Distressed energy supply companies: further guidance for officeholders and stakeholders | Allen & Overy LLP

Utility Point: the English High Court provides directions on key aspects of the supplier of last resort regime.

Key Takeaways

  • The decision handed down last Friday (11 November) in Re Utility Point Limited and Ors [2022] EWHC 2826 (Ch) provides some much-needed clarity on a number of previously untested legal issues relating to the liabilities of insolvent energy supply companies (ESCs) that have undergone the ‘Supplier of Last Resort’ (SoLR) process. The judgment also clarifies the law on the provability of liabilities in respect of the ‘renewables obligation’, being an obligation of suppliers of electricity to provide certificates certifying that they have acquired electricity from renewable sources ie ‘renewable obligations certificates’ (ROCs), or to make a payment in lieu of producing sufficient ROCs (buyout payment).
  • The High Court (Court) ruled that an insolvent ESC whose license is revoked (a Failed Supplier) continues to owe monies in respect of its renewables obligation incurred prior to the appointment of the SoLR, notwithstanding the revocation of its license. The Court ruled that an ESC’s liability to make so-called buyout payments with respect to a failure to discharge its renewables obligation in full solely by provision of ROCs by 1 September is (a) prior to 1 September, a contingent liability (the contingency being the supplier not satisfying its renewables obligation by providing sufficient ROCs by that date); and (b) after 1 September, an actual obligation that continues beyond 31 October (notwithstanding the existence of a mutualisation scheme being available with respect to the relevant liabilities after 31 October, subject to a certain threshold of liabilities being reached).
  • The Court further ruled that the relevant SoLR does have a claim in unjust enrichment against a Failed Supplier’s estate for the credit balances of former customers that it has assumed, paid or otherwise honored as part of the SoLR process.
  • The Court noted that there were too many unknown variables to address one of the legal issues raised, viz. whether the customers have a proprietary claim in constructive trust to the payments made to the Failed Suppliers pursuant to direct debit arrangements after the making of the last resort supply direction order in respect of the relevant Failed Supplier, but before the transfer of the direct debit mandates to the SoLR could be effected. The position therefore remains uncertain.

Brief Background

The case was brought by the liquidators and administrators of eight collapsed companies (Applicants) that were formerly licensed under the Electricity Act 1989 (EA 1989) and the Gas Act 1986 (GA 1986).[1] The licenses of each of the companies[2] were revoked by the Gas and Electricity Markets Authority (GEMA) following a determination by the court that such company was unable to pay its debts, and each company’s customers transferred to the so-called ‘suppliers of last resort’. The Applicants approached the Court seeking directions relating to the precise obligations which arise under the statutory regime governing the supply of electricity and how those obligations should be treated in an insolvency process.

The first set of issues were concerned with the Failed Suppliers’ renewables obligations pursuant to the EA 1989 and the Renewables Obligation Order 2015 (ROO15)[3] which requires a supplier to provide ROCs to GEMA in an amount as notified to them by 1 October of each year preceding an obligation period (an obligation period running from 1 April to 21 March annually) or to make a buyout payment in lieu of producing sufficient ROCs. The buyout payment is to be made before September 1 in the following obligation period, the following obligation period then defined as the ‘settlement period’[4]. The Court was asked to determine whether the Applicants are subject to a payment obligation in relation to the Failed Suppliers’ renewable obligations for which GEMA may prove in the Applicants’ insolvency estates. The Applicants contended that a supplier comes under no liability to make a payment in respect of its renewables obligation on the basis that the ‘mutualisation scheme’ under ROO15 (as described in paras 27-35 of the judgment) is intended to replace any liability that had arisen in respect of the renewables obligation. Alternatively, they contended that if any liability did arise, it ceased to exist on October 31 in the settlement period when the mutualization provisions were triggered.

The second set of issues related to a possible claim by a SoLR against a Failed Supplier arising out of the fact that the SoLR honored the credit balances of the former customers of the Failed Supplier. The Court was required to consider principles of the law of unjust enrichment, which formed the only basis for claims by SoLRs against the Applicants in the absence of a direct contractual relationship between the two.

Court’s decision

On the first issue relating to Applicants’ payment obligations in respect of their renewables obligations, the Court interpreted the renewables obligation as comprising of a primary obligation on a supplier to provide ROCs by September 1, and a secondary obligation, to the extent that it does not provide ROCs, to make the buyout payment to GEMA. The liability to make the buyout payment is contingent on the supplier not having satisfied its renewables obligation by providing ROCs prior to 1 September, and ultimately crystallizes as of 1 September. Further, the Court held that the liability continues beyond 31 October, notwithstanding the existence of the mutualisation scheme from that date. The Court noted that this interpretation better reflects the purpose of ROO15, and that the alternate interpretation as proposed by the Applicants would disincentivise suppliers from complying with their renewables obligations.

On the second issue relating to SoLR’s claims against the Applicants for the credit balances of customers, the Court considered the authorities on the requirements of (i) request, authority or ratification, (ii) compulsion and (iii) payment being made at the expense of the claimant, to establish unjust enrichment. Applying the principles to the facts of the present case, the Court concluded that the payment of the credit balances by the relevant SoLR was implicitly requested / ratified by the Failed Supplier and was made under compulsion, for the purposes of giving rise to an equitable entitlement (on the part of the SoLR) to be subrogated to the customers’ claims against the Failed Supplier. Further, the Court ruled that the enrichment of the Failed Supplier (ie the discharge of its debt to the customers) was at the expense of the SoLR, and could not be treated as merely ‘incidental’ or ‘collateral’ to the reason why the SoLR honored the credit balances.

Closing comments

This case provides further guidance in relation to how matters relating to failed ESCs may be dealt with by officeholders and the court, an area which continues to build and evolve at pace in light of the energy supply crisis and consequent impact on ESCs.

While this article focuses on matters relating to the SoLR process, we also refer you to our previous alert concerning the energy supply company administration regime which was published following Bulb Energy Limited becoming the first ESC to enter into the special administration regime on 24 November 2021.

The written judgment for Re Utility Point Limited and Ors [2022] EWHC 2826 (Ch) can be found here.

Footnotes

1. Note that Zacaroli J observed at [6] that there is no material difference between the provisions of the GA 1986 and the EA 1989 or the respective statutory instruments made under them. His Honor therefore referred to the relevant provisions of the EA 1989 and the statutory instruments made under it throughout his judgment for simplicity.

2. Other than PFP Energy Limited, which did not hold a license at the time it became insolvent.

3. Or in Scotland, the Renewables Obligation (Scotland) Order 2009 which is substantially the same.

4. Note there is also a further grace period called the “late payment period” which runs from 1 September to 31 October in the settlement period.

Back to top button
MONTAGNEDISTRIBUTION