On 23 September 2019 Thomas Cook Group Plc (together with various of its associated UK entities) entered into compulsory liquidation and its UK business ceased trading with immediate effect. Partners from KPMG and from AlixPartners have since been appointed as special managers to assist the Official Receiver.
This immediate liquidation followed the collapse of £900m rescue talks between Thomas Cook, its lenders and its largest shareholder, Fosun. This rescue deal ultimately foundered because Thomas Cook was unable to persuade its stakeholders to provide a further £200m of new funding (on top of the £900 million) to see the company through its usually quieter winter months.
What are the effects of Thomas Cook’s liquidation?
Upon a winding up, the powers of the directors cease and the Official Receiver or appointed liquidator takes control of the company and its assets. It is usually the case that the company immediately stops trading. For a group of companies as large as Thomas Cook, the consequences of the winding up order were significant. An estimated 150,000 UK holiday makers were left stranded abroad (although a repatriation took place) and thousands of employees were dismissed.
Thomas Cook’s employees
A compulsory liquidation has the effect of automatically terminating all employee contracts with immediate effect from the date of the publication of the winding up order. The order itself is considered as notice of dismissal. Employees may however be able to claim unpaid remuneration through the National Insurance Fund (a government backed fund), which is subject to Part XII of the Employment Rights Act 1996 (ERA) and in particular, sections 182 and 184.
Under the ERA, employees can claim for:
- Up to 8 weeks’ arrears of pay, up to the current maximum statutory limit on a week’s pay (£525 per week), less tax and National Insurance Contributions.
- Up to 6 weeks’ holiday pay, up to the current maximum statutory limit on a weeks’ pay.
- Statutory notice pay, up to the current maximum statutory limit on a weeks’ pay.
- Statutory redundancy pay.
The above claims will be capped up to the limits set out in the ERA and the Pension Schemes Act 1993. Any claims in excess of the statutory limits may be brought as a further claim in the liquidation. Employees who are owed unpaid wages are treated as preferential creditors under the Insolvency Act 1986.
Thomas Cook’s customers
In respect of the holiday makers, the Civil Aviation Authority carried out the repatriation (the biggest peacetime repatriation in British history, following the Monarch repatriation in 2017) of the majority of those stranded abroad.
For those holidaymakers who booked package holidays and had not yet travelled, much of their costs will have been covered by the ATOL protection scheme. For holidaymakers who did not book package holidays but who booked their holiday elements separately, the ATOL scheme is unlikely to apply, but they may be able to recover those costs from their credit card companies if they paid for their holidays on their credit card (under s.75 of the Consumer Credit Act 1974). Certain debit card providers may also offer protection under the Chargeback scheme. Other holidaymakers may be able to claim for these losses on their travel insurance (depending upon their terms of cover).
Any holidaymaker who is unable to access any of these sources of reimbursement will be left with a claim in the winding up as an unsecured creditor.
Why did Thomas Cook not go into administration?
Had the troubled tour operator entered administration instead of compulsory liquidation, the immediate consequences might not have been so dire. However, a company can only go into administration if the purpose of administration is likely to be achieved. Schedule B1 to the Insolvency Act 1986 sets out that an administrator of a company must perform his function with the objective of:
- Rescuing the company as a going concern, or
- achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up, or
- realising property in order to make a distribution to one or more secured or preferential creditors.
Equally, an administration will not be possible if there is insufficient cash available in the company to fund the administration.
Ultimately, a business of this size and complexity, with its interrelated airline, tour operator, own-brand hotels and retail business, together with its associated risks, proved too difficult and too expensive to rescue.
Claims in the liquidation
The Official Receiver and the appointed special managers will now consider the value of assets and liabilities of Thomas Cook. The vast majority, if not all, of the assets of the company will be subject to claims by secured creditors. Further, all but three of Thomas Cook’s current fleet of planes were leased and will most likely be repossessed by the lessors.
Given Thomas Cook’s highly geared position, there will likely be little if anything in terms of returns for unsecured creditors, although this position will certainly become clearer in the coming months.
Personal liability of the directors
As part of their investigations into the company, the Insolvency Service with the aid of the special managers will consider the circumstances that lead to the company falling into liquidation. Business Secretary Andrea Leadsom has requested that the Insolvency Service prioritise and fast-track their investigations which will involve examination of the actions of directors and possible breaches of their fiduciary duties under the Companies Act 2006. The Official Receiver may also have the power to review and seek to reverse transactions that took place prior to the liquidation.
Summary
The news of Thomas Cook’s demise follows a series of high profile liquidations in recent years which include the likes of Carillion and British Steel. As with those companies, Thomas Cook’s liquidation will have far-ranging consequences, not just on holiday makers and employees but also those in the supply chain as well as landlords of Thomas Cook shops in the UK. As a recent development, the UK’s largest independent travel agent, Hays Travel is set to buy all 555 Thomas Cook shops in a deal with the Official Receiver and KPMG that may save up to 2500 jobs. In the context of the current high street market, it is likely that landlords may have to accept significant reductions compared to the rents that they would have historically agreed with Thomas Cook.
In the wake of another high profile airline insolvency, it will be interesting to see whether the Government now acts on recommendations made by the Department for Transport in the Airline Insolvency Review, published in May 2019. A summary of the review can be found here.
David Steinberg, co-head of Restructuring & Insolvency at Stevens & Bolton, comments:
One of the notable features of Thomas Cook’s insolvency is that the Official Receiver was appointed liquidator, who then engaged private sector professionals as special managers to assist the Official Receiver in conducting the liquidation. This follows the precedents set in the cases of Carillion and British Steel and perhaps reflects the complexities and risks in each instance. This is, of course, a departure from the ‘normal’ route of the debtor company appointing administrators from private sector professional firms. The ‘Official Receiver’ route is often adopted where none of the incumbent stakeholders (banks, bondholders, shareholders) are willing or able to fund an administration themselves and where the government chooses to step in to provide funding itself, whether for strategic or public policy reasons.
David Steinberg