Stuck with the bill—are administrators responsible for utility costs?

Restructuring & Insolvency analysis: Mathew Ditchburn, partner at Hogan Lovells, and Ed Boyle, director at KPMG, consider the decision in Laverty v British Gas Trading. They say the decision clarifies how the principle established by the Supreme Court in Nortel should apply to certain property and other liabilities arising following an administration appointment.

Original news

Laverty and others v British Gas Trading Ltd [2014] EWHC 2721 (Ch), [2014] All ER (D) 76 (Aug)

The trial of a preliminary issue was ordered, concerning the priority to be given to the payment of certain charges owed to the respondent company for gas and electricity supplied to retail premises after companies in liquidation had entered into administration and after they had been vacated by the companies. The Companies Court held that liability under the deemed contracts was provable, pursuant to the Insolvency Rules 1986, SI 1986/1925, r 13.12(1)(b) as a liability to which the companies had become subject after the date of administration by reason of an obligation incurred before that date.

What were the facts in this case?

British Gas supplied utilities to stores owned and operated by the Peacocks group of companies. The companies went into administration in 2012. Relying on a break right they had in the event of insolvency, British Gas terminated their supply contracts with the companies, but continued to supply gas and electricity to the Peacocks stores. As the utilities were supplied other than pursuant to express contracts, contracts were deemed to arise under the Gas Act 1986 and the Electricity Act 1989.

Following administration, a number of the Peacocks stores were sold and others vacated. However, the deemed contracts endured and charges continued to accrue on the 177 vacant Peacocks stores still being supplied gas and electricity by British Gas.

What were the main legal arguments arising?

The administrators accepted that utilities costs for gas and electricity supplied to the Peacocks stores during the administration while the companies were still a trading business was an administration expense. However, they refused to pay charges that had accrued once all the stores had been vacated, totalling about £1.2m. British Gas argued that the charges arising under the deemed contracts were automatically an administration expense, irrespective of whether the charges had been incurred as a result of something done by the administrators or for their benefit.

The subsequently appointed liquidators of the Peacocks companies argued that the charges were provable debts under the Insolvency Rules 1986, which meant that they ranked for dividend and were payable proportionately out of whatever remained (if anything) of the companies’ assets once administration expenses had been paid in full. British Gas argued that the charges were administration expenses, payable in priority to other debts.

In doing so, British Gas relied heavily on earlier cases concerning business rates. These provide that, if a company took out a lease on a property but then went into administration and stopped using the property, it is still nevertheless liable to pay the rates as an expense of the administration. This is because the company remains in rateable occupation (ie it has a right to occupy the property) for as long as the lease exists. It has nothing to do with the conduct of the administrators in respect of the properties or any benefit they may be deriving from them. British Gas argued that the position in relation to deemed utilities contracts ought to be analogous to rates.

What was the decision of Judge Etherton?

The judge had to decide whether the charges that had accrued after the administration appointment and following the vacation of the Peacocks stores by the administrators were, under the Insolvency Rules 1986:

  • provable debts, or
  • an administration expense

The judge held that the cost of the supply of electricity and gas is not an expense of the administration, but rather a provable debt.

The question of what are ‘provable debts’ within the Insolvency Rules 1986 was considered in the Supreme Court’s Nortel judgment (Re Nortel GmbH (in administration) and other companies and other appeals [2013] UKSC 52, [2013] 4 All ER 887) regarding pensions liabilities. The starting point is that all the company’s debts at the time of administration are provable. However, ‘debt’ has quite a broad definition and includes any liability to which the company became subject as a result of an obligation entered into by the company before the administration. The Supreme Court said that a company had incurred an ‘obligation’ if it had taken some steps which had legal effect and resulted in the company being vulnerable to the liability in question.

In relation to the Peacocks companies, they had become vulnerable to the liability under deemed contracts as soon as they entered into supply contracts with British Gas that were determinable in the event of insolvency. This was sufficient to mean that charges under the deemed contracts arose out of a pre-administration obligation and so were merely provable.

The court held that there was a difference between the liability to pay business rates and the liability to pay utilities charges under a deemed contract. A deemed contract does not terminate when the customer ceases to have a right to occupy the premises. The terms and conditions of deemed contracts, including as to termination, are for the utilities companies to decide. All the legislation did was stipulate when deemed contracts were to arise and, other than that, there is very little legislative control over their terms. British Gas’ deemed contracts incorporated their standard terms and conditions, which provided that the customer would remain liable under the contract until they found a new customer to take over liability for supply who was acceptable to British Gas. This was different to the liability to pay rates, which arose on a daily basis depending solely on whether the ratepayer remained in rateable occupation.

To what extent is this judgment helpful in clarifying the law in this area?

The court’s decision was very much informed by the specific facts in this case. Certainly in the context of deemed utilities contracts, it has clarified things—deemed contracts are not automatically an administration expense simply because they arise after the appointment of administrators.

There might be a degree of sympathy for the utilities companies in these situations, who may find that they have no-one liable to pay for supply but no easy means of disconnecting it (which usually requires someone to access the premises to disconnect manually, for which they will either need the occupier’s permission or a court order). In light of this ruling, utilities companies might try to persuade landlords of companies in administration to sign up to new utilities contracts, failing which they will have to disconnect. It’s likely that landlords are going to be high on the utility companies’ list of targets in terms of finding somebody else to take on the liability for utilities charges.

The judgment is also helpful in that it gives us some guidance in practice on how to apply the Nortel decision to different types of liabilities beyond the pensions regime. Everyone appreciates that Nortel is a very important decision but there remain a number of unanswered questions about how it should be applied to other liabilities—including those arising out of property occupation, such as health and safety and environmental liabilities. In that respect, Laverty is an important new piece of the jigsaw indicating what type of approach might be taken in future cases.

What practical lessons can those advising take away from this case?

Administrators should be wary of the possibility of liabilities arising under statute for unoccupied properties and that these could potentially be treated as an administration expense. Short of getting further guidance from the court as to whether these kind of liabilities are going to be considered as administration expenses or provable debts, or legislative change, one practical solution in the short term may be to put the company into liquidation and disclaim the deemed contracts, as well as the leases, as soon as practically possible.

Landlords need to be aware of the possibility of a more proactive approach being taken by utilities companies, who may disconnect services unless landlords enter into a new contract for supply.

Further reading

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First published on LexisPSL Restructuring and Insolvency

Interviewed by Duncan Wood.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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