Business, Energy and Industrial Strategy Committee 

Oral evidence: Thomas Cook, HC 39

Wednesday 23 October 2019

Ordered by the House of Commons to be published on 23 October 2019.

Watch the meeting 

Members present: Rachel Reeves (Chair); Vernon Coaker; Stephen Kerr; Peter Kyle; Mr Ian Liddell-Grainger; Mark Pawsey; Antoinette Sandbach; Anna Turley.

Questions 403 – 553

Witnesses

I: Dean Beale, Chief Executive Officer, Insolvency Service; Elizabeth Barrett, Director of Enforcement, FRC; David Rule, Executive Director of Supervision, FRC.

II: Bill Scott, former CFO, Thomas Cook; Harriet Green, former CEO, Thomas Cook; Manny Fontenla-Novoa, former CEO, Thomas Cook.

Examination of witnesses

Witnesses: Dean Beale, Elizabeth Barrett and David Rule.

Chair: Thank you very much to the three of you for coming to give evidence this morning as part of our inquiry into the collapse of Thomas Cook. We have two sessions to get through this morning and then business in the Chamber, so we will try to keep our questions short and to the point. If you could try to do the same with the answers, that would be incredibly helpful for everybody. We will start the questions this morning with one from Ian Liddell‑Grainger.

Q403       Mr Liddell-Grainger: There is a thing in the FT that fascinates me. I want to read the first sentence, because it is quite interesting. “Nor does any of this explain why a failure to refinance had to mean immediate liquidation. Travel groups can enter administration—as Flybmi, Superbreak and LateRooms.com did this year—while a sale is sought”. Why was Thomas Cook different? Why did it go straight into liquidation? What was the thinking or the reason behind it?

Dean Beale: Effectively, with Thomas Cook, the company was balance sheet insolvent; it was cash flow insolvent. There was an urgent cash flow crisis. I understand the money was due to run out on 4 October. Efforts to recapitalise the group had failed. There was insufficient support for its restructuring from its creditors. It needed over £1 billion of new capital injected. Without the support of creditors and without other buyers ready to take over the business, the company petitioned for its own liquidation. The court reviewed the evidence presented by the companies and determined that liquidation was appropriate in these circumstances.

Q404       Mr Liddell-Grainger: Was it trading while insolvent, then? Was it very close to trading while insolvent?

Dean Beale: That is something the official receiver will be looking at, but certainly it had an urgent cash flow crisis. I suspect, if it had traded beyond 4 October, which is the date the directors believed it would run out of money, it would have been trading very much at the risk of its creditors.

Q405       Mr Liddell-Grainger: Can I follow that on? What will be the effect on the creditors of it going straight into liquidation? I am slightly out of touch with this now. What will the difference actually be?

Dean Beale: Creditors’ claims at the date of liquidation—it is the same whether it is the date of administration or liquidation—will be put into their respective rankings under the insolvency legislation. Unsecured creditors and any secured creditors are grouped together. I am not aware that there are secured creditors across the 26 companies we are dealing with in liquidation. Those claims fall due, and it is the duty of the liquidator to realise assets and make a distribution to those creditors.

Q406       Mr Liddell-Grainger: Following on from that, why did you appoint KPMG and then AlixPartners as special managers? How did you choose them? Who was on the panel, committee or whatever you want to call it that made the final decision to appoint them?

Dean Beale: The official receiver is entitled to seek the appointment of special managers to assist him in his work as liquidator. In cases like Thomas Cook, where the scale of the wind‑down operation is significant, it is usual practice for the official receiver to seek to employ special managers. That is an application to court. The court considers the need for special managers and in this case agreed the appointment of KPMG and AlixPartners.

In terms of who, in the first instance it is for the official receiver to determine what capability and skills he needs in order for the special managers to carry out the work that needs to be done. In this case, KPMG was able to bring resources very quickly to the liquidation to support the official receiver and AlixPartners had, through its work with Thomas Cook in the run‑up to the liquidation, information and experience of the operation of Thomas Cook, had been working with the firm and had been liaising with the CAA over different options for repatriation and rescue. The official receiver was satisfied that both firms were appropriate to appoint in the circumstances, and the court made those appointments.

Q407       Mr Liddell-Grainger: Have you done any work on how much this is going to cost and how much they will be paid? I know it is still early days, but you have presumably done a guesstimate.

Dean Beale: It is early days. We are four weeks into the insolvency. It is very, very difficult to estimate how much this is going to cost overall, although those estimates are coming together at the moment. In terms of payments so far, the costs of the special managers are around £11 million to date across the two firms. That figure is coming down rapidly. With the cessation of the repatriation exercise and as parts of the business that can be sold are being sold, the amount of work the special managers are doing for the official receiver is tailing off significantly.

Q408       Chair: What does the £11 million cover?

Dean Beale: It covers the special manager fees for the first three weeks or so of the liquidation across the 26 liquidated companies and across both firms.

Q409       Chair: Is that a lot? It sounds a lot to me.

Dean Beale: The context of it is the scale of the work that needed to be done when the companies fell into liquidation. In week 1, there were over 300 people from the special manager firms working around the country dealing with employees, the shops, the money, the cash that was spread across the 555 shops. It was a huge undertaking in those first couple of weeks, but it is reducing significantly now. Against that, there are assets being realised by the special managers on behalf of the liquidator. We had the sale of the retail stores to Hays, and there are other assets being pursued at the moment.

Q410       Mr Liddell-Grainger: How much did the Hays family pay for the shops?

Dean Beale: I understand the figure was just over £6 million for the stores.

Q411       Mr Liddell-Grainger: It does not seem an awful lot.

Dean Beale: In terms of the initial assessment of the value in those retail stores, I understand that the official receiver and the special managers believe there may be some value in certain groups of stores. When it comes to the sale of the whole retail sector for Thomas Cook across those stores, in many cases we thought that some of these leases were probably of little or no value and would effectively be returned to landlords. The official receiver was satisfied that it was a good deal for creditors. He has a statutory duty to ensure that he gets the best value from assets for creditors.

Q412       Mr Liddell-Grainger: They bought 555 shops, so £6 million is not a lot of money.

Dean Beale: The leases of the shops would have different periods to run. Some of the stores would be relatively small, I believe. The assessment of the official receiver was that this was a good deal.

Q413       Chair: Were there any other bids for the shops?

Dean Beale: I understand there were some discussions around certain groups of stores, but the recommendation was that this was the best deal on the table.

Q414       Stephen Kerr: Why are the German, Scandinavian, Indian and Chinese subsidiaries of Thomas Cook still operating if Thomas Cook UK is in liquidation?

Dean Beale: Those entities are not UK entities, so they were not part of the group of companies that petitioned for liquidation to the court in London. Those entities are separate; they are very different.

Q415       Stephen Kerr: Who owns them?

Dean Beale: Some of the UK entities will have interests in those foreign companies. Where there are interest shareholdings, for example, it effectively falls to the liquidator to pursue realisation of interests in these other companies. Where there are shareholdings, where they are subsidiaries of the UK entities in liquidation, those interests are effectively assets for the official receiver to pursue.

Q416       Stephen Kerr: What was the scale of the interest that Thomas Cook UK had in these businesses?

Dean Beale: It varied. I do not have those details today. I would be happy to write to the Committee with further information.

Chair: That would be very useful. For the parts of the Thomas Cook Group that are still trading—Condor, for example—it would be very good to know what the liquidator owns in those trading companies.

Q417       Stephen Kerr: I have a question about Condor, actually. I will come onto it straightaway. That was Thomas Cook’s German airline. Under the arrangements that are now in place, as I understand it, the German Government have bought Condor. Is that right?

Dean Beale: There has been support for Condor from the German Government.

Q418       Stephen Kerr: That means it is under German insolvency law or some mechanism.

Dean Beale: Yes.

Q419       Stephen Kerr: It would sever the ties. Does that mean UK creditors have been deprived of any of the value of that asset? It sounds like that is the case.

Dean Beale: It depends what the value of that business is, what interest the UK entities have in that business and whether there is any realisable value for the liquidator to pursue in that entity.

Q420       Stephen Kerr: Sorry, I did not quite understand the answer. Does that mean Thomas Cook’s creditors will have no benefit of that asset? It is probably one of the company’s largest assets.

Dean Beale: That depends on what the official receiver is able to recover from the interests held by the companies in liquidation in foreign subsidiaries.

Q421       Stephen Kerr: But it is true, is it not, that under German law Condor can sever its ties completely from Thomas Cook UK? There is a risk here, is there not?

Dean Beale: I do not know the answer, I am afraid.

Q422       Stephen Kerr: If Thomas Cook owned the airlines, and the airlines have all been brought by other countries’ Governments, are those assets similarly at risk to the creditors of Thomas Cook UK?

Dean Beale: I am not aware that they have been bought by other countries’ Governments. Some of the foreign subsidiaries continue to trade in different forms, some with support from Governments through an insolvency process. It is the job of the official receiver and the special managers to determine what interest the UK entities in liquidation have in those foreign subsidiaries and, if there is value, to seek to realise it.

Stephen Kerr: That is understood.

Chair: Further clarification after this session on that would be very helpful, Mr Beale.

Q423       Stephen Kerr: I have one very quick last question. Was Thomas Cook Airlines still operating profitably? If it was, why was it liquidated rather than allowed to carry on trading?

Dean Beale: One of the official receiver’s statutory duties is to determine the cause of failure. The official receiver will be looking at the financial position of the different entities. The court was satisfied that that entity was insolvent under the legislation.

Q424       Stephen Kerr: You mean Thomas Cook Airlines.

Dean Beale: Yes. Therefore, it made the winding‑up order against that entity.

Q425       Stephen Kerr: That suggests it was not operating profitably.

Dean Beale: The court was satisfied, based on the evidence presented to it, that that entity was insolvent and was liable to be wound up under the insolvency procedure.

Q426       Chair: There are a few more technical questions from me to you, Mr Beale, if that is okay. Having been appointed as the liquidators, are you able to tell us whether the taxpayer is a creditor in that liquidation? If so, how much, roughly, is it owed?

Dean Beale: I am not able to say at the moment whether there are debts outstanding, for example, to HMRC. There is funding for the official receiver’s work through an indemnity provided by Government. There are 26 entities. Some entities have assets; others will be in deficit. Until we get a clearer financial picture of the liquidation it is difficult to say at this stage the extent to which there is exposure to the taxpayer either through liabilities owed by Thomas Cook or through the indemnity that the Government have provided to the official receiver for the liquidation.

Q427       Chair: So we do not yet know what liabilities Thomas Cook had, in the example you gave, around tax.

Dean Beale: That is one of the activities ongoing at the moment. The official receiver will be preparing a report very shortly that will go out to all creditors, and that will set out the full picture of assets and liabilities for each of the entities.

Q428       Chair: We would be keen to know what the liability is to the Government. The Government’s operation to repatriate customers, Operation Matterhorn, is estimated to have cost in the region of £100 million. Can you confirm that figure? Will the costs be added to the debt?

Dean Beale: The official receiver is involved in the liquidation. The repatriation exercise is being handled by the Civil Aviation Authority and the Department for Transport. In terms of our visibility on the costs of the repatriation exercise, through things such as retaining certain employees necessary to support the repatriation, the official receiver paid those salaries for those people. We have seen some of the costs, because they flowed through the official receiver, although they are segregated from the liquidation costs.

In terms of the full extent of the costs of the repatriation, yes, I do not have visibility of those full costs. The figures that you quote are figures I recognise from the media, but I am sure in due course the Department for Transport will provide further details of the full costs.

Q429       Chair: Will the CAA become a creditor in the liquidation?

Dean Beale: I guess potentially, but I would not say necessarily in respect of the repatriation, because this is something quite separate to the liquidation. It is being done after the liquidation. The repatriation costs are not an expense of the liquidation. But that is something the official receiver will be working through with the CAA to understand.

Q430       Chair: That money cannot be recovered in any way from the assets of Thomas Cook, the cost of bringing home Thomas Cook customers.

Dean Beale: In the first instance, for the cost of the repatriation they will be looking to the ATOL scheme and to other forms of insurance. That is for the costs of repatriating those passengers. In terms of the balance, that is something we will be looking at with the DfT and the CAA.

Q431       Chair: Going back to HMRC, are the Government a preferential creditor? Will they be paid before other creditors?

Dean Beale: Generally not, no. There are very small elements of preferential claim around employees and unpaid pension contributions, but generally debts due to HMRC fall as an unsecured creditor in the insolvency, along with suppliers and other stakeholders.

Q432       Chair: We know around 150,000 customers had to be repatriated. Do we know how many customers in total are owed money for holidays that they have already paid for but will not be honoured?

Dean Beale: That exercise is being undertaken by the CAA. I have seen figures of around 500,000 customers, but we do not have visibility on the extent of customers.

Q433       Chair: But you will have visibility of how much they are owed, will you?

Dean Beale: Those claims are being handled by the CAA. We have taken possession of Thomas Cook’s accounting records so we would have access to that information. We will work with the CAA, if it needs information from the companies’ records.

Q434       Chair: But you will have to pay that money.

Dean Beale: No. All the monies being paid back are being dealt with by the CAA, not the liquidation.

Q435       Chair: So you do not know how much is owed to customers.

Dean Beale: No.

Q436       Chair: If customers obtain refunds from their credit card companies, are those debts cancelled or do the credit card companies take on the debt on their customers’ behalves?

Dean Beale: Ordinarily, the credit card company should step into the shoes of the consumers for having a claim against the company for what it has had to pay out.

Q437       Chair: So the credit card companies will become creditors.

Dean Beale: I suspect so.

Q438       Chair: Do you know how much that will be worth?

Dean Beale: No, this is still being collated at the moment, as you can imagine.

Q439       Chair: Do you know when we will get some figures? It is not your fault that this has all happened, but a bit more visibility on the costs to the taxpayer would be useful when we are assessing the Government’s role in all of this and the implications of the collapse of Thomas Cook.

Dean Beale: No, I understand. As you would imagine, the official receiver’s focus over the last few weeks has been on the assets and on the employees, but information is being pulled together to enable him to produce a statutory report.

Q440       Chair: Do you know when we will get that?

Dean Beale: It will be as soon as possible. There were 30 accounting systems across the group of companies that we are dealing with. There is a big forensic exercise to pull together the necessary information, but we will do it as quickly as possible.

Q441       Chair: I am sorry to push, but does that mean in the next couple of months?

Dean Beale: I would suspect so, yes.

Q442       Chair: It will be before Christmas.

Dean Beale: Yes.

Q443       Stephen Kerr: Sorry, my questions are again directed to Mr Beale. How will the official receiver be investigating the personal culpability of the directors in Thomas Cook’s collapse?

Dean Beale: The official receiver has a statutory duty to investigate the failure of a company and the activities of the directors of the company. In terms of how, we interview the directors; we look at the evidence; we look at the information provided to us by third parties. There are some concerns already raised in relation to Thomas Cook, and the official receiver will be examining those issues with the directors and gathering evidence.

Q444       Stephen Kerr: What is the evidence you would be looking for to assess whether the directors were negligent?

Dean Beale: That would be evidence of key decisions made and the impact that had on Thomas Cook stakeholders, evidence of compliance with the regulatory and legal duties of the directors, the directors’ responsibilities for causing any harm to creditors through continuing to trade beyond the point at which there was no reasonable prospect that the company could survive. I am talking generically here. It is not for me to speculate on what the results of the official receiver’s official investigation will determine.

Q445       Stephen Kerr: Is it fair to say the framework is the one set out in section 172 of the Companies Act?

Dean Beale: The Companies Act sets out the duties. The main enforcement mechanisms the official receiver has at his disposal are the Company Directors Disqualification Act and the Insolvency Act, to take action against directors where, for example, there is evidence of wrongful trading or misfeasance. The official receiver has a range of tools at his disposal.

Q446       Stephen Kerr: There is an extensive array of powers available. The former chief executive of Thomas Cook, Peter Fankhauser, told this Committee that it would be possible to claw back two years of bonuses, back to 2017. Will you be looking at doing that? What criteria will you use?

Dean Beale: The official receiver is looking at those issues. His legal advisers are examining the contracts with the directors and the contractual arrangements for bonuses. He is considering whether those contractual arrangements have been met and whether there is any scope, under those contractual arrangements, to claw back any bonuses paid to directors.

Q447       Stephen Kerr: Just to clarify, who will make that decision?

Dean Beale: The official receiver will.

Q448       Vernon Coaker: I will come on to the others in a moment, but, Mr Beale, there are a few questions from me, please. We are trying to understand the role of BEIS and the Government in the run‑up to the collapse. In its investigation, will the Insolvency Service look at whether the Government could or should have done more to support Thomas Cook in order to keep it out of liquidation?

Dean Beale: No, that is not the role of the official receiver. The official receiver’s role is to establish the cause of failure and to establish any culpability of directors involved in the management of that company.

Q449       Vernon Coaker: The question then is who would do that. If you are not doing it and it is not your role, and yet presumably you advise people on insolvency—not you personally, but the Insolvency Service does—who is actually going to do that?

Dean Beale: I do not know.

Q450       Vernon Coaker: A major company has gone into liquidation. This is just structurally, so we can understand. You are dealing with the consequences of that.

Dean Beale: Yes.

Q451       Vernon Coaker: In terms of how it happened, the Government were asked, it was reported, for a bailout of some £200 million. Other Governments have done it, as in Germany, but it has also been reported that, in Turkey and Spain, they have supported it. In our system, nobody will look at that.

Dean Beale: I am aware that this Committee—

Q452       Vernon Coaker: I mean in terms of all the different bodies that are set up. Part of our role is to look at what is happening and what happened. Unless I am getting it wrong, when I asked you who would look at that—this is not a personal criticism; it is just looking at the way the system works—you said the Insolvency Service does not do it and nobody else does or will.

Dean Beale: The Insolvency Service looks at the cause of failure of the business. This is an insolvent business we are dealing with. What the Government did or did not do is not the root cause of why this company was in the financial situation it was. That is the focus of the official receiver; that is the scope of its inquiry.

Q453       Vernon Coaker: In terms of whether it would have been in the taxpayer’s interest to issue a bailout, and the fact that Matterhorn has reportedly cost £100 million when the bailout was £200 million, nobody will look at whether it would have been better to have done that than not.

Dean Beale: We are brought in to deal with the process of liquidation. Our function, our role in this, is to do that liquidation work as an officeholder, under the legislation.

Q454       Vernon Coaker: Did the Secretary of State for BEIS come to you for advice prior to allowing Thomas Cook to fall into liquidation? Did they ask for your opinion on what they might do?

Dean Beale: Our discussions with colleagues in BEIS and in other Government Departments would have been focused on what, if there is a possibility of this company going into liquidation, the official receiver would do. What resources would they need to undertake that? It would have been in a scenario planning discussion that they would have spoken to the Insolvency Service. Indeed, I am aware that those discussions did happen, but it was along those lines: “If this group of companies goes into liquidation, what would happen? What would the official receiver need to do? What resources would they need?”

Q455       Vernon Coaker: Was that the Secretary of State or was that officials?

Dean Beale: It was at official level. I took over as the chief executive on 2 September. I had a meeting with the CAA and the Department for Transport on 6 September to talk about what might happen if the Thomas Cook Group went into liquidation. It was about scenario planning.

Q456       Vernon Coaker: But it was not with the Transport Secretary or the BEIS Secretary.

Dean Beale: No, but it was with their officials.

Q457       Vernon Coaker: Was it unusual not to have the involvement of senior Cabinet in something as high profile as this? For example, were they involved in British Steel or Carillion?

Dean Beale: I cannot comment on those other cases, because I was not directly involved myself.

Q458       Vernon Coaker: Would you have expected the Secretaries of State to be involved?

Dean Beale: In terms of Thomas Cook, I sent a briefing to the Secretary of State on 13 September saying, “If the case goes into liquidation, this is how the official receiver”—

Q459       Vernon Coaker: You sent a briefing to the Secretary of State.

Dean Beale: Yes.

Q460       Vernon Coaker: Could we have that?

Dean Beale: Yes. It was very straightforward.

Q461       Vernon Coaker: On 13 September, you sent a briefing to the Secretary of State about the potential liquidation of Thomas Cook.

Dean Beale: It was about the role the official receiver might need to undertake if Thomas Cook collapsed.

Vernon Coaker: It would be handy to have that formally.

Chair: Yes.

Q462       Mark Pawsey: I wonder whether I might now turn to Elizabeth Barrett and David Rule from the Financial Reporting Council and ask about the actions you have carried out. We know that on 24 September you said you were considering an investigation, and on 1 October you launched an investigation. Businesses fail all the time and not all of them are looked at by the FRC. What was it that prompted you to look at it on 24 September? What did you find out between 24 September and 1 October that said, “There is something serious going on here; we had better launch an investigation”?

Elizabeth Barrett: Perhaps I can start with that and David can pick up. We had been looking, as part of our audit quality review inspections function, at aspects of the 2018 audit of Thomas Cook.

Q463       Mark Pawsey: When did that work start?

Elizabeth Barrett: March 2019, I believe.

Q464       Mark Pawsey: Was that because of concerns and anxieties that the FRC had about the company or the way it was being audited?

Elizabeth Barrett: Not as such, no. It was because our AQR function identifies, using a risk‑based model, which audits to inspect in each year.

Q465       Mark Pawsey: So there was something dodgy about this business that caused you to want to look at it that early.

Elizabeth Barrett: No, I would not characterise it like that. I would say it was an audit that was identified as being in a risky area, which merited inspection.

Q466       Mark Pawsey: Okay, tell us a bit more about why you considered it to be in a risky area. What was risky?

David Rule: Audit inspection is in my area. We look at a number of indicators of risk, including, for example, the short interest in the company that is being traded, whether it is in one of our sectors that every year we identify as high risk. It was not specific to the company in the sense that we had any knowledge of the company. It is based on public information about that company, together with—

Q467       Mark Pawsey: They were not selected at random, though. There was some knowledge and information that you got that gave rise to that concern.

David Rule: There was some knowledge and information. Yes, we select about 140 to 160 companies a year for our audit inspections. Around 60 or so of those are FTSE 350 companies. The basis on which we do that is in part risk-based, where we look at public indicators of risk, and we also identify sectors of the economy that we believe to be at more risk. It is also covering the waterfront, because we have to do sufficient inspections of each of the major audit firms, and we try to cover all of the 350 over a period of years.

Q468       Mark Pawsey: Okay, so what was it that caused you to announce the concerns you had on 24 September? What did you find out then? What caused you then to launch the investigation on 1 October?

Elizabeth Barrett: There are really two separate considerations. By the time of the first announcement, we had sufficient information coming out of the inspections work to suggest that there were potential issues with the audit that might merit investigation. In order for an investigation to be launched, as a matter of due process we have to satisfy ourselves that the relevant threshold test for commencement has been passed, and the period between the two dates that you refer to was the period when that issue was assessed.

Q469       Mark Pawsey: Was there additional information that came to light between the 24th and the 1st, or was it just a process thing that you were going to do anyway?

Elizabeth Barrett: The way I would put it is that it is very difficult to speculate as to what we would have done but for the developing story about Thomas Cook.

Q470       Mark Pawsey: My next question to you, really, is whether the furore that was being created in the press was the reason why you have done what you have done.

Elizabeth Barrett: I do not believe so. I could not rewrite history and tell you what would have happened but for the furore.

Q471       Mark Pawsey: You were not just responding to public opinion.

Elizabeth Barrett: No.

Mark Pawsey: There were serious issues with the running of the company and the quality of the audit.

Elizabeth Barrett: There were concerns that met our threshold test for investigation.

Q472       Chair: What were those concerns?

Elizabeth Barrett: Broadly speaking—I need to be a little careful here, because, as you will appreciate, we have a current investigation that has just commenced—we were looking in particular at issues of going concern and good will impairment.

Q473       Chair: Can you tell us a bit more about your concerns about the good will impairment?

Elizabeth Barrett: If I stand back for a moment, we are investigating the audit of Thomas Cook, as you know. Therefore, the questions that arise in relation to auditors’ work around good will impairment relate to the sufficiency of the challenge that they have applied—it is an area full of estimates and assumptions—to management’s estimates and assumptions, and the sufficiency of the audit evidence to support the work they have done. I hesitate to go further, if you do not mind, because of the current investigation.

Q474       Chair: I am not sure whether my years are totally correct, but the last time good will was impaired at Thomas Cook was 2011 or 2012. Is that right? Of course, in 2019 it was impaired by £1.1 billion. Is that your concern? They bought a company, MyTravel, and then good will was impaired once but then not again for seven years, not until the very end.

Elizabeth Barrett: No, not quite in those terms. The question we look at in relation to the 2018 audit is whether the management assessments about the need or otherwise for good will impairment were properly tested in accordance with the audit standards by the auditors.

Q475       Antoinette Sandbach: There were two write‑downs, were there not? But IFRS has changed its standard around good will, has it not, fairly recently?

Elizabeth Barrett: I am talking about the going concern. Let me hand over to David on this one.

David Rule: We have changed the audit standard for both, actually: going concern quite recently in September and estimates—good will comes within the audit standard for estimates—at the end of last year.

Q476       Antoinette Sandbach: Previously, had IFRS not changed its—

David Rule: IFRS is not within our scope. I am actually not an accountant so I do not know whether that has changed recently.

Q477       Antoinette Sandbach: But good will is subject to risk, is it not?

David Rule: Yes.

Q478       Antoinette Sandbach: Given the large collapses that have occurred so far—Thomas Cook, Carillion and others—is the FRC addressing good will in a sufficient way? Obviously, you have changed your standards, so there must have been concerns. Since then, are you seeing a difference in the way companies are auditing accounts?

David Rule: Again, our scope is the audit, not the IFRS accounting standard for good will. It is an area that we will look at both in our corporate reporting review, when we look at the accounts of companies, and in our audit inspections. It is one of the areas in which, it is fair to say, we have often found issues around challenge of management. It is one of those areas that are more judgmental. We often find problems with audits arise in the challenge of management in areas of that type, which are more judgmental.

Q479       Antoinette Sandbach: Do auditors have a conflict of interest because they effectively have to challenge their client about the client’s assessment of good will and they are afraid of upsetting their clients by saying that they may have overpaid for assets?

Elizabeth Barrett: Can I chip in on that? You have hit a very fundamental point, which is whether the auditor should regard the audited entity as a client or whether he should be considering the position much more as—I am going to use words informally—an independent scrutiniser of the behaviour of management. Speaking from an enforcement rather than an inspections perspective, we have cases where we find that auditors have, to our mind, have lost their objectivity in where that line between the client relationship and the separate, dispassionate, independent reviewer should lie.

Q480       Antoinette Sandbach: Given that there is that problem and you have identified it, what protection is there for shareholders, customers or suppliers? The audit is effectively the statement or independent oversight of management saying that this is a going concern.

David Rule: There are questions about the culture within the audit firms. I have been in this job for six weeks. I have been to some of the conferences that the firms run for their partners. To be fair to them, they are stressing audit quality and they are stressing that the client is not the management; the client is the shareholder and the wider public interest, personified, if you like, by the chair of the audit committee, who is supposed to represent that. They report to the chair of the audit committee rather than, for example, the executive.

There are at least the right noises being made in some of the audit firms, but, nonetheless, when we look at audits and find problems—to be fair, we do not find problems in 75% of the audits we review—it is often around challenge of management. That may in some cases reflect a culture of not being willing to challenge management because of that conflict. There are also questions of time pressure, of partners not being sufficiently involved and of quality control. Obviously, that goes to the question of separation.

Q481       Antoinette Sandbach: In 2013, lots of people know that Thomas Cook had had a pretty big refinancing. It had taken on £1.5 billion of debt. There had been an equity swap, which included £400 million of equity in the business. It was really only the good will that stopped it trading while insolvent, effectively. What is it about your standards that makes sure consumers, shareholders and suppliers are properly protected?

David Rule: I would say a couple of things on that. One, we have tightened up the audit standards on good will, and we scrutinise that carefully. In a way, the good will is just the asset on the balance sheet that reflects the ability of that business to generate cash and earnings. That is the question.

Q482       Antoinette Sandbach: We knew that the underlying assets in Thomas Cook that had been purchased were losing money. That was clear in the accounts. There was a good will provision. There had been no impairment since 2013; I think that was the last impairment. Yet as I understand it—and I am not an accountant either—the IFRS standards require that impairment is considered every single year. This was a company that was prone to being affected by the weather, currency movements in relation to Brexit, with a 20% fall in the pound, consumer confidence and terrorist attacks. This is a highly vulnerable sector, and yet there was no impairment since 2013. Should that not set alarm bells ringing at the FRC?

David Rule: I am not sure it is our job to regulate the financial health of companies. Our role is in relation to reporting and audit. I see that legitimate questions can be raised about the good will. The way good will works, as you know, is that, if you buy a company, you account for it on the balance sheet by separating out the tangible assets and the other intangible assets. You have to identify brands and customer relationships et cetera. The residual is the good will.

Q483       Antoinette Sandbach: I understand all of that, but Thomas Cook had obviously needed to refinance. There was a flag waving to say, “We are having to refinance. We are having to take equity investment”.

Chair: “We are not generating the cash that our good will might imply”.

Antoinette Sandbach: Did you see the evidence of the chief executives when they gave evidence to the Committee?

David Rule: Yes.

Q484       Antoinette Sandbach: So you heard Mr Fankhauser saying that, effectively, they had looked at every part of the business to see what they could sell to try to reduce their debt burden, but they could not sell anything without effectively making the company insolvent. In those circumstances, it seems to me that the only thing that was keeping the company from trading while insolvent was the statement of good will.

Elizabeth Barrett: We are certainly going to look at that question, as I said, in relation to the 2018 audit. When we investigate, sometimes we find that what we look at causes us to need to extend or expand our investigations, but we understand very well the concern about this issue.

Q485       Antoinette Sandbach: In relation to the changes to your good will accounting standards, have you recommended that there is an annual impairment write‑down in respect of good will?

David Rule: That would be the accounting standard rather than the audit standard. The toughening of the audit standard is to require, when auditing that impairment test done by management, the auditor to look at both evidence that challenges that as well as evidence that corroborates that, for example looking at revenues in other similar companies, looking at the cost of capital in the business and whether that test has been done in a reasonable way. That is the work the auditor should be doing on that impairment test done by management.

Q486       Chair: The former Secretary of State Greg Clark asked Sir John Kingman to do a review, after the collapse of Carillion, of the Financial Reporting Council, and of course he came up with a number of recommendations, many of which have already been implemented. You have a new chair who our Committee did a pre‑appointment hearing with. Some of the reform that Sir John Kingman recommended will require Government legislation. What is it that requires legislation? What has not been done that Sir John Kingman recommended that needs legislation?

Elizabeth Barrett: That is quite a long question to answer. Approximately 34 of the 80‑odd recommendations require legislation.

Chair: That is almost half.

Elizabeth Barrett: Yes. There are 11, from memory, that we cannot achieve in any way without legislation. We are considering, given the parliamentary timetable, whether there are things we can do as an interim measure to move towards achievement of the recommendations where legislation is required.

Q487       Chair: Sir Donald Brydon is doing a review into the purpose of audit at the moment. Is there any reason why you need to wait for Sir Donald Brydon to report before you can make the changes Sir John Kingman recommended to the regulation? Is there any reason why you need to wait for that?

David Rule: Some of them we can get on with, and our new leadership wants to move at pace where we can. One area, for example, we are looking at is publication of our audit quality review reports on individual companies. Without legislation, we would need the consent of the audit firms and the companies to do that.

Q488       Chair: My question is whether, on the final reforms, the 34 that Elizabeth Barrett mentioned, we need to wait for Sir Donald Brydon’s review to be complete before we make the changes to the Financial Reporting Council and ARGA.

David Rule: You do not need to wait, but, practically speaking, my understanding is that Donald Brydon will report before the end of this year and the consultation paper that the Department is going to publish will therefore be able to take into account his findings as well as Kingman’s findings, if it is produced in the spring.

Q489       Chair: But we do not need to wait. We know what the recommendations are. The 34 could be implemented through legislation.

David Rule: If that moved very quickly, yes.

Elizabeth Barrett: We have an important opportunity to reshape the market for the preparation of financial statements, the obligations placed on preparers and the obligations placed on auditors. In circumstances where we have a highly relevant review that is about to report, I would suggest it is better to get things right than to rush things. With that said, I am personally very keen for the recommendations to be introduced in my area as soon as possible.

Chair: Of course, since Sir John Kingman made those recommendations, we have had another collapse of a company, another company where the audit has thrown up questions that the regulator is looking at but, I am afraid, after the horse has bolted. It is similar in many ways to what happened at Carillion. There is clearly an urgent need to reform both the purpose of audit, and the regulation and oversight of the audit sector. That is why our Committee hopes the Government will, with some speed now, reflecting on what has happened at Thomas Cook, bring in the necessary legislation to do the job of delivering those reforms to the regulatory framework.

Thank you very much, Dean Beale, Elizabeth Barrett and David Rule, for giving evidence to our Committee this morning. We will move now straight to the next session.

Examination of witnesses

Witnesses: Bill Scott, Harriet Green and Manny Fontenla-Novoa.

Chair: Thank you very much to the three of you for coming to give evidence to our Select Committee this morning on the collapse of Thomas Cook. We have a number of questions but also business that we need to be in the House for at about 11.30 am, so we will try to crack on as quickly as possible. If we could keep our answers succinct, that would be helpful to everybody.

Mr Liddell-Grainger: Can I call you Manny, because the rest of it I am a bit stuck on? Is that all right? With a name like Liddell‑Grainger, I sympathise.

Manny Fontenla-Novoa: Manny is fine.

Q490       Mr Liddell-Grainger: Thank you. Last week, Peter Fankhauser and Frank Meysman both told us that the Thomas Cook problems stemmed from the acquisition of MyTravel and the formation of the group in 2007. You oversaw that. When you were managing it, the debt that arose from the acquisition of MyTravel was the start, dare I say it, of the downfall to where we are today. Did you think at the time that you were justified in paying the price you did for MyTravel? Was the debt accumulation worrying to you and the board at that time?

Manny Fontenla-Novoa: By way of background, if you do not mind, I will take two minutes to explain why we merged with MyTravel.

Mr Liddell-Grainger: Yes, please do.

Manny Fontenla-Novoa: At that time, the European travel industry was really controlled by two major players, both German‑owned. One of them owned Tui, as it is now, or Thomson as it was in those days, and the other one owned Thomas Cook. I now take you back to 2006. In 2006, First Choice put its business up for sale. First Choice was one of the four major travel groups in the UK, the others being Thomas Cook, Tui and MyTravel. We and MyTravel were in competition to buy First Choice at the back end of 2006 for a price of £800 million to £900 million. That move would have allowed us to consolidate the UK market. During those conversations, it became clear to me that, although it was an attractive acquisition, it did not address some of the issues Thomas Cook had at that time.

By “issues”, I mean some of the gaps we had in our portfolio. For example, in 2006, we did not have a presence in the northern European market, the Scandinavian market, which is the most profitable market in Europe. It still is today. We did not have a presence in Canada, which is really important for flying the planes in winter and utilising capacity in winter. The UK market was still unconsolidated.

Nonetheless, we went through that process. At the same time, we had discussions with MyTravel about merging the two businesses. That is where we ended up. We merged the two businesses in January 2007. It got regulatory approval in June of that year. The reason for that merger was that it gave us a huge presence in the northern European market, the Scandinavian market. With it came the biggest and most profitable business in Scandinavia. With it came a Canadian business, which meant we could utilise our aircraft in the winter. With it, we consolidated the market in the UK.

By merging MyTravel and Thomas Cook, we went from four to three and that resulted in Tui merging with First Choice. That was the rationale and the strategy behind the move. Sorry, am I speaking too fast?

Chair: No, no. We just need to move on.

Manny Fontenla-Novoa: This is just by way of background. At the end of that, we created a group with £9 billion of revenue, 30,000 staff, 20 million passengers and a profit of £350 million.

The second part of your question was about the debt. At that time I thought, and we as a board thought, that the debt was manageable, we could service the interest charges on that debt and it gave us a great platform for future growth.

Q491       Mr Liddell-Grainger: You had borrowings of roughly £1 billion in 2007, and generally you paid between £100 million and £170 million a year in financing costs. You may well be right. However, looking at your share price and everything else, it did blip when you restructured but, dare I say it, it showed at the time that there was a potential structural problem.

Manny Fontenla-Novoa: The merger was 2007. In 2008, as you may recall, there was the world financial crisis. There was a banking crisis and the banks had to be rescued. The whole financial sector changed. We had to take some decisions at that time. That not only affected the financial markets and our relationship with banks and bondholders; it also had a huge impact on consumer confidence at the time.

On top of that we had the volcanic ash, sterling crashing against the dollar and we faced some really tough times for two or three years. We faced tough times, but we managed our way through those tough times. I believe, at the end of those tough times, we were in great shape for the future growth of the company.

Q492       Mr Liddell-Grainger: I just have one last thing on that. Very roughly, your borrowing in 2009 was just over £100 million. In 2012, 2013, 2014, 2015 and 2016 it was over £160 million per year. There was a sharp increase, and then it stayed at that level until 2017, when it shot up to £180 million. I know that was not all on your watch. In fact, what you are saying is not quite borne out by the reality of what happened.

Manny Fontenla-Novoa: By the end of 2007, and indeed in 2010 or the middle of 2011, when I left, we had a business that I believe had a fantastic platform for future growth. As you look forward, you have two choices: you either believe in your business plans and that you can grow the business, or you do something about your debt. What I would point you towards is that, in that period from 2011, when I left, until 2019, there were eight annual statements and eight chairman’s statements. At no time did they say that debt was unmanageable; at no time did they say they had to restructure the finance of the group, so presumably they felt the same as I did.

Q493       Stephen Kerr: You mention the situation in 2008 with the crash and so forth, but you continued to make acquisitions in 2008, 2009 and 2010. You bought quite a lot of businesses in that period. What was the rationale behind that?

Manny Fontenla-Novoa: At that time, Stephen, there was a lot of consolidation in the marketplace. There was a huge amount of consolidation. It was not only by us, but by Tui and even before 2007 by First Choice. We felt we had to develop our business. We wanted to keep growing our mainstream business and develop our independent business. Most of the acquisitions were to grow our independent business and reduce our reliance on the mass‑market business.

Q494       Stephen Kerr: In 2011 you bought Co‑op Travel.

Manny Fontenla-Novoa: We merged with Co‑op Travel. It was not in 2011; that one was in 2010.

Q495       Stephen Kerr: It was 2010. What was the impact of that on the finances of the group?

Manny Fontenla-Novoa: It was a merger; it was not a cash transaction. Effectively, it did not affect—

Q496       Stephen Kerr: Did it improve profitability?

Manny Fontenla-Novoa: Yes, it did. Again, I am sorry; I do not want to take too much time, but it is so difficult to explain the rationale. The rationale behind it is that Thomas Cook’s strength in the UK was around the northern airports: Newcastle, Manchester and Glasgow. At that time in 2010, high street distribution was still vital to the profitability of a group because most of the bookings taken on the high street at that time were full‑price brochure bookings. Once you get into the later period, the swing in margin could be between £50 and £70.

Co‑op was very strong in those areas as well. Therefore, we wanted to increase the in‑house distribution from what it was at the time, which was around 60%, to more like 80%. That was the rationale behind our merger. It was synergistic.

Q497       Stephen Kerr: But it created a hike in your debt level.

Manny Fontenla-Novoa: I do not believe that particular transaction did. It was a non‑cash transaction.

Q498       Stephen Kerr: I just wonder about this, because subsequent to your successor coming into office there was a series of sales. That was an attempt to reduce the level of debt, was it not?

Manny Fontenla-Novoa: In the middle of the financial crisis, I believe at the end of 2010, we announced our non‑core asset disposal programme, which we hoped to raise £200 million from. By the time I left, that figure had reached £150 of disposals agreed. Therefore, we were well in line to achieve the outstanding £50 million. We did announce an asset‑disposal programme.

Q499       Stephen Kerr: That was before you left.

Manny Fontenla-Novoa: Yes.

Q500       Stephen Kerr: Your successor then carried out that series of disposals. What about all these high street travel agents? Were there not questions about the business model?

Manny Fontenla-Novoa: There were at the time. People were saying there was going to be growth in the internet.

Q501       Stephen Kerr: Were high street travel agents not closing down at that time?

Manny Fontenla-Novoa: There was some rationalisation going on, but even today high street travel agents have a really important role to play in the British travel industry, a really important role. If you think about what has happened with Hays Travel, for example, it has taken all 555 Thomas Cook shops.

Q502       Chair: The thing about Hays Travel, though, is that it is not saddled with huge amounts of debt. It managed to buy Thomas Cook travel agents in a cash purchase. It is not sitting on a huge amount of debt.

The evidence Peter Fankhauser gave us last week—this is what we really want to establish today—is that he was doing his job with his hands tied behind his back because the company had so much debt, which you had acquired in the four years you were chief executive officer, and, as a result, he was not able to invest in the business because all the money they had went into servicing the debt. That was debt you put on the company. I am not saying that one is right and one is not right, but the evidence he gave was that your strategy of purchasing all these companies and building up the debt made his job impossible. He did not think that your strategy was the right one.

Manny Fontenla-Novoa: I understand why Peter said that, but I cannot accept that. If Peter felt that, maybe they should have done something about that debt. Maybe they should done what we did in 2010, which was to look at disposing of some assets. Maybe they should have done that earlier. If they believed that they could not service that debt, they should have done something about it before 2019.

Q503       Chair: What would you have done, then, in Peter Fankhauser’s position?

Manny Fontenla-Novoa: It is an interesting question, because I believed that there was a growth opportunity—

Chair: In Canada and Scandinavia, you mean.

Manny Fontenla-Novoa: That was very important to us, but also since 2012 or 2011, whenever it was, Thomas Cook shrunk capacity. If you look at the turnover in 2010, it was £9 billion. If you look at the turnover in 2019, it was £9 billion. In effect, because of inflation, the capacity has gone down. In that same period, Jet2holidays has grown from nowhere to 4 million passengers a year; On the Beach has grown from nowhere to 1.6 million passengers a year; Loveholidays has a similar amount.

I believe there was growth in the market. I believe we would have grown with that growth in the market. Instead, Thomas Cook’s capacity has shrunk while competitors have grown.

Q504       Chair: The point that Peter Fankhauser made is that other companies could invest in new opportunities, but Thomas Cook could not because it was spending £150 million to £170 million a year on servicing its debt, so he was not able to make those investments. That is the case he made in the evidence last week.

Manny Fontenla-Novoa: Okay, but the point I made is that cutting capacity down or increasing capacity is not a financial investment. That is about the capacity that you put on sale in the marketplace and your ability to sell in that market. It is not about buying businesses or investing in technology. It is about the capacity you put on to the marketplace. For whatever reason, during that time, Thomas Cook’s capacity stood still in the UK. During that same time, Jet2holidays has gone from nowhere to nearly 4 million passengers. This is the point I already made.

Chair: Yes, you made that point. Stephen Kerr, do you want to continue or should we move on?

Q505       Stephen Kerr: The only point I would make is that you acknowledge the weight of the debt in the business because you had a plan before you left office to dispose of assets, including Thomas Cook Canada, which you have mentioned a few times. That was sold. Then your successor had to carry that on, because obviously there was a problem, as the Chair had outlined, in the long‑term viability of that level of debt. Is that not true?

Manny Fontenla-Novoa: Yes, that is true. But, if I could just provide the context, that was caused by our nervousness because of the crisis in the financial markets.

Q506       Stephen Kerr: This is the last point before I pass on. The group’s debt was even understated in real terms, because the practice that was followed in how things were accounted for meant that the net effect of owing more to your suppliers at year-end than was owed to you was not included in the debt figure. Your debt number was a bit higher, actually, because you were using your suppliers as a bank. Is that not true?

Manny Fontenla-Novoa: The net debt figure takes all that into account.

Q507       Stephen Kerr: That is not what we have in our briefing. That is not what it says. You had the debt that was recorded, and you also had the amount of money you owed at the end of every year to your suppliers. I repeat again: you were using your suppliers as a bank at the end of your financial year. Is that not true? I think it is.

Manny Fontenla-Novoa: No, Stephen, at the end of every year, we look at the amount of money we owe to suppliers. Of course we do, because we pay after departure, typically. That amount of money is taken into account in the net debt position we report.

Q508       Chair: The point is that Thomas Cook, when you were chief executive and when it went into liquidation, was not a signatory to the Prompt Payment Code. Your average payment terms were 60 or 70 days. You were getting the cash in, but you were not paying it to the people who provided the service.

Manny Fontenla-Novoa: I am sorry. I have to come back to you on that, because we were not doing anything that was not standard practice at the time in that industry. We would have adopted the industry standards.

Q509       Chair: There may be industry standards, but to be a signatory to the Prompt Payment Code, as you will know, you have to pay your suppliers in 30 days. That did not happen when you were chief executive and it was not happening when Peter Fankhauser was chief executive.

Manny Fontenla-Novoa: I will have to investigate that and come back to you. I am sorry.

Chair: That is fine

Q510       Antoinette Sandbach: Manny, were you still at Thomas Cook Group when the decision was taken to write down good will in 2011?

Manny Fontenla-Novoa: No. I had left by then; I had just left, though. That decision was taken at year-end. I left in August of that year.

Q511       Antoinette Sandbach: Do you know why that decision was taken? It would have related to issues that had arisen. Maybe you could answer that, Mr Scott.

Bill Scott: I started at Thomas Cook in 2012, so I was not there in 2011. I imagine they applied the same sort of tests that were talked about in this Committee last week and earlier this week: you look at the future cash flow generation of the UK business. At that point in time, I presume it did not support the carrying value of good will.

Q512       Antoinette Sandbach: In effect, was that an indication that the group’s investment in the Co‑op was not worth what it was believed to have been worth. I do not know whether you can answer that, Harriet. You took over as the chief executive around that time.

Harriet Green: Yes, I joined the company in July 2012. At the time we had a significant wall of debt, £1.6 billion. We had three profit warnings, as you know, and the acquisition of the Co‑op. We set about very, very quickly on each of those issues. The acquisition of the Co‑op meant that Thomas Cook was one of the largest retailers in the UK.

Q513       Antoinette Sandbach: Sorry, I am specifically dealing with the good will. Were you aware as to why the good will had been written down in 2011?

Harriet Green: Not when I joined in July 2012, no.

Q514       Antoinette Sandbach: You did not check.

Bill Scott: Maybe I could offer something. I started at the same time as Harriet in July 2012. By that stage, it was clear that the UK business was not making as much profit as it had historically done, so the trading performance in the UK business had declined to the extent that there must have been some impairment in the good will value.

Q515       Antoinette Sandbach: Can you remember what the impairment was in 2012?

Bill Scott: I cannot remember what it was in 2011‑12, but when I started the UK business was not making any money.

Q516       Antoinette Sandbach: In terms of good will, you were the chief financial officer until 2018. Why was there no impairment in the intervening years, given the risks of the sector that you work in?

Bill Scott: As has been set out before, we looked at the impairment of good will annually. Actually, our accounting policy required us to do that every six months, which we did, based on the latest financial plans we had. We compared the carrying value of the good will, in this case in the UK, with the future projections and future cash flows for the UK business. At each point in time in each financial year, that supported the carrying value of good will, so it did not need to be impaired-

Q517       Antoinette Sandbach: But good will also involves an assessment of the risks under the IFRS standard. That includes intangible risks such as weather, terrorism and exposure to currency risk. Yet at no point between 2012 and 2018 did you consider it appropriate to write down what was a very high level of good will only for it, six months later, six months after the 2018 accounts were filed, to be written down by £1.1 billion.

Bill Scott: After the decline in profitability in the UK, which I referred to earlier, by 2012, under Harriet’s tenure and subsequently under Peter Fankhauser, that business improved significantly. Its profitability improved significantly and its cash flows improved significantly. All the way up until 2018‑19 that business was improving, which supported the carrying value of good will. As part of those calculations at year-end, there were also sensitivities done: assumptions of what could happen with these intangible factors that you mentioned, what would happen if there was a decrease in demand or a change in—

Q518       Antoinette Sandbach: When you are looking at something like that, what kind of risk element would you put in?

Bill Scott: You would typically sensitise your forecast to take account of such elements. You may decide that demand can decline by 10% and profitability can decline by 20%-

Q519       Antoinette Sandbach: Yes, but you had the experience of both the terrorist attacks and the volcanic‑ash incident. Did you approach good will differently after that, having seen the impacts that those two incidents had already had on your business?

Bill Scott: In terms of the financial projections, there would have been more sensitivities applied in line with what could happen if there were a terrorist attack-

Q520       Antoinette Sandbach: But good will was not written down.

Bill Scott: Even after those sensitivities the forecast demonstrated that there was no need to write it down.

Q521       Chair: There obviously was a need to write it down because, in the end, you had to write it down all at once by £1.1 billion.

Bill Scott: That was because of the performance in 2018‑19, and the subsequent reduction in the UK profitability and the forecast profitability beyond 2019. I was not there in 2019, but that would have been what caused the good will write‑down.

Q522       Chair: So you honestly think everything was all right all the way up until the end of 2018, and then suddenly it was not. It just does not seem likely, Mr Scott.

Bill Scott: Yes, but you are aware of the trading conditions in 2018 caused by the heatwave. That was a once‑in‑a‑generation heatwave that happened quite late in the booking cycle. As Manny explained earlier on, once you get that late in the booking cycle, any amount that you have to discount on prices goes straight to the bottom line. There was a sudden and sharp decline in profitability from around about June 2018-

Q523       Chair: We do not have Tui, Jet2 or other companies finding themselves in the position that Thomas Cook has found itself in. They, as far as I am aware, suffered from those same factors, but they are not with the liquidators now.

Bill Scott: They are not.

Chair: There must be something special about what happened at Thomas Cook. The problem is that everybody we have seen from Thomas Cook has blamed everybody apart from themselves. They never look at themselves and the decisions they have made and reflect on those. It is the volcanic ash; it is the hot weather in the UK; it is the depreciation of sterling; it is the debt acquired by somebody else.

It would be really, really good to see somebody from Thomas Cook say to your customers, your suppliers and your employees, some of whom are sitting here today, “We got it wrong. I wish I could go back and do something differently. I wish we had disposed of some assets. I wish we had not bought MyTravel. I wish we had made different decisions”, rather than just passing the buck to someone else.

I will give you another opportunity. Is it really the case that in 2019 that good will was worth £1.1 billion less than it was just a few months before when you were CFO, or should you, Mr Scott, have done something sooner in writing down that good will?

Bill Scott: Based on the plans we had at the time, we did not feel there was a need to write down good will at the end of 2008[1].

Q524       Chair: If you could go back in time to 2017‑18, knowing what we know now—I am being generous and giving you the benefit of hindsight—would you have written down that good will?

Bill Scott: With the benefit of hindsight, it appears unusual that there could be that level of decline in the value of a good will asset over a short period. Again, based on the information we had and the plans we had at the time for the UK business, it did not indicate that impairment was required in 2018.

Q525       Chair: I put it to you that good will was misstated on the balance sheets of Thomas Cook and it had to be written down in 2019 because of the erroneous assumptions you made about good will in previous years.

Bill Scott: It is clear that the assumptions made in the plan in 2018 did not then come to bear fruition in 2019. The plan assumptions we made seemed reasonable at the time. Clearly, that plan deteriorated over the course of 2019.

Q526       Antoinette Sandbach: Harriet, are the accounting rules on good will fit for purpose?

Harriet Green: When I came in, I did strategic work to ensure that the good will issues that were discussed regularly at the audit committee, et cetera, were lessened. Good will is the relationship between what you pay for a business and what it is worth in real terms. As one of the six pillars of my 28 months, I embarked on work to divest of nine businesses, including the Canada business and the India business, many of the businesses that were not making return.

That way, we were in a position to increase our trading actions and we could then focus on the absolute core of the business. There is a strategic element to good will. I did not acquire any businesses. I felt the future of the organisation was not in the capacity race that has been described but in a very different direction. If the Committee feels it is appropriate, I can talk to that. Strategically, the way to change good will is not to be on a serial acquiring, capacity‑driven strategy.

Q527       Antoinette Sandbach: My question is around the accounting standards. You cannot put a value on a strategic approach, but clearly you took a strategic direction. Are the accounting standards sufficient to reflect the risks in assessing good will?

Harriet Green: When I came in, the good will values were at £2.66 billion. As I departed, they were a little less. The whole process of risk, escalation and the amount of discussion about them at Thomas Cook, in the committees set for them, was quite intense. As for whether there should be a different approach, looking at what has happened here, there clearly should have been.

Q528       Vernon Coaker: Can I build on something that was said in answer to the Chair’s point, Mr Scott? One thing that was said—I do not think I am misquoting you—was that you acted with the information you had at the time. Yesterday EY and PwC, the auditors, came to see us, and they said they questioned some of the approaches the group had had, in terms of its use of separately disclosed items, good will and those sorts of things.

In a sense, some of the issues the Chair has just raised were flagged with the company as potentially a problem by those who were auditing the accounts of the company. They were suggesting to us that the accounts were presented in the most favourable way for the company. Through an accounting mechanism, they disguised some of the underlying issues there might have been. Were the auditors wrong in suggesting that to us?

Bill Scott: I would not have characterised it like that-

Q529       Vernon Coaker: How would you have characterised it?

Bill Scott: We use separately disclosed items to try to help people’s understanding of the underlying business. It is an area where there is a lot of subjectivity: how you decide whether it should be separately disclosed or as part of the underlying business. We had those discussions regularly with the auditors and the audit committee in order to come to a view: “Is this special enough to be separately disclosed or should it be part of the underlying business?”

During my time there, we also tried to improve the disclosure around separately disclosed items so that all that was explained. If people felt they wanted to take a contrary view on whether it should be an underlying or whether it should really be separately disclosed, the information and the explanations were there so people could form that view. The same was true for the regular meetings we had with shareholders, investors, banks and bondholders. We frequently got questions around that area, and we explained.

Vernon Coaker: There was one phrase that I particularly picked up. I think it was EY rather than PwC. In their management letter—I think it was your time there, but I apologise if it was not—they talked about “potential manipulation”. That is actually in a management letter from an audit company to Thomas Cook Group. It is not saying, “You have made a mistake”.

Q530       Chair: Was that when you were there, Mr Scott?

Bill Scott: It would have been. The management letter was issued just after I left. I left in November last year-

Chair: So it was based on your work.

Bill Scott: The turn of phrase “potential for manipulation” is not one that I would have used. No one is saying that there was actual manipulation. It is just that, because it is a subjective area, clearly people have different views. In their view there was a potential that you could take a view that went too far.

Q531       Vernon Coaker: But it is an astonishing phrase, is it not?

Bill Scott: It is not a phrase I would have used, but I can see what they mean: there is a potential for people to take a different view on certain things, because it is not covered by accounting standards and it is an area of subjectivity.

Q532       Vernon Coaker: Can I ask a question of all three of you, very quickly? As the Chair has just indicated, we are short on time. What is the purpose of an audit that can say things like that? Presumably it can say other sorts of things to other big businesses. Is the purpose of an audit just to say, “Look, there is a bit of a problem here; can you have a look at it?” or should the purpose of the audit be to say, “This is a fundamental misrepresentation of the way the business is operating; you need to change this”? Is it a cosy club or is it an actual regulation of the market to make sure it operates in the interests of everyone?

Bill Scott: In my experience of both EY and PwC, there was a lot of challenge around this area; there was a lot of discussion around this area. We tried to do it in a way where we gave them information as soon as we could and we had that discussion as soon as we could before the accounts were finalised. Everyone was conscious that it was a subjective area. I do not think it was a case of them acquiescing to whatever we wanted. As I say, there were detailed discussions both at the audit committee and with the auditors to get to a position that we felt, as the board, was the correct position.

Q533       Vernon Coaker: Just to finish on this, the point that we get time and time again is that the auditors make all sorts of points, the regulators make all sorts of points and nothing happens.

Bill Scott: That is not entirely true in our case. For example, on separately disclosed items, we got a letter from the FRC in 2017 based on our 2016 accounts. They had some questions, which we answered; they had some suggestions around improving disclosure and so on, which we acted upon. It is not as if people raised things and nothing happened. We were happy to have the discussion with the auditors and the audit committee, and implement the FRC’s recommendations.

Q534       Peter Kyle: Manny and Harriet, we are really trying to understand what was happening in the company at the time. We will try to do a report that either learns the lessons of it from a legislative point of view or makes recommendations to the way the private sector and the audit industry is regulated. None of us has run FTSE 100 companies in the past, but we are trying to understand precisely what was happening, from the inside out, because we were not there then. We are not trying to ask you to incriminate yourselves, if I can put it that way.

When you look at Thomas Cook through the period you two were running it, it seems like there was just a series of restructures and new management plans coming in. If we look at 2011, you had a new plan, a turnaround plan, for the business; in 2013, you had a transformation plan; then you had a new operating model in 2015. It takes time to design and implement a plan, and then to give it time to embed, but yet it seems that every two years there was a new fresh approach to the way you were running the company and restructuring it. To us, that says that this was a company in constant change that never, ever really found its feet. Manny, is that accurate?

Manny Fontenla-Novoa: I cannot comment on what happened after 2011, because I was not there. Prior to 2011, we had a strategy that the board signed off on and we implemented, with the merger with MyTravel. It was a merger that was supported at the time by the financial markets, by analysts and by shareholders, and we believed in our strategy.

Peter Kyle: Okay, leave it there.

Harriet Green: I came in during 2012, as I said. The company had three profit warnings and a wall of debt et cetera. We embarked upon five things that yielded very significant results. The first was to remove that wall of debt in a way that did not impact any of the stakeholders involved: banks, pension funds et cetera. That £1.6 billion refinancing allowed us to significantly reduce the debt.

The second critical piece was really to build a digital business. This was a company whose 1,000 stores did not even have a connection to enterprise‑level internet. Hiring the right people, developing the right data and putting together a plan enabled us to drive new clients, new customers and the basis of an internet business. The entire industry had moved on; an entire generation had never been to a store.

Thirdly, we made the business significantly more efficient. This is a company that negotiated with itself to buy hotels or to lease hotels. We created centralised procurement and a much more efficient back end, and we began the task of reducing the number of stores we had. That yielded a significantly improved debt position and a very much stronger cash generation. That was the first time in many years that cash had been generated. These cost savings were beginning to enable us to take the next stage. I firmly believe that all those actions, if allowed to continue, would have positioned Thomas Cook very viably for the future.

Q535       Peter Kyle: Is your thesis, then, that the plan you left behind when you left just did not have time to breathe, to embed and to mature?

Harriet Green: Indeed, and we had done the first part of it in 28 months, which was to renegotiate the debt, to build—with an advisory council, with hundreds of people—a digital business and to start those efficiencies. I was not able to complete that work, which was really about a six‑year plan.

Q536       Peter Kyle: Thomas Cook has never really had a massive asset base. In the transformation you are talking about, the move to digital, you still had a sort of rental relationship with other landlords and people owning property abroad. When you look at Tui, today it has £4.5 billion of assets. It owns ships, properties, hotels and all the rest of it. You never moved in that direction.

Harriet Green: That is a totally different model that is much more‑asset light.

Q537       Peter Kyle: Yes, it is a model that is still trading.

Harriet Green: Indeed, but there are also plenty of models that are asset‑light, digitally driven, that have attracted large bases of millennials and that are technology‑based businesses that use augmented reality to attract people in so they can assess the type of vacations they are taking.

Q538       Peter Kyle: My question is whether you were transitioning to the right model?

Harriet Green: I believe we were. The results after 28 months show that. It was £2 billion of capitalisation from a business that, when I started, was less than £200 million. We had started to generate cash, to grow the business in those key targeted areas and to add newer and younger clientele. It was beginning, by the results themselves, to drive not only investor interest. You could not have done that refinancing if there was not an underpinning growth strategy that people believed in.

Q539       Peter Kyle: You were selling businesses quite soon after you got in. You sold Thomas Cook India and Gold Medal. Was your belief then that the previous generation of leaders of the company were just buying too much and saddling you with too much?

Harriet Green: At that time, 2012, Thomas Cook needed to focus and not have a vast array of businesses that did not return and that were haemorrhaging money. We needed cash to invest. It was self‑help, and that was very well received by those who either owned the company or were buying into it.

Q540       Peter Kyle: How did you feel when the plan you put in slowly started to be unpicked?

Harriet Green: I felt incredibly frustrated and sad. These are not fictional things; they were being demonstrated after 28 months. You can read them in the annual report and the results that we were having, but I was not able to continue that.

Q541       Peter Kyle: Is that the reason why you left?

Harriet Green: The reason I left was because in November 2014, after the year‑end board meeting, which was a full day of great positivity about the second year of the transformation, the chairman summoned me very early on the second day—this is the day when we give our results to the investors; the stock had been going up very, very nicely—and I was told, “You have done a great job. You have started the transformation. Thank you, but we would now like someone who is a traditional travel person to take this strategy forward”.

Q542       Peter Kyle: What did you interpret by that: a return to the previous trends or to what?

Harriet Green: I did not believe my interpretation of what was meant was the critical element here. I was basically being told, “Your services are no longer required, and we wish to return to more traditional travel‑orientated leadership”.

Q543       Peter Kyle: When I google your name, there is gossip out there as to why you left. Some people were speculating that there was friction between you and personality conflicts within the board at the time. Were they aspects of it?

Harriet Green: Certainly the board and I had disagreements over the level of assets and over the rate and pace of a digital transformation, which takes daily standing up. This is changing the DNA of a business, just like I did at Premier Farnell, which worked, over a six‑year period. We certainly had differences of opinion. There were anonymous reports, which the press made a great deal of, but in August 2014 in the engagement survey my rating from the employees was 93% favourable.

Q544       Peter Kyle: I question whether I should put this to you, because you might well want to set the record straight on some of those anonymous briefings. One of the anonymous sources I read in the press suggested that you had very high levels of personal spending, credit cards and so forth. Do you want to say anything on the record about that?

Harriet Green: Yes, for sure. When I came into the business, we determined that, after everything that had gone before and this level of turnaround, this would be a 24‑hour type of role. With my family, we agreed that Monday, Tuesday, Wednesday and Thursday I would be living away from home, travelling across Europe. This was a Europe‑based business. I was very, very focused on the survival and the development of Thomas Cook. In the second year, I reduced those expenses by a third and I gave back a car allowance.

It is also important that the package I was given in terms of salary and bonus was entirely risk-based. If I achieved the things we laid out, I would be rewarded; if I did not, there was no outlay of that type to the board or the shareholders. It is on record that I earned less than the previous male CEOs and, indeed, the CEO who came after me.

Q545       Peter Kyle: Finally from me, in a nutshell, why did the company fail?

Harriet Green: This entire industry, for over a decade now, has transitioned to a digital environment where it can be more asset‑light and where a huge part of the clientele, such as Generation Zers and millennials, take their events and their entire vacations online, and do not visit travel agents. While that trend developed at pace—it was one of the first industries to go that route—having at least a credible digital capability, while reducing an enormous bricks‑and‑mortar base of 555 stores, was essential for its survival.

Q546       Anna Turley: Manny, if I may, during your time as CEO you took some enormous bonuses. Over £5 million came, as I understand it, as a result of the merger with MyTravel. Was that not a huge personal incentive for you to drive ahead with other mergers, such as the Co‑op merger, which ultimately, as we have heard today, increased the amount of debt on the company?

Manny Fontenla-Novoa: The £5 million is a huge bonus, but it was not for the deal. That was for delivering the synergies, which were over £200 million. When we merged the two businesses, the management teams of both MyTravel and Thomas Cook were charged with delivering those synergies, and the bonuses were based on the delivery of those synergies. We did not just say those synergies were delivered; those synergies were audited by an external audit company.

Q547       Anna Turley: Those synergies may have been delivered but in your time, between 2008 and 2012, in which time your total rewards from the group were £12.8 million, Thomas Cook Group’s net profit was almost wiped out and the net debt more than doubled. Were those levels of bonuses really justified by the results you gave the company?

Manny Fontenla-Novoa: I confirm again: they are big amounts. They are made up of cash amounts and shares, and some of the cash amounts I received I reinvested into shares. Nonetheless, they are big amounts. Do I feel they are justified? At the beginning of every year, we will set ourselves a set of objectives, a very clear set of objectives. At the end of the year, we will measure against those objectives. The bonuses were published; the bonuses were put in front of the shareholders for them to review and to vote on.

Q548       Anna Turley: Bill, Warren Tucker told us last week that he regretted that performance‑related pay had been based on profit, claiming it would have been more helpful to incentivise cash flow generation. Do you agree with that? Did the incentives we have just heard about help or hinder the company?

Bill Scott: In my time at the company, rewards were based on a balance of profitability, cash flow and other metrics such as customer satisfaction or personal objectives. I felt that the balance was in line with what I had seen at other companies and it was appropriate. I don’t think that anything occurs to me that I would have changed necessarily. I know some of the headline bonus numbers have attracted a lot of attention, and people can question whether that was truly earned or not. As I say, my perspective is that there was a balance of different metrics, and ultimately the remuneration committee took the decision to award bonuses or not.

Q549       Anna Turley: I will ask all three of you this question. Looking back at all of your time at Thomas Cook, is there anything that you regret and would have done differently?

Bill Scott: From my perspective, after Harriet left, perhaps we did not have the level of urgency that we needed in order to transform the company, to change its business model and to move it more online, as Harriet said. We should have done that more quickly. That would be the main thing for me. We were making progress, but the progress was too slow in light of changing circumstances in the competitive landscape.

Manny Fontenla-Novoa: It is such a difficult question to answer. It is incredibly sad that the company has failed. It is incredibly sad. It is affecting lots of people, in particular the staff. It is a company I have worked with since I was 18 and I worked my way up to become the CEO of that company. It is a company I care deeply about. I cannot believe it does not exist any more, and I hope somehow Thomas Cook comes back again in some form or another. But, looking back, do I regret things? Of course I regret things. I am human; I make mistakes. I have no doubt about that. But I honestly, genuinely believe that the merger with MyTravel was the right decision.

I have to say I thought Harriet did a very good job in restoring confidence in Thomas Cook and rebuilding the share price, but I fundamentally disagree with her in terms of the structure of the travel industry. There is still a place for traditional package holidays, and I point towards Jet2. Since 2010, it has built a business up to £4 million based on traditional package holidays, and very profitably so. Do I regret things? Yes. If I could turn the clock back, would I do things differently? I would do lots of things differently. But I just believe I got the major decisions right. I am sorry for the way it has turned out, but I believe that.

Harriet Green: Yes, to be in the position we are in is devastating for everyone. There are four things that I should have done differently. First, thinking about the rate and pace of a business transformation of this type, which was intensive for 28 months, I should have inputted more in terms of a board that also understood business transformations and how to change business models.

Secondly, we could have done even more to reduce the very heavy asset base. I felt strongly about this, and I presented on investing money in something other than planes, which are very, very expensive things. At the time, I brought together joint venture plans, for companies such as Monarch, with our own airline. Changing the model to be less asset‑heavy, in that sense, would have been very helpful.

We started some of these amazing Apple‑type stores with lots of technology, where people would queue in Lakeside to make sure that, with their augmented reality, they could actually see the hotel they would be staying in. I should have pushed that even harder and faster.

Q550       Chair: Can I ask the three of you what you are doing now?

Harriet Green: I run businesses across Asia‑Pac for IBM.

Manny Fontenla-Novoa: I run a consultancy company.

Bill Scott: I am not working at the moment.

Q551       Chair: Harriet, you have sort of answered this question; can I ask it to Manny and to Bill? Do you think you have some responsibility for what happened at Thomas Cook? If so, what is that responsibility?

Manny Fontenla-Novoa: No, Chair. As I have said already, I feel I got most of the major decisions right, and yet the organisation collapsed in 2019. It was eight years after I left. I just feel desperately sad it has happened.

Q552       Chair: You feel sad, but you do not feel the decisions you made contributed to that. It is fine if that is your answer: you feel sad but you do not feel the decisions you made contributed to its collapse.

Manny Fontenla-Novoa: I do not, no.

Bill Scott: As I said earlier, I feel we should have gone more quickly. We should have got out of a cycle of restructuring that was referred to earlier, with plan after plan after plan. We did not quite get to the bottom of it. We should have changed the business model more quickly, and we should have become a bit more digital and a bit more able to compete in the current landscape. Partly, it was difficult to do that. We had 1,200 shops when I started, and now it is 555.

Chair: Now it is zero.

Bill Scott: There was progress. It just was not quick enough.

Q553       Chair: Harriet, you have talked about some of the things you wish you had done when you were chief executive, but do you think you have any responsibility for what happened to the business?

Harriet Green: The responsibilities I had were characterised in 2012 by three profit warnings, a huge wall of debt and a business model that was entirely out of sync with the industry. That is what I fought for 28 months, 22 hours a day, to change. My responsibility is that I failed to complete that.

What I should have done differently was to have had more in common from a chair/board perspective. One has to consider all of those things. But in those 28 months I had a vision of what that business could be. This is a brand that was loved, with staff as loyal and amazing as I have seen anywhere in the world, with a commitment and promise that would allow us to do the things we had already started to do. The results of that period are evident. It was a business that was worth £2 billion and would have got stronger. Although I was prevented from continuing that, everyone has to think about why it happened.

Manny Fontenla-Novoa: Chair, very quickly, the model we created in 2007 was very, very similar, almost exactly the same, to the model Tui had at that time. From 2010 to 2012, Tui developed that model and used that model to develop its business, and to grow its revenues by 70% and its profits threefold. The model was not broken. The model was there to be used.

Chair: Sir, with all respect, your two successors, not just Harriet Green but Peter Fankhauser as well, blame the decisions you made, the acquisition of those other companies and the build‑up of that debt, which prevented them from carrying out a modernisation strategy. I am not passing judgment, and I am not going to have a back and forwards either, but a little more humility and introspection about what went on would not go amiss. But we have missed the opportunity today for that for you, Manny.

Thank you very much to the three of you for coming to give evidence today to the Select Committee.