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Utilities companies denied power to take priority over other creditors in administration
The case concerned the Peacocks retail chain, which collapsed into administration in January 2012. Officeholders from KPMG, advised by Hogan Lovells, were appointed administrators to various companies within the Peacocks group.
At the time of the administration, one of the companies held a series of gas and electricity supply contracts with British Gas on behalf of the group. It was a term of the contracts that if the company appointed administrators then British Gas could terminate the contracts, which it did shortly after the administration appointment.
Legislation provides that where there is no express supply contract in place, one will be deemed to exist for any supply of utilities made. Under the Gas Code, the deemed contract is between the supplier and the "consumer". Under the Electricity Code it is with the "occupier" or "owner" of the property. When British Gas terminated the express contracts, one or other of the companies fell within those definitions and so deemed contracts for the supply of gas and electricity were imposed on them.
The terms of deemed contracts are for the relevant utilities companies to determine. British Gas' terms included that the deemed contract would continue, even after the customer had vacated the premises supplied with gas or electricity, until someone else that British Gas accepted as a customer took over the supply. After the administrators had sold the business, they ceased trading and closed the remaining 224 stores, 177 of which were supplied by British Gas. Although those stores were by that stage empty, the deemed contracts continued.
The administrators accepted that the cost of utilities supplied to the stores during the administration while the companies continued to trade from them was an expense of the administration, but considered that any charges accruing once the stores had been vacated ranked as unsecured claims provable in the administration. British Gas claimed that ongoing charges totalling about £1.2 million (comprising fixed standing charges and ongoing usage at some stores) 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 dispute was taken to Court.
The Chancellor of the High Court, who heard the case, applied the test set out by Lord Neuberger in the landmark Supreme Court decision of Nortel GmbH from July 2013, on which Hogan Lovells also advised, in relation to pension liabilities.
The Court concluded that if pre-administration utilities contracts are terminated after the company enters insolvency and new contracts deemed to arise under statute, the liabilities under those deemed contracts are not treated as administration expenses simply because they arose during the administration. Although technically new contracts, the deemed contracts had arisen out of a pre-administration "obligation" within the meaning of the Insolvency Act 1986 as the companies had fallen within the scope of the deemed contract regime as soon as the group took supplies from British Gas. Equally, there was nothing in the Gas or Electricity Codes, or in the nature of the liability, to indicate that Parliament intended that the liabilities under the deemed contracts should rank as anything other than provable debts. On that basis, the charges were held to be provable debts.
If British Gas had succeeded it would have meant that utilities companies would be able unilaterally to achieve priority over other creditors in respect of supplies that were never requested and made to premises after administrators had closed them. For a property-heavy business like a retailer, that could be a significant liability. In certain circumstances it could put the administration process into jeopardy.
The decision is a timely one as it coincides with the Government's current consultation on introducing legislation which, amongst other things, would invalidate termination clauses in utilities contracts triggered by insolvency. It does not obviate the need for the consultation as utilities companies may still, for example, terminate contracts to get the benefit of non-discounted rates under their standard deemed contract terms, even if they do not gain automatic priority.
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