As has been widely reported, recent energy price volatility (coupled with price caps limiting the ability of suppliers to pass increased costs on to consumers) has led to a number of supply company failures. of energy. Yesterday came the news of the bankruptcy of Bulb, one of the UK’s largest energy suppliers, which is expected to be placed under special administration very soon.
This is the first special energy administration we have seen. How are the insolvency rules different for energy companies? What is a special administration, and why is it the first?
How are the rules different for failed suppliers?
The Energy Law of 2004 (as amended by the Energy Law of 2011) (âEnergy Lawâ) creates a parallel insolvency regime for (among others) energy suppliers. The essence of this is that providers cannot enter administration without notifying Ofgem and these notification requirements create a 14 day “limbo” period.
Normally, a company enters into administration at the time and date indicated on the notice of appointment of directors (“NOA”), or on the date ordered by the court in the case of an administrative appointment ” to the court “.
Given the sensitivity of energy companies and the need to ensure continuity of supply to consumers, the energy law adds an additional step to the entry into procedure of an energy supplier; administration cannot take effect for 14 days after a “copy of any document relating to the appointment which is filed or filed with the court”. In other words, once the notice has been filed and approved (and directors would normally be appointed), there is an additional 14 days. Naturally, insolvency practitioners may be reluctant to make appointments on this basis as they find themselves in a very difficult position vis-Ã -vis clients, creditors and other stakeholders, but without being able to take the decisive actions that directors must take early in an insolvency.
What is a special administration?
The purpose of the 14 day notice period is to ensure that Ofgem is involved in the process and can act to protect consumers. It also allows the Secretary of State or Ofgem (with the consent of the Secretary of State) to decide whether to apply to the court for a special administration order and to appoint a special administrator.
A special administrator has the obligation to manage the company according to certain objectives, which differ from those applicable in an ordinary administration. They must continue to supply customers until the business is rescued, sold, or its customers are transferred to other suppliers.
A special administrator must act in accordance with the objectives of the special administration, while also acting in a manner that best protects the interests of the creditors of the defaulting supplier as a whole. The primary objective of a special administration is to maintain the energy supply at the lowest cost that is reasonably possible.
In addition, the UK government may provide financial support (grants, loans or guarantee) to a special administration business to achieve the targets, so the cost of special administrations to the public sector could be a reason for their limited use. Ofgem’s policy is that a special administration should alone be considered when the use of SoLR powers is not possible (see below). In Bulb’s case, the SoLR scheme may not have been an appropriate measure due to the size of the customer base that would have required an SoLR to support all of Bulb’s roughly 1.7 million customers. .
What usually happens?
The restrictions in the Energy Act only apply to companies that hold a ârelevant licenseâ. Therefore, once a company no longer holds a supply license, it is free to initiate appropriate insolvency proceedings in the usual way.
Ofgem has a process known as the Supplier of Last Resort (âSoLRâ) scheme, the purpose of which is to streamline the process for energy suppliers to enter insolvency proceedings and to allow revocation of energy licenses. supply. Ofgem’s SoLR tips can be found here, but in essence the process is:
- Ofgem asks the court for a declaration of insolvency with regard to the company
One of the grounds for revoking a supply license is insolvency on a balance sheet or cash flow basis, largely in accordance with Section 123 of the Insolvency Act 1986 (except that any unsatisfied debt must be at least Â£ 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 pass judgment on the solvency and s ‘will therefore rely on a court order.
Normally, Ofgem and the defaulting supplier will cooperate in this process, so Ofgem will bring a claim to court with the benefit of a witness statement from a director of the defaulting supplier. This witness statement will set out the history of the defaulting supplier, the reasons for the insolvency and will confirm that the defaulting supplier does not object to obtaining a statement of insolvency.
- Once the insolvency declaration has been obtained, Ofgem will select an SoLR
The guide sets out the considerations that Ofgem will take into account when selecting an SoLR (including the impact on existing clients of potential SoLRs and whether the potential SoLR would take on clients’ credit balances). Ofgem’s preference is to select an SoLR on a consensus basis, but Ofgem has the power to impose SoLR status on a supplier.
In practice, an SoLR procedure is generally launched on Tuesday or Wednesday, when Ofgem knows that the legal request is imminent. Ofgem will then take a few days to allow potential SoLRs to âvolunteerâ and Ofgem to select an SoLR.
- The supply license will be revoked with 24 hours notice
Once an SoLR has been chosen, Ofgem will formally inform the failing supplier that its license (s) will be revoked within 24 hours.
- Once the supply license is revoked, the SoLR will be appointed and will take care of the customers of the defaulting suppliers.
In practice, this tends to be effective overnight from Saturday to Sunday (notice of revocation being sent on Friday evening). From the time and date of the transfer, the SoLR will have a âdeemed contractâ with each customer (which may be at a different price from the price with the defaulting supplier). The âdeemed contractâ lasts 6 months, unless the customer switches to another contract (with the SoLR or another supplier).
- The defaulting supplier is able to initiate the appropriate insolvency process in the usual way (i.e. a cancellation notice can be filed and will take effect at the time and date therein. are registered) once the transfer of SoLR has been completed,
Once the defaulting supplier has entered the appropriate insolvency process, the designated PI will work closely with the SoLR with the aim of trying to achieve a smooth transition, process final invoices, debt collection, etc.
So what’s next ??
As this is the first special administration for an energy supplier, apart from the fact that the purpose of the administration is different, we do not know exactly what will happen next or how the administration process will be carried out.
bulb website (and the Energy Law) make it clear that the Special Administrator will continue to supply energy to customers and protect customers’ credit balances.
At the time of writing, it is understood that a special administrator would be appointed “shortly”, but it was not clear who it would be and when exactly the special administration would take effect (given that a court order is pending). required), so watch this space to see what happens next.