As the Official Receiver and the Special Managers appointed to the failed giant of the travel industry dig into their task, our Restructuring and Insolvency partner Simeon Gilchrist takes a few moments to reflect on the signs, consider the consequences for the travellers, employees and creditors caught in the turbulence, and ponder what next for the sector.
These are undoubtedly hard times in which to sell the dream of travel; if the dreaded B word were not enough to dissuade the core market from the sell that Spain trumps Scarborough (seriously has anyone seen the government's TV ad for the post B landscape – you might want to check your travel documents and insurance arrangements. Really?) then there is the environmental concern that the train, local holidays and staying put might be best, or the more mundane point that global businesses buy and sell fuel in dollars, employment, property, leasing and fixed costs seem only to rise, and there is of course the eternal pressure to deliver dividends and remunerate the executives for the sterling work that they have been doing, and that no one else can seemingly do for less incentive.
There are many lurid headlines in the press ("Stranded") to the obvious concern of the Civil Aviation Authority, tasked with rolling out the new repatriation airbridge but, with the Monarch collapse still reasonably fresh in the mind, how was a 178 year old company allowed (is that the right word? Was it pushed, or did it not in fact jump into the abyss on 23 September 2019 by seeking the immediate relief of compulsory liquidation?) to collapse in the way that it did, only a few short months after key parts of the group posted their annual accounts? Yes, in June, the audited accounts to 30 September 2018 in which the directors of Thomas Cook Group UK Limited were able to say that despite "key performance indicators" set out in the May 2019 audited (yes, audited!) accounts of the parent Thomas Cook Group plc, the directors had "a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future". Comforting that the "Directors have received confirmation that Thomas Cook Group plc intends to support the Company for at least one year after the financial statements are signed."
Only a few short months later, the fig leaf of parental support was torn away by the harsh wind of a group debt pile reportedly in the GBP 1.7 billion area, strong headwinds from the market and little apparent banking appetite for more risk. The irony of banks rescuing themselves not so long ago to the tune of untold billions in public money reportedly unable to find a paltry £200 million of additional financing is not lost on the very public waiting patiently on the tarmac for re-purposed flights home.
It is perhaps this background that has caused the Rt. Hon Andrea Leadsom, the Secretary of State for Business, Energy and Industrial Strategy to write, and then post to the Insolvency Service website, a number of unusual letters from which it might be thought that action is on the way. Letters addressed and signed in first name terms to the CEO of the Insolvency Service exhorting investigative action; to the CEO of ABTA imploring support for consumers; to the CEO of UK Finance wishing for fair treatment of unemployed workers; and to the CEO of the Financial Reporting Council inviting yet further investigation. And yet, what tools might have been available to restructure the group prior to the buffers being hit?
It is often said by the UK restructuring industry (yes, we are an industry, and yes, members of R3, the Association of Business Recovery Professionals do have a vital statutory role and make a valuable net contribution to UK plc) that the UK market is the best place in Europe to restructure, refinance and save worthwhile businesses but time after time another High Street name – now "Brands" – fades into the past.
The European market place has long recognised the need for appropriate pre-insolvency restructuring mechanisms for viable economic entities. Within the landscape of the "proper functioning" of the market, the newly minted Preventive Restructuring Directive nods towards a harmonisation of the restructuring market, partly in order to ensure that the toolkit is uniformly stocked across the EU market but, also, in a bid to address the perception that negative capital is better served in UK law processes.
The overarching purpose of the Directive is to facilitate preventive restructuring by creating the framework for the implementation of pre-insolvency moratoria and processes by which inward capital investment might arrive during that period and, of course, understanding the rules of the casino, the only new capital that will appear in the process will demand better returns to reflect the risk taken, and look for priority to and over historic capital. The UK presently is wrestling with its own proposals that would (or will) sit within the Directive framework, and that might have provided a less turbulent flight path into a more productive outcome for all concerned.
Meanwhile, in the real world, consumers find that in order to take a realistic view of whether hard earned money should be placed with one operator or another, advanced qualifications in accountancy might be needed to parse the statements made by company directors, that are reviewed by auditors, and seemingly facilitate the continuation of trade. Of course, a consumer facing business is built on confidence, and the needs of cashflow militate against refusing orders or business during a period of consolidation or restructuring but one might wonder about the difference between this model and a classic investment fraud in which new money is sucked in to pay old money, or secured money.
This is where the regulators might be thought to act. The several directors of the many layers of the group will no doubt be looking to their lawyers at mention of the classic clawback tools: was their remuneration lawful; were distributions to shareholders lawful; did the entity trade wrongfully; is there personal liability ahead for the directors; and will the Insolvency Service think them culpable to the extent that disqualification might be on the cards?
These are reactive tools in the practitioner's kit; they do nothing to assist the holidaymaker or employee. They do not save or rescue the business from a failed structure. That plane has flown (apologies). The Minister's letter to UK Finance is telling; "please help". From government. Statutory recovery for employees falls in the first instance on the state, it is far short of the contractual rights earned by them and suppliers will be looking to their contracts for retention of title clauses and self-help remedies as a means of squeezing ahead of the secured lenders.
There is a significant distance yet to travel, at least in relation to the recovery and investigation phase of the late Thomas Cook's trading life. Whether that road involves yet further criticism for a big four auditor by the investigations team of another big four practice remains to be seen but, looking back already to Carillion (and does anyone remember Farepak?) consumers, employees and suppliers will need to buckle in.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.