Judgement may speed up energy company insolvencies

31 January 2023

By Rupert Darrington

Future insolvencies of energy supply companies may now be more likely to happen earlier in the year, rather than between 1 September and 31 October as has mostly happened in the past.

That is the view of Andy Stirk, head of restructuring at law firm Womble Bond Dickinson, after a judgment by Mr Justice Zacaroli in the High Court in relation to the debt obligations of recently insolvent energy suppliers.

In the first ever application of its type, the officeholders of a group of insolvent energy companies – with a combined customer book of some 2.5 million consumers – had applied to the court for directions on the treatment of claims by two types of creditors.

The judgment means that a number of administration and liquidation cases that have remained open while these issues are resolved will now be able to distribute to creditors and be closed, said Stirk.

The first type of claim was by Ofgem (acting on behalf of the Gas and Electricity Markets Authority) in relation to the failed companies’ renewables obligations and whether these obligations should be treated as a present provable debt.

The second type of claim was in relation to the credit balances of the failed companies’ former customers. These balances were claimed by the solvent energy suppliers who – as “suppliers of last resort” (SoLRs) – had become responsible for supplying electricity and gas to the failed companies’ former customers. The legal issue related to whether the the SOLRs had a provable claim.

“This is a landmark judgment, as it is the first time that the court has been asked to consider whether, and to what extent, the [Gas and Electricity Markets] Authority and SoLRs are creditors of the failed suppliers for certain categories of debt in the estates of the failed suppliers. There is accordingly now much needed clarity in this area of law,” said Stirk.

“Whilst we now have some guidance as to the treatment of certain categories of creditor claim, there remain certain statutory provisions under ROO15 where further clarification is still required. This perhaps suggests that we can expect some changes to the current legislative framework when parliamentary time allows.”

One of the legal issues at stake was the question of on what date the renewables obligation was due to be paid given that Ofgem gives energy companies a “grace period” between 1 September and 31 October. In the past, energy suppliers had developed their cash flow forecasts based on making payments by 31 October.  

But according to Stirk, the judgement implies that renewables obligations are actually due on 1 September and that the grace period does not offer any protection for a supplier against Ofgem seeking to enforce the debt immediately.

“The implication of this judgment is that the grace period only protects a supplier against regulatory enforcement by Ofgem, not a debt action by Ofgem. As a result, where the prior crop of insolvencies mostly occurred in the period between 1 September and 31 October, in the future the timetable may be more accelerated,” said Stirk.

He also said it was “noteworthy” that the judgement has been handed down at a time when Ofgem has recently announced proposals to reform the energy supply sector to help ensure companies are better capitalised to withstand future shocks to the market. One of these proposals, it is believed, will include a requirement for suppliers to ringfence money that they need to buy renewable energy.

“Along with the proposals for ring-fencing customer credits, this would have a further impact on the working capital available to suppliers and would create a new barrier to entry for any potential new competitor seeking to enter this market,” said Stirk.

Womble Bond Dickinson acted on behalf of the majority of the officeholders of the failed energy companies who had applied to the court for directions.

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