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High Court Decision has Important Impact for Insolvency Professionals and Creditors

04 August 2014

4 August 2014 - The liquidators to the Peacocks group (being officeholders from KPMG), advised by Hogan Lovells, obtained an important ruling from the High Court on 31 July, concerning the priority of utility charges arising under statutory deemed contracts. The High Court ruled that charges for closed stores relating to the period after the administrators ceased trading are provable debts, and not administration expenses with priority over other unsecured creditors and floating charge holders.

Commenting on the ruling, Chris Laverty, restructuring partner at KPMG and one of the liquidators, said:

The ruling by the High Court has clarified the position for administrators and we welcome the clear direction it offers. As administrators, we work closely with multiple suppliers to rescue distressed businesses for the benefit of all creditors. Having clear rules to work to greatly assists us to manage these relationships, and enables us to do our job”.

Mathew Ditchburn, partner in Hogan Lovells real estate disputes team who represented Peacocks' liquidators, said:

"If the utility supplier’s claim that these charges were an administration expense had succeeded it would have meant that they were entitled to be paid for utilities – in full, in priority to other creditors – even though the utilities were never requested and were supplied to premises after the 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.  This cannot be what Parliament intended and it will be a relief to office holders and other creditors that the Court thought so as well

The Background
In January 2012, officeholders from KPMG were appointed as administrators of the Peacocks retail chain.  Upon administration, a major utility supplier terminated all supply contracts with the result that new deemed supply contracts arose under the terms of the Gas Act 1986 and the Electricity Act 1989.

After the administrators sold the business in February 2012, 224 Peacocks stores were closed, about 177 of which were supplied with electricity and gas by the major utility supplier. The administrators agreed to settle the charges for the period during which they traded from the stores, but disputed their liability to pay any ongoing charges, totaling about £1.2 million, which were made up of fixed standing charges and ongoing usage at some of the stores.

The utility supplier claimed that as the deemed contracts had arisen during the period of the administration, the ongoing charges were automatically an administration expense, irrespective of whether the charges had been incurred as a result of the conduct of the administrators or for their benefit.  The administrators argued that the charges were no more than provable debts (ie unsecured claims), and the dispute was taken to Court.

The Ruling
The Chancellor of the High Court, who heard the case (Christine Mary Laverty and others as Joint Liquidators of PGL Realisations PLC and others v British Gas Trading Limited), 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 utility supply contracts are terminated after the company enters insolvency and new contracts are deemed to arise between the supplier and the company under statute, liabilities incurred under those contracts are not automatically treated as administration expenses simply because they arose during the course of the administration.  Although they were technically new contracts, they arose because the company had fallen within the scope of the deemed contract regime before the administration and so were provable debts under the Insolvency Act 1986.  There was nothing in the Gas or Electricity Acts or in the nature of the liability to indicate that Parliament intended anything else.

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