Vol 11 (2014) - Issue 6

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Administration and Statutory Liabilities: Deemed Utilities Contracts Do Not Take Priority

Overview
The ongoing rewrite of the United Kingdom's insolvency rules is long overdue. A clear example of this can be seen in the shortcomings in the rules relating to the determination of whether or not particular creditor claims constitute administration expenses. Until such time as the rules are overhauled, office holders and creditors may find that themselves looking to the courts to fill in the gaps. Recent litigation over the treatment of rents is a case in point.
This issue extends to liabilities imposed on a company by statute after the appointment of administrators, as demonstrated by last year's landmark Supreme Court case regarding pension liabilities in the Nortel group.
The categorisation of another statutory liability was in question in the case of Laverty and others v British Gas Trading Limited [2014], in which the High Court handed down judgment at the end of July this year. It is an important decision for the insolvency industry as the court held that deemed supply contracts for gas and electricity imposed under statute did not give utilities companies priority over other creditors in an administration.

The facts
The Peacocks chain operated more than 600 clothing stores in the UK before it collapsed into administration in January 2012, becoming one of the year's highest profile retail failures. Officeholders from KPMG, advised by Hogan Lovells, were appointed administrators to various companies within the Peacocks group.
Prior to the administration, one of the Peacocks companies had entered into a series of contracts on behalf of the group for British Gas to supply gas and electricity to its stores. The contracts were terminable in the event that the company appointed administrators and British Gas exercised this termination right shortly after the administration.
Under UK law, the Electricity and Gas Codes provide that where utilities are supplied (in the sense of 'made available') but there is no express supply contract in place then one will be deemed to exist with the supplier. Under the Gas Code, the deemed contract is between the supplier and the 'consumer'. Under the Electricity Code, it is with the 'occupier' or 'owner' of the relevant property.
The deemed contract regime is a practical necessity because utilities companies do not routinely disconnect supply just because there is no contract in place with the end user. They simply do not have the operational ability to do that easily on the necessary scale as it requires them to send someone to enter the premises to disconnect manually (for which they will either need to get permission or apply to court for a warrant). In the vast majority of cases, disconnection is uncalled for as a new customer will take over the supply and will not want to pay reconnection charges.
British Gas continued to supply utilities to the stores after it had terminated the contracts with Peacocks. Deemed contracts were, therefore, imposed by statute. By virtue of the leases in place, one or other of the Peacocks companies fell within the definitions of 'consumer' and 'occupier' or 'owner' in the legislation and so deemed contracts for the supply of gas and electricity were imposed on them.
The legislation only provides for when deemed contracts are to begin. It is for the individual utilities companies to devise a 'scheme' for determining the terms and conditions of their deemed contracts. Aside from that, there is very little statutory control over the terms on which deemed contracts will operate.
British Gas' terms included that their deemed contracts would continue, even after the customer had vacated the premises supplied with gas or electricity, until either another supplier took over the supply or British Gas accepted someone else as their customer.