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Impacts of the Carillion liquidation

Published: 19 January 2018
Sector: Energy

The implications of customer insolvency for energy suppliers

The liquidation of Carillion, and the potential effect on its supply chain, is a timely reminder for suppliers of electricity and gas to monitor the financial health of their customers, and to ensure that they are fully aware of their rights when customers enter into an insolvency process. Whilst in some circumstances it may be too late to do anything about the arrears, other than to claim in the insolvency, it is vitally important to protect the position going forward.

Section 233 of the Insolvency Act 1986 allows suppliers of electricity and gas to make it a condition of the giving of the supply that the appointed office holder, usually the administrator, liquidator or supervisor of a Company Voluntary Arrangement (“CVA”), personally guarantees payment of any charges incurred post appointment. If an office holder refuses to provide a guarantee, a supplier will need to consider its rights under its contract, and their interaction with the relevant statutory provisions such as section 233A of the Insolvency Act 1986 as referred to below.

The type of insolvency process is critical here. Businesses that are facing insolvency usually enter into either liquidation, administration or a CVA. For some businesses, it will be beneficial to keep trading for a short while and ordinarily these would enter into administration. Carillion, on the other hand, has entered straight into compulsory liquidation

An energy supplier’s rights will depend on the insolvency process, as illustrated by Section 233A of the Insolvency Act 1986, a relatively new provision, inserted by the Insolvency (Protection of Essential Supplies) Order 2015). This provides that certain “insolvency-related terms” in contracts of supply entered into after 30 September 2015 cease to have effect when a company enters into administration or once a CVA is approved. This means that, except in certain circumstances, a supplier cannot terminate a supply (e.g. de-energise a site), terminate the contract, alter the terms of the contract or compel higher payments for a supply.

Section 233A does not however apply when a company is wound-up, and so, assuming the contract provides for this, a supplier would be free to terminate a contract or supply when a company goes into liquidation.
It is important to look at the exceptions in section 233A. These allow a supplier to terminate the contract with the insolvency office holder’s consent or if the court grants permission, but crucially also if charges incurred after the start of the administration or CVA are not paid within 28 days of the payment being due. Importantly, a supplier may also terminate the supply itself (rather than the contract) if the insolvency office holder refuses to give a personal guarantee within 14 days of receipt of a notice. Although it should be noted that the Court’s permission may be required to seek a warrant to enter a premises if the company is in administration.

However, the position is not always straightforward. Even where the contract is terminated, suppliers may find themselves in a position where they continue to supply a site because of the “deemed contract” rules. Statute provides that where electricity or gas is supplied “otherwise than in pursuance of a contract”, a deemed contract exists. All suppliers are obliged to have a deemed contract scheme in place setting out the terms that will apply in these circumstances. This scheme would also set out the tariff charged under a deemed contract, which is usually higher than the tariff charged under a fixed term contract.

In circumstances where there is a deemed contract in place, the Electricity Act imposes liability for supply charges on the occupier of the premises, and in the absence of there being an occupier, on the owner. There are similar provisions in the Gas Act 1986.

The determination of whether a site is occupied, and if so by whom, is critical when the officeholder declines to accept responsibility for ongoing supply and the supplier terminates the contract. Suppliers often end up in disputes with landlords or “occupiers” over this point.

At present there is no binding authority establishing the correct approach to the construction of the word “occupier” in the context of the Electricity Act. The term has been the subject of a number of cases that do not relate to the supply of electricity and each case is decided on its own facts. If a Court was asked to determine the issue, it would take into account a number of factors, including whether a party was in physical occupation of the property or whether a party has sought to demonstrate an intention to permanently vacate a property, for example by an occupier or administrator handing the keys back to a landlord. These are some of the factors an energy supplier will need to consider when determining whether to terminate a contract or not.

In summary, when a supplier of electricity or gas is faced with a situation where one of its customers enters into some form of insolvency process, there are a number of factors that need to be taken into account, and there is no “one size fits all” rule.

What is clear however is that suppliers should act quickly to ensure that their losses are minimised and the supply going forward is regularised as far as possible.

"The dedication and commitment of Shakespeare Martineau
throughout the process helped to create, and preserve,
value for the shareholders."

Roger Crosse, Managing Director, POS Direct Ltd