Thomas Cook’s collapse: a legal case analysis about compulsory liquidation

On 23 September 2019, the Thomas Cook Group plc (“Thomas Cook”), a world-renowned holding travel group, consisting of nineteen companies, entered insolvency as it was approaching the end of its cash flows and therefore unable to pay its liabilities. As a result, the high court issued an order for the group to be compulsorily liquidated. To date, Thomas Cook is the third largest company to be compulsorily wound up by UK courts and to be conducted by the OR in eighteen months, following Carillion and British Steel.

This article sets out: (a) a summary of the court’s order; (b) the differences between compulsory liquidation and administration; and (c) the impact of the court’s decision for Thomas Cook’s employees, customers and other parties that have a contract with any of the companies of Thomas Cook.

THE COURT’S ORDER

The order appointed an official receiver, an officer of the insolvency service associated with and answerable to the court itself for carrying out the court’s orders, as liquidator (the “Liquidator”) as well as special managers to conduct the liquidation.

However, the court’s order in this case differs from the previous cases of Carillion and British Steel. In the latter, the Liquidator kept the businesses going and sought to eventually sell them as this would be beneficial for the companies’ affairs. In Thomas Cook’s liquidation, the Liquidator instead decided that the best course of action would be to either sell off separate parts of the whole business or all the assets of the companies when it was deemed judicious to do so. The Liquidator’s decision to do this this could have either been because the companies were losing money on a daily basis (and this needed to stop or be reduced); or due to the size and complexity of the business, made rescuing it unmanageable.

THE KEY DIFFERENCES BETWEEN COMPULSORY LIQUIDATION AND ADMINISTRATION

The legal case of Thomas Cook reflects two potential avenues the court can choose for companies under insolvency: compulsory liquidation and administration.

On one hand, when a company enters liquidation, the company director’s control is passed onto a liquidator who then has full decision-making powers over the practices of the business itself. Such liquidator may either attempt to rescue the company by selling it to a reputable buyer or wind it up altogether. In either case, all contracts of employment are terminated upon liquidation.

On the other hand, when a company enters administration, the court appoints a temporary administrator to rescue the company or find a reputable buyer. The court chooses administration over liquidation in cases where: (a) there is a reasonable expectation that the company can be rescued; (b) there is belief that this process will produce a better outcome for creditors than liquidation would; or (c) there is the potential to distribute the company to one or more secured creditors. 

IMPACT OF THE ORDER

A compulsory winding-up order generally has a major impact on any entity or group, but in the case of Thomas Cook – a group composed of a number of large companies – the impacts were far reaching, not only for the companies themselves, but also for those involved with them, such as consumers and employees and any business or person that have a contract with companies in the group.

First, the Liquidator takes control of all company assets. Then, on the publication of the compulsory insolvency order, the employees’ contracts of service are terminated, as the order is regarded as a notice of dismissal. The employees will be paid any pending remuneration (up to £800), granted any leave entitlements (up to six weeks) and entitled to redundancy payments which will be claimed by the Insolvency Service (on behalf of such employees) in the winding up process.

Second, customers who, at the time of the compulsory insolvency order, were on holidays arranged by Thomas Cook will be or will have been repatriated by the government and booked to return to their departure countries. Whether customers will want to claim may well depend on the terms of any personal travel insurance they hold, but in any case, they would have to direct their eventual claims against the Liquidator.

Finally, any legal proceedings brought by companies or persons (other than customers and employees that have a contracted with Thomas Cook) cannot be started or continued against any of the Thomas Cook companies without permission from the court. Those who have eligible claims will equally have to submit them to the Liquidator.

For more information, and any guidance or advice on insolvency and liquidation Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.

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