily skewed in favour of investors and the taxpayer, calling for the balance to be shifted.
The report into the controversial closure of the company over Christmas said that, under current rules, it was in the financial interest of a company to break the law and ignore the statutory redundancy consultation period.
Any fine will be paid by the taxpayer, noted the business and Scottish affairs select committees.
Mick Cash, leader of the Rail, Maritime and Transport union, said the “shocking” report vindicated its complaint about the “carefully engineered collapse” of City Link.
He said: “Lives were wrecked, with the taxpayer footing a massive bill, while those responsible skipped away unscathed and with large chunks of their assets protected.”
The company was placed into administration at 7pm on Christmas Eve following several years of losses.
For many of the 2,727 staff and 1,000 contractors, the first confirmation that their jobs and livelihoods were at risk came from reports in the media on Christmas Day.
The report said that, under the current system, those who have given secure credit to a company are “cushioned” from the impact of an insolvency because losses are borne by workers, contractors or suppliers.
Ignoring the consultation period with workers had a “high human cost” that appeared not to have been taken into account in the City Link case.
The committees recommended the UK government support dialogue between unions, employers and insolvency experts to improve communication when administration is considered, and to review arrangements for sharing information.
The report said it regretted that City Link’s owners, Better Capital, felt its investors’ interests could only be protected at the expense of the delivery firm’s future, and its workers.
Ian Davidson, chairman of the Scottish affairs committee, said: “The rules on insolvency, on everything from how and when information is shared with employees, to the order in which creditors are paid out, are skewed too far to the advantage of investors, directors and management.
“Further, the system provides perverse incentives to withhold information or to skip proper consultation processes in contravention of the law and at a high cost to workers struggling to cope with the loss of their livelihoods.
“It also creates incentives to use cheap, insecure forms of employment.”
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