Provable debts in insolvent estates: A landmark case in the energy supply sector

There has been a spate of energy supplier insolvencies in recent years, and this judgment gives welcome clarity on the treatment of two types of debt which are peculiar to energy suppliers.

In the first case of its kind, the officeholders of several companies in administration and liquidation, have applied for directions from the High Court in relation to the treatment of certain creditor claims in the estates of various insolvent energy suppliers (the Insolvent Estates). On 11 November 2022, Mr Justice Zacaroli handed down the keenly awaited judgment.

Provable claims

The judgment deals with many complex issues at length but provides long-awaited clarity on two main issues:

1. whether Ofgem has a provable claim in the Insolvent Estates for the Renewables Obligation; and
2. whether the appointed Supplier of Last Resort (SoLR) has a provable claim in the Insolvent Estates for credit balances of customers that were honoured by the SoLR as a consequence of the SoLR process.

The Renewables Obligation^[1]

This is a statutory obligation that requires licensed electricity suppliers to (by 1 September each year):

1. under a primary obligation, present Renewables Obligation Certificates (ROCs) to Ofgem, evidencing that they have acquired the electricity from renewable sources; or
2. under a secondary obligation, instead of presenting the ROCs above, they must make a 'buy-out' payment to Ofgem.

The judgment confirmed that Ofgem does have a provable claim in the Insolvent Estates for the Renewables Obligation. The Court determined that before 1 September, this payment is a 'contingent payment' and the Court notes that 'the contingency being that the supplier has not produced the requisite renewables obligation certificates'. From the 1 September, it becomes a 'present payment liability' and is therefore provable as a debt.

The Court also clarified the following points, which were raised by the parties:

1. a liability arising out of the Renewables Obligation is not affected by a subsequent revocation of the supplier's licence;
2. if an electricity supplier fails to discharge its Renewables Obligation under the time period in the legislation, they are granted a grace period until 31 October and interest accrues until that date - this does not mean that the obligations come to an end after that date;
3. a liability for a Renewables Obligation continues beyond 31 October, despite the existence of the Mutualisation Scheme ^[2] from that date or payment obligations being triggered pursuant to it; and
4. as regards payment obligations under the Mutualisation Scheme: a payment of a shortfall created by one group of suppliers by another group of suppliers does not mean that the liability of the first group falls away; they remain to be subject to the same liability, albeit to a different party via the mechanism of subrogation.

Credit balances under the SoLR regime

The Court also considered the matter of credit balances of customers of insolvent gas and electricity suppliers that are paid or otherwise assumed as part of the SoLR regime. This regime relates to appointing a supplier of last resort when there is a failure of a licenced energy supplier. The Court refers to Ofgem as a 'safety net' for customers, as the process essentially ensures that the supply to customers and their credit balances are protected under this regime.

The Court held that the SoLR appointed to take on the customers of the insolvent supplier upon that supplier ceasing to trade, does have a provable claim in the Insolvent Estates for any credit balances it has paid or otherwise honoured during the SoLR process. This included closed balances where the SoLR confirmed to Ofgem that it will honour such credit balances. The Court confirmed that the SoLR has a claim in unjust enrichment against the failed supplier (which is satisfied by an equitable right of subrogation to the customers' claims against the failed supplier).

It is worth noting that the Court left one issue open (as it did not arise on the facts) by stating that in order to give rise to a claim in unjust enrichment (and a provable debt) where:

1. a SoLR honours customer balances; but
2. has not confirmed to Ofgem that it will be honouring such customer balances;

then, in the absence of any other authority or request, the SoLR would have to establish that it was legally obliged to honour such credit balances.

Impact

The ongoing energy crisis has posed a significant amount of commercial, legal and other issues within the energy sector, and we have seen huge numbers of consumer energy suppliers of all sizes collapse in recent years. The application of the SoLR regime, under which Ofgem can direct any licensed electricity or gas supply company to take over from a failed supplier, is by far the most common result in these cases. The impact of this case is therefore significant in that it gives welcome clarity on the outcomes for key stakeholders when an energy supplier becomes insolvent and a supplier of last resort is appointed.

Our team

We have significant experience in acting for various stakeholders involved in distressed energy suppliers, including advising: distressed suppliers in successful rescues; suppliers as they enter the SoLR regime and an insolvency process; administrators of insolvent suppliers; suppliers acquiring a customer book via the SoLR regime; and advising parties with exposure to failing supplier on insolvent processes and the special administration regimes.

The Gowling WLG Restructuring, Corporate, Energy and other sector teams work closely together to provide expert, joined up advice to our clients. Please contact us should you have any queries on this judgment or on our work in this area.

Footnotes

[1] For Great Britain, as set out in the Renewables Obligation Order 2015 and the Renewables Obligation (Scotland) Order 2009.
[2] The 'Mutualisation Scheme' is calculated by assessing whether there is a shortfall between the payments received under the Renewables Obligation from suppliers that have failed to discharge their obligations under the rules. The mechanism of the Mutualisation Scheme is designed to prevent excessive shortfalls from occurring.