High court ruling sees utilities companies lose power

In a recent High Court decision, utility companies will not be able to use the statutory deemed contracts regime for the supply of gas and electricity to automatically gain priority over other creditors.

Laverty and others as Joint Liquidators of PGL Realisations PLC and others v British Gas Trading Limited.

Case Background

The Peacocks retail chain of companies (Companies) went into administration on 19 January 2012. Before this they were supplied gas and electricity by British Gas Trading Limited (BGT) under various written contracts (Contracts). BGT had the right to immediately bring the Contracts to an end by giving notice if the customer's business became insolvent.

BGT served notice terminating the Contracts.

BGT continued to supply gas and electricity to the Companies stores under contracts deemed to arise under the Gas Act 1986 and the Electricity Act 1989 (Deemed Contracts). The administrators were notified of the new tariffs.

The administrators of the Companies sold a large number of the Companies stores as part of a sale of the Companies' business. The remaining 176 stores (Closed Stores) stopped trading. The administrators vacated the Closed Stores and no further use was made of them by the Companies.

Gas and electricity continued to be used at the Closed Stores after they were vacated by the administrators. It was suspected that those stores may have informally re-let by the landlords or that squatters may have been in occupation.

The Companies were later wound up and the remaining leases, that had not been surrendered or assigned, were disclaimed by the liquidators.

The administrators had accepted that gas and electricity supplied to the Companies stores during the administration whilst the Companies continued to trade from them was payable as an administration expense.

BGT went on to claim that more than £1.2 million was payable under the Deemed Contracts in relation to the Closed Stores after they were vacated by the administrators (Post- Trade Liabilities) as an expense of the administration.

Whilst the liquidators of the Companies (Liquidators) accepted that a payment was due to BGT in respect of the Post-Trade Liabilities, the liquidators argued that such sums were provable as an ordinary unsecured debt within rule 13.12(1) of the Insolvency Rules 1986 (IA86) and were not recoverable as an administration expense.

Decision

• The test set out by Lord Neuberger in the case of Re Nortel GmbH [2014] AC 209 was applied.
• The Companies became subject to the liability under the Deemed Contracts after the date of the administration by reason of an obligation that was incurred before the administration and therefore the debt was provable pursuant to rule 13.12(1)(b) of the IA86.
• Charges for periods where the relevant sites were not being used by the administrators were not an administration expense.

Case comments

• Utilities cannot achieve priority status over other creditors if the supplies have not requested by an administrator and the administrator is not using the premises for the benefit of the administration. Such supplies will rank as an ordinary provable debt.
• What is interesting to note in this case is that it seems that BGT did in fact request permission from the administrators to disconnect the supplies of gas and electricity to the Closed Stores but the administrators refused (to avoid a disconnection fee!).

Don't let the 'power' go to your head...

Whilst this decision brings much needed clarity for administrators, utilities companies may still opt to terminate existing contracts in the event of insolvency.  This will help them take advantage of higher rates afforded by statutory deemed contract terms. Administrators should therefore still keep any eye on this and liaise with the utilities companies where necessary.

For more information, help or advice please contact Claire Seddon on 0191 211 7991.