UK: Administration Expenses: The Next Instalment

Last Updated: 14 August 2014
Article by Ashely Katz, Devi Shah, David Allen and Jessica Walker

Keywords: administration expenses, High Court, British Gas Trading

The High Court has rejected the argument that amounts owing to British Gas Trading Ltd (BGT) under post-administration, deemed contracts for the provision of gas and electricity are automatically classed as expenses of the administration. The court has reserved for consideration, however, whether and if so how an administrator's conduct may give the liability super priority or bring the salvage principle into play.

Background and preliminary issue

The liquidators of the Peacocks group applied for directions in February this year to determine whether certain charges incurred under deemed contracts pursuant to Schedule 2B Gas Act 1986 and Schedule 6 Electricity Act 1989 should be treated as provable debts or administration expenses.

The liquidators argued that the charges are merely provable debts even though the deemed contracts came into existence after the date of administration because the charges relate to periods of usage after the administrators had ceased trading from the relevant stores or otherwise making use of them for the benefit of the administrations, on the basis that they arose out of obligations incurred prior to the entry of the group into administration.

BGT contended that the charges are "imposed by a statute whose terms render it clear that the liability to make the disbursement falls on the administrator as part of the administration – either because of the nature of the liability or because of the terms of the statute" (per Lord Neuberger in Re Nortel GmbH (In Administration) [2014] AC 209, paragraph 100 (the "Nortel Judgment")) and, as such, fall within the definition of "necessary disbursements" in Rule 2.67(1)(f) Insolvency Rules 1986.

In a judgment handed down last week, the court determined a preliminary point of law as to whether the charges were provable debts or administration expenses. The scope of the question was narrowed and based on a set of assumed facts to avoid the need for any substantive evidence on the facts of the case, namely (a) that the deemed contracts came into being after the date of administration; (b) the charges relate to a period after trading had ceased; and (c) "the charges do not relate to or arise out of anything done by the administrators or on their behalf in the course of the administrations".

The facts

BGT supplied gas and electricity to stores of the Peacocks group pursuant to written contracts for a fixed term from 1 April 2011 to 31 March 2012, subject to BGT's standard terms and conditions. The administrators were appointed on 19 January 2012 and BGT terminated those contracts in accordance with their terms on 20 January 2012 and 23 January 2012.

Notwithstanding the termination and without entering into any new express contracts with the companies in administration, BGT continued to supply gas and electricity to stores. Rather, BGT made the supply pursuant to deemed contracts, which commence the moment that either gas or electricity is supplied (under the Gas Code contained in Schedule 2B to Gas Act 1986 and the Electricity Code contained in Schedule 6 to the Electricity Act 1989 respectively). The terms on which the supply of each of gas and electricity is to be made are not set out in the applicable statutes, but in the scheme made by each supplier to determine the terms that are to apply to such deemed contracts. In BGT's case, these are the same as the standard terms and conditions that applied to the fixed-term express contracts.

After a period of trading, the administrators sold a large number of stores on 22 February 2012 and vacated the companies' other stores during February and March 2012. It appears that gas and electricity continued to be used in some stores even after they had been vacated – possibly because the landlord had re-let the store without accepting a surrender or squatters had taken possession. The companies were placed into compulsory liquidation on 19 July 2013 and the remaining 70 leases were disclaimed on 22 July 2013.

The administrators had paid for the gas and electricity used during the period in which the companies were trading, but BGT claimed that an additional £1.2m plus VAT was owing for the period after trading ceased as an expense of the administration.

The decision

The court considered first that for a charge under a contract to fall within the category of administration expense in Rule 2.67(1)(f) Insolvency Rules 1986 (necessary disbursements), there needs to be a "positive and conscious act" on the part of the administrators or someone on their behalf and that contract must contain all the terms agreed between the parties. A deemed contract under the Gas Code and the Electricity Code does not require any action by the recipient of the supply and its terms and conditions are not agreed by the parties but are determined by the supplier and imposed on the consumer. The charges were therefore not to be considered as expenses incurred in respect of a contract entered into by the administrators.

BGT argued that the liability under a deemed contract is similar to rating liabilities for two reasons:

  1. the deemed contracts came into force after the date of administration and the liabilities accrue on a daily basis; and
  2. the status of occupier for the purposes of ratings liabilities was analogous to the status of consumer or occupier under the Gas Code and Electricity Code.

However, the court found in respect of the first reason that the obligation to pay rates arises on each day as a new and independent liability, independent of any previous or future occupation rather than an ongoing contract with a daily rate, which is what the deemed contracts are. It also found in respect of the second reason that the continuing effect of the terms of the deemed contracts did not depend on the status of the company. The liability to pay rates depends on a positive act to start and end – to take occupation and to quit – whereas the deemed contracts under the Gas Code and Electricity Code start and end automatically; their terms did not even permit the consumer to require the supply to be disconnected. The deemed contracts were therefore not analogous to ratings liabilities.

The court agreed with the liquidators' arguments that it was unlikely, following Nortel, that Parliament would have given a supplier the unilateral ability to obtain priority over other creditors. The court also agreed with the liquidators' submission that the existence of section 233 Insolvency Act 1986 was indicative of the fact that Parliament did not intend liabilities under a deemed contract to have automatic priority; section 233 provides that a supplier of gas and electricity may require a guarantee from administrators as a condition for the continued supply, which guarantee would not be needed if there was automatic priority over other creditors in the Gas Code (which was enacted on the same day as the Insolvency Act) and the Electricity Code (enacted only three years later).

Having reached the view, therefore, that the charges were not expenses of the administration, the court then considered whether they satisfied Lord Neuberger's three-part test for provable debts (at paragraph 77 of the Nortel judgment) so that they fall within rule 13.12(1)(b) Insolvency Rules 1986. That test is whether the company has "taken or been subjected to some step or combination of steps which (a) had some legal effect..., and which (b) resulted in it being vulnerable to the specific liability in question... If these two requirements are satisfied, it is also... relevant to consider (c) whether it would be consistent with the regime under which the liability is imposed to conclude that the step or combination of steps gave rise to an obligation [to which the company may become subject after the date of administration]".

The court decided, taking each of the elements in turn, that Lord Neuberger's test was satisfied because:

  1. as soon as gas and/or electricity was supplied to the companies (before the appointment of administrators), they were bound by the statutory framework of the Gas Act 1986 and the Electricity Act 1989, which includes a liability to pay the costs of a deemed contract if one arises (the position is loosely analogous to the position of parties to litigation (highlighted in the Nortel Judgment at paragraph 136) as a participant in litigation is deemed to have submitted to the rules of the court, including rules regarding the potential liability to pay costs);
  2. immediately before the appointment of the administrators, the companies were "vulnerable to the specific liability" under a deemed contract, as it was highly likely that BGT would terminate the written fixed-term contracts following the appointment; as such, the companies came under an obligation incurred before the date of administration; and
  3. this approach is entirely consistent with the regime in the Gas Act 1986 and the Electricity Act.

Accordingly, the charges under the deemed contracts are provable debts and ordinary unsecured liabilities.

Comment

This judgment is helpful in identifying another statutory charge that will not be classed automatically as an expense of an administration or liquidation. However, the specific limited scope of the preliminary issue that the court addressed means that there is still a risk that charges such as these could rank as expenses; the issue that was considered was whether the charges would rank as expenses if "the charges do not relate to or arise out of anything done by the administrators or on their behalf in the course of the administrations". The court did not touch on what that might mean and it is still open to BGT to put forward either or both of its alternative arguments:

  1. that the administrators did indeed do something that means that the charges have priority. Indeed, the court noted the administrators had refused to allow the supply to be disconnected by BGT; while this may have been because a disconnection fee would have been applied, it may indicate one potential way in which BGT could argue that the administrators' conduct gives rise to the charges ranking as an expense; or
  2. that the charges are provable debts that should be given administration expense status by virtue of the salvage principle as identified in Re Lundy Granite Co (1870-71) LR 6 Ch App 462.

Until a court determines this issue, administrators will find themselves in the difficult position of having no clear guidance as to what constitutes "something done in the administration".

One of the ways in which administrators might attempt to avoid incurring administration expenses, is to draft specific provisions into post-appointment contracts to state unequivocally that charges will not be deemed to be expenses once the administrators have given notice to the supplier, giving the administrator the opportunity to limit the liability. This approach is not without problems, however, as it creates an additional administrative burden for the administrators and suppliers may not be willing to make supplies on that basis. This also does not address the question of the salvage principle, which may still apply and has not yet been considered by the court. This area of law will undoubtedly continue to develop and the approach taken by administrators will need to develop in line with it.

Originally published August 2014

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