Civil Law

As has been widely reported, the recent energy price volatility (coupled with the price cap limiting suppliers’ ability to pass increased costs on to consumers) has caused a number of energy supply company failures. Yesterday saw the announcement of the collapse of Bulb, one of the UK’s largest energy suppliers, with it being due to be placed into special administration very shortly.

This is the first energy special administration we’ve seen. So how are the insolvency rules different for energy companies? What is a special administration, and why is this the first one?

How are the rules different for failed suppliers?

The Energy Act 2004 (as amended by the Energy Act 2011) (“Energy Act”) creates a parallel insolvency regime for (amongst others) energy suppliers. The essence of this is that suppliers cannot enter into administration without notifying Ofgem and these notification requirements create a 14 day “limbo” period.

Ordinarily, a company enters into administration at the time and date endorsed on the notice of appointment of administrators (“NOA”), or the date ordered by the court if it is an “in court” administration appointment.

Given the sensitivity with energy companies and the need to ensure continuity of supply to consumers, the Energy Act adds an additional step to an energy supplier’s entry into administration; the administration cannot take effect until 14 days after a “copy of every document in relation to the appointment that is filed or lodged with the court”. In other words, once the NOA has been filed and endorsed (and the administrators would ordinarily be appointed), there is a further 14 day time-lag. Understandably, insolvency practitioners can be reluctant to take appointments on that basis as they are left in a very difficult position dealing with customers, creditors and other stakeholders but with no power to take the decisive action administrators need to take at the beginning of an insolvency.

What is special administration?

The purpose of the 14 day notice period is to ensure that Ofgem are involved in the process and can act to protect consumers. It also enables the Secretary of State or Ofgem (with consent of the Secretary of State) to decide whether to apply to Court for a special administration order and appoint a special administrator.

A special administrator is under an obligation to run the company in accordance with certain objectives, which differ from those applicable in an ordinary administration. They must continue to supply customers until the company is either rescued, sold or its customers transferred to other suppliers.

A special administrator must act consistently with the special administration objectives, whilst also acting in a way that best protects the interests of the creditors of the failed supplier as a whole. The primary objective of a special administration is to continue energy supplies at the lowest cost which it is reasonably practicable to incur.

In addition, the UK government may provide financial support (grants, loans or a guarantee) to a company in special administration to achieve the objectives, so the cost of special administrations to the public sector could be a reason for their limited use. Ofgem’s policy is that special administration should only be considered where use of SoLR powers isn’t practicable (see further below). In the case of Bulb, the SoLR regime may not have been an appropriate course of action because of the size of the customer base which would have required a SoLR to take onboard all of Bulb’s c1.7million customers.

What usually happens?

The Energy Act restrictions only apply to companies who hold a “relevant licence”. Therefore, once a company no longer holds a supply licence, it is free to enter into an appropriate insolvency process in the usual way.

Ofgem have a process called the supplier of last resort (“SoLR”) regime, the purpose of which is to streamline the process for energy suppliers to enter into insolvency processes and enable supply licences to be revoked. Ofgem’s SoLR guidance can be found here, but in essence, the process is:

 

1. Ofgem applies to court for a declaration of insolvency in respect of the company

One of the grounds for revocation of a supply licence is insolvency on a balance sheet or cash flow basis, largely in accordance with section 123 Insolvency Act 1986 (save that any unsatisfied debt must be at least £100,000). Ofgem’s policy (which is not universally accepted as the correct interpretation of the legal position, but has become common practice) is that neither it nor the directors are empowered to make judgment calls on solvency and will therefore rely on a court order.

Ordinarily, Ofgem and the failed supplier cooperate in this process, so Ofgem will make an application to court with the benefit of a witness statement from a director of the failed supplier. This witness statement will set out the background to the failed supplier, the reasons for the insolvency and confirm that the failed supplier does not object to a declaration of insolvency being obtained.

 

2. Once a declaration of insolvency is obtained, Ofgem will select a SoLR

The guidance sets out considerations Ofgem will take into account when selecting a SoLR (including the impact on the prospective SoLRs existing customers and whether the prospective SoLR would take on customer credit balances). Ofgem’s preference is to select a SoLR on a consensual basis, but Ofgem does have the power to force SoLR status on a supplier.

In practice, a SoLR process is usually launched on Tuesday or Wednesday, when Ofgem knows the court application is imminent. Ofgem will then take a couple of days to allow for prospective SoLRs to “volunteer” and for Ofgem to select a SoLR.

 

3. The supply licence will be revoked on 24 hours’ notice

Once a SoLR has been chosen, Ofgem will formally notify the failed supplier that its licence(s) will be revoked in 24 hours’ time.

 

4. Once the supply licence has been revoked, the SoLR will be appointed and will take on the failed suppliers’ customers

In practice, this tends to be effective overnight on a Saturday into a Sunday (with the revocation notices being sent on a Friday evening). From the time and date of the transfer, the SoLR will have a “deemed contract” with each customer (which may be at a different price to the price with the failed supplier). The “deemed contract” lasts for 6 months, unless the customer moves on to another contract (with the SoLR or another supplier).

 

5. The failed supplier is able to enter into the appropriate insolvency process in the usual way (i.e. a NOA can be filed and will take effect at the time and date endorsed on it) once the SoLR transfer has taken place,

Once the failed supplier has entered into the appropriate insolvency process, the appointed IP will work closely with the SoLR in an effort to try to achieve a seamless transition, deal with final bills, collection of debts etc.

 

So, what’s next??

As this is the first special administration for an energy supplier, aside from noting that the purpose of administration is different, we don’t know exactly what will happen next or how the administration process will be run.

Bulb’s website (and the Energy Act) make it clear that the special administrator will continue to supply energy to customers, and will protect customer credit balances.

At the time of writing, it is understood that a special administrator would be appointed “shortly”, but it wasn’t clear who that would be and when exactly the special administration would take effect (given a court order is required), so watch this space to see what happens next.

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