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With three profit warnings issued this year, coupled with a rapidly dwindling share price, the clouds have been gathering over Thomas Cook for some time.

After failing to raise a required £200m investment to secure its future, and with no chance of rescue, the beleaguered travel firm effectively ceased to exist on Monday morning as it was announced the company had entered compulsory liquidation after 178 years in business. What follows now is a huge repatriation effort with over 150,000 Thomas Cook customers stranded abroad at the time of the company’s collapse.

While the reasons behind Thomas Cook’s failure have been blamed on a multitude of factors ranging from Brexit uncertainty and the associated fall in the value of the pound, an out of date business model which was reliant on brochures and a high street presence, through to the fact that ownership of its fleet of planes meant high costs were incurred all year round, it is likely that all of these factors, and more, were at least partially to blame for the company’s unfortunate demise.

While the eventual closure of Thomas Cook was not unexpected in itself, what may have been surprising to some is the route the travel giant took when it came to entering into a formal insolvency process. There are a variety of insolvency options open to ailing businesses; two of the most commonly utilised are liquidation and administration.

Liquidation vs Administration: What is the difference?

While liquidation and administration are both formal insolvency procedures, they are in fact extremely different processes with opposing motivations behind each of them.

When a company enters administration this is often done with hopes of rescuing the company, or at least a part of it, as a going concern. Even if rescue doesn’t appear to be a likely option, administration is typically the preferred process for larger companies, such as Thomas Cook, as this often paves the way for maximum returns to be distributed to creditors as opposed to what would be realised through a break-up sale of assets in liquidation.

Liquidation is a terminal process which brings about the end of a company with no chance of rescue. It is used when the underlying business is simply not viable and the company’s affairs need to be wound up. The liquidation of an insolvent company can be both voluntary – initiated by the company’s directors and/or shareholders – or compulsory, where the court steps in to wind up the business and its affairs. During a liquidation, the liquidator has limited powers to trade (if at all) meaning an administration is normally the preferred option in the case of live companies.

So why did Thomas Cook opt for liquidation?

For a company of its size, administration may have been the expected route; however, an application was made to the UK High Court, forcing Thomas Cook Group plc and its associated companies into compulsory liquidation and resulting in the immediate cessation of business.

Although creditors petitioning the court is by far the most common catalyst to compulsory liquidation, a number of parties are able to apply to court for a winding up petition. In this case the Thomas Cook board were the ones who made the application to court.

“Unfortunately, the Thomas Cook model was heavily based on a legacy model of high street travel agencies combined with a lacklustre online offering.”

Why Thomas Cook opted for compulsory liquidation rather than administration is not fully clear, the reasoning behind this decision may be down to the fact that there were simply no viable parts of the business to sell coupled with the company having insufficient funds in order to facilitate such a process.

In terms of an administration, the process has to achieve what is known as the statutory purposes of administration. These three potential ‘statutory purposes’ are to either (i) rescue a business as a going concern; (ii) realise a better outcome for creditors than would be attained if the company went straight into liquidation or (iii) should neither of these be possible, realisation of property or other secured assets to enable returns to secured or preferential creditors. If achieving one of these objectives is not possible, the company will not be allowed to enter administration.

The priority purpose is to rescue the company as a going concern - but a company needs to be able to fund the trade to do so. If there is no cash available – including a lack of any readily realisable assets to leverage for funding – administration would be discounted.

What is the current situation with the Thomas Cook liquidation and what happens next?

The Official Receiver has now taken control of Thomas Cook following their appointment as liquidators. As with other high-profile insolvency cases over the past couple of years - including Carillion and British Steel - special managers have been appointed to assist with the liquidation, acting under the Official Receiver. Working as agents of the company, the special managers will help the Official Receiver to facilitate the management of the company, its assets, creditors, and employees during the liquidation.

Although this is not the typical process for a company entering liquidation, the sheer size of the Thomas Cook Group, in addition to the number of individuals including employees and customers affected by its closure, means this is far from an ordinary liquidation.

In the meantime, efforts are focussed on ensuring stranded holidaymakers are flown home on time, while business secretary, Andrea Leadsom, is keen to ensure questions are answered by those in charge. She has promised to write to the Insolvency Service urging them to “fast-track” their investigations into the events leading up to Thomas Cook’s entry into liquidation.

Julie Palmer, Partner at Real Business Rescue, commented on the unanswered questions facing the owners: “Questions do have to be asked of the management’s strategy. Other competitors, such as Tui, have faced similar issues yet have weathered this storm and developed a more compelling product offering. 

“Unfortunately, the Thomas Cook model was heavily based on a legacy model of high street travel agencies combined with a lacklustre online offering. 

“But whatever the reasons for Thomas Cook’s demise, the UK travel industry will be reeling for some time with the loss of one of its most respected and historic names.”

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