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  admin- istrators 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 enter- ing 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 “posi- tive 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 adminis- trator 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.