As winter draws near, the days grow shorter, temperatures dip, and businesses will be turning on the lights longer and the heating up higher; all leading to higher energy bills. But, with continuing volatility in the energy market, how many businesses can afford to do so and will energy bills sound their death knell?
The government stepped in recently with a package of relief to assist with rising prices until at least April 2023 but help is not guaranteed after that. What then for businesses, especially heavy energy use businesses from construction/manufacturing to farming/livestock, frozen food and drink right down to your local pub or corner shop? Could this be the waterfall moment to tip these businesses into insolvency?
This reminded me recently of a small provision in the Insolvency Act that has probably, to date, been often overlooked by many but which I predict may begin to garner more attention and significance next year.
Section 233 applies to administrations, liquidations, CVAs, provisional liquidations and receiverships. It governs the continued supply of essential supplies i.e. gas, water, electricity by energy providers to businesses that enter insolvency. Section 233 was heavily amended by regulations made in 2015 following the historic practice by these large energy providers to threaten to turn off the taps/lights/pipes unless arrears were paid in full before agreeing to continue supplying services. Clearly, for many businesses, without essential supplies continuing, the prospect of a rescue would be impossible and energy providers ended up in a preferential (not in the technical sense) creditor position as there was no choice but to pay them in circumstances in which they would otherwise be unsecured. The amendments made to Section 233 prohibits that old practice and draws a distinction between the pre-insolvency debts for these essential supplies (see s233(2)(b) where it’s now prohibited to insist on payment of arrears in full) and post insolvency debts.
As to the latter, section 233(2) provides that suppliers can impose a condition on future supply that the office holder give a personal guarantee to pay the energy charges going forward as a condition of continued supply.
For administrations, it is also important to keep in mind the provisions of the moratorium protection provided in paragraph 43 of Schedule B1 of the Act. This prevents third parties (including energy suppliers) from taking steps to enforce any security, repossess goods (e.g. smart meters) or institute or continue any legal process against the company without either administrator consent or order of the court. That part should be read in conjunction with section 233A that grants further protection to the supply of essential services in administrations and CVAs (though note it does not apply to other insolvency events e.g. liquidations). Section 233A voids the effect of any clause in a contract that would seek to automatically terminate the contract on occurrence of an insolvency event (i.e. the ipso facto clause).
However, the supplier can still terminate the contract and supply under certain conditions:
- Firstly, it can terminate the contract if the office holder consents or the court grants permission. Permission will only be granted if continued supply will, in the court’s view, cause the supplier hardship or, if any charges incurred post administration (or CVA taking effect) are not paid within 28 days of the due date.
- Secondly, supply can be terminated only if the supplier gives written notice to the office holder that it requires a personal guarantee for future charges and that guarantee is not provided within 14 days of notice being served.
Whilst most, if not all, office holders will shy away from giving any personal guarantee where possible, given the energy crisis shows no signs of abating any time soon, it will be interesting to see how this section will come into play and how many insolvencies will be ended prematurely because of energy bills. There is no question that office holders will not want to take on personal liability for exorbitant energy bills, not without certainty they will be indemnified but that seems unlikely. I predict that companies in heavy use industries like those highlighted above who under other circumstances may have been able to trade out of trouble, for example, by administration may find that option removed altogether and going down the CVL route. The lights may be turned off once and for all.
As a matter of public policy it will also be interesting to see how the insolvency courts respond. Will it be David v Goliath - big utility companies versus the struggling customer? Will the “hardship” test in section 233A come into play and how will the courts apply it? It would be hard to argue these utility companies will not suffer huge losses themselves and, therefore, “hardship” but does that need to be balanced against the other objective of the Act to try to rescue businesses?
Further, will we see an increase in satellite litigation by these suppliers seeking court approval to terminate contracts/supplies as soon as possible or is it more likely that suppliers will promptly approach officer holders demanding personal guarantees (that won’t be given in 14 days) and also writing to request their urgent consent to terminate the contract at risk of a court application and adverse costs risk? We are currently left in the dark.
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