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Utilities companies are denied priority over other creditors in administration

Ed Boyle
Director, KPMG
Mathew Ditchburn
Partner, Hogan Lovells

The High Court handed down judgement at the end of July 2014 in the case of Laverty and others as Joint Liquidators of PGL Realisations PLC and others v British Gas Trading Limited. In an important decision for the insolvency industry, it was held that the statutory deemed contracts regime for gas and electricity supply did not give utilities companies priority over other creditors.

The case concerned the Peacocks group, which operated a retail chain when it collapsed into administration in January 2012. At that time, one Peacocks company 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 appointment.

The Electricity and Gas Codes provide that where there is no express 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, by virtue of the leases in place, one or other of the companies in the group fell within those definitions and so deemed contracts 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. When the administrators sold the business in February 2012, they closed the remaining 224 stores (177 of which were supplied by British Gas) and ceased trading. Although those stores were by that stage empty, the deemed contracts continued.

The administrators accepted that the cost of utilities supplied to the stores while they continued to trade from them was an expense of the administration (on the basis that the administrators were deriving benefit from the supplies). However, as the landlords of a substantial number of the closed stores did not accept the administrators’ offer to surrender the leases, significant additional charges (comprising fixed standing charges and ongoing usage at some stores) accrued after the administrators had vacated.

The administrators contended that any charges accruing once the stores had been vacated ranked as unsecured claims provable in the administration. British Gas claimed that the ongoing charges, totalling about £1.2m, were automatically an expense because the deemed contracts had arisen during the administration, even if the charges had not 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. The Court concluded that if utilities contracts are terminated after the company enters insolvency and new contracts are deemed to arise under statute, 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-existing “obligation” within the meaning of the Insolvency Act 1986, as the companies had fallen within the scope of the deemed contracts regime as soon as the group took supplies from British Gas, which was before the administration. 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 (i.e. unsecured claims). On that basis, the charges were provable and not expenses of the administration.

If the Court had found that the deemed contract charges were automatically an administration expense, 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 make an administration unfeasible.

The status of a leasehold property after an administrator has closed it down, has no further economic interest in it and has offered a surrender of the lease to the landlord, remains an area of frustration, as this case highlights. Unless there is a new tenant ready to move in, a landlord will often not accept the offer of surrender for months or even years in order to avoid liability for ongoing rates on the empty property. This leaves the company exposed to various statutory liabilities associated with property occupation like deemed utilities contracts, Council Tax, the Occupiers Liability Act and environmental legislation.

From the landlords’ perspective, they will still want the property to be insured, secured and have a utility supply (for example to power the alarm and enable any roller shutter on the entrance to be operated). In future, when properties are vacated by administrators, it is possible that utilities companies may seek to disconnect electricity and gas meters unless the landlord agrees to pay for ongoing supplies.

The decision will be welcomed by supporters of the rescue culture and could be seen as continuing the trend set by Nortel GmbH and Games Station from earlier this year that, to quote Lord Neuberger, “all possible liabilities within reason should be provable”.


Ed Boyle is a director in KPMG’s restructuring practice and is a joint liquidator (formerly a joint administrator) of companies within the Peacocks group.

Mathew Ditchburn is a partner in the real estate disputes team at Hogan Lovells and acted for the administrators and liquidators of the Peacocks group.


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Posted on 12th August 2014 by

 

 

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