Today, the eagerly-awaited judgment has been handed down by Mr Justice Zacaroli in respect of the application for directions made by office-holders of a number of failed energy suppliers. 

The impact of this judgment will be felt much wider than just within the applicants' insolvent estates and it is relevant to any office-holder or unsecured creditor of a failed energy supplier.

The judgment provides clear directions on the treatment by office-holders of claims in the insolvent estates of failed suppliers capable of being made by the Gas and Electricity Markets Authority (Authority) in respect of the failed supplier's renewables obligations and also in respect of claims capable of being made by a Supplier of Last Resort (SoLR) in respect of honoured customer credit balances; in each case providing that such claims are provable debts.

The effect of this judgment will be to allow significant claims to be made in the estates of the failed suppliers, likely dwarfing any other unsecured creditor claims.  However, perhaps the most significant, and surprising consequence of the judgment is that each of the Authority and a SoLR can potentially submit claims that would lead to double recovery in respect of the same debt. We explore this in more detail below:

A link to the full judgment is here.

Detail

An application for directions was made by the office-holders of a number of failed energy suppliers in relation to a number of issues, which were agreed between the parties to the application ahead of the substantive hearing.  The issues that were put before the court for consideration were (broadly):

1. The nature of the payment obligations of a designated electricity supplier in relation to its renewables obligations;
2. The impact on any such payment obligation of any payment made (by way of supplier payments, mutualisation or otherwise) by relevant suppliers by reason of the failure of the designated electricity supplier;
3. The nature of any claim by a Supplier of Last Resort (SoLR) in the insolvent estate of the failed supplier in respect of any customer credit balances it honours;
4. Whether the honouring of a credit balance by a SoLR has the effect of discharging the obligation of the failed supplier to its former customers; and
5. Whether a constructive trust arises in circumstances where a customer continued to make payments by way of direct debit to the failed supplier during the period between the making of the Last Resort Supplier Direction (LRSD) and the appointment of administrators or liquidators.

Renewables Obligations

Each electricity supplier is required to produce to the Authority renewables obligation certificates (ROC) in respect of renewable electricity that it supplies, in an amount as notified to them by 1 October of each year preceding an obligation period (obligation periods running from 1 April to 31 March annually).  A supplier is given the option of discharging its renewables obligation (in whole or in part) by making a payment to the Authority (referred to as a "buyout payment") before 1 September in the following obligation period.

If a supplier fails to discharge its renewables obligation before 1 September it is given further grace to make a late payment (in the period from 1 September to 31 October).  If there is a shortfall in the amounts received by the Authority by the end of the late payment period a process of mutualisation occurs, subject to the shortfall hitting a certain threshold (and also subject to a cap).  If the threshold is triggered, the Authority then seeks payment from suppliers (who have in whole or in part complied with their renewables obligations) in respect of the mutualisation sum with the (broad) intention that this covers the shortfall.  A supplier who has failed to meet its renewables obligations (by producing ROCs or making a buyout payment or late payment) is not required to make a mutualisation payment.

Directions were not sought on the nature of the mutualisation payment obligation as it is generally accepted that this is a provable debt to the extent it has been claimed and is unpaid at the date of appointment of the office-holder.  However, the court held that the buyout payment is also a provable debt, and is not discharged or replaced by the existence of a mutualisation process.  Mr Justice Zacaroli addressed the risk that the Authority recovers twice in respect of the same debt (given the mutualisation payments are in essence, required to make up the shortfall on any unsatisfied renewables obligation) on the basis:

• firstly, the mutualisation may not be triggered if the shortfall does not reach the designated threshold and it is also subject to a cap
• secondly, there would be no double counting in respect of a supplier which had failed entirely to meet its renewables obligations (as there would be no claim for a mutualisation payment)
• thirdly, even where a supplier had only partially complied with its renewables obligation (and therefore was also responsible for making a mutualisation payment), the ability for the Authority to claim both payments in the insolvent estate essentially places the insolvent supplier into the same position as fully compliant suppliers who comply with their renewables obligations AND contribute to the mutualisation fund. The fact that fully compliant suppliers are entitled to a payment out of the mutualisation fund (whereas an insolvent supplier is not) is explained by the fact this entitlement only arises for suppliers who have complied with the renewables obligation by producing ROCs rather than making a buyout payment.

Suppliers of Last Resort

Mr Justice Zacaroli concluded that, where a SoLR has given confirmation to the Authority prior to the date of the LRSD that it would honour customer credit balances and then, indeed, honours those balances, the SoLR has a claim for unjust enrichment against the failed supplier which would be met by an equitable right of subrogation to the customers' claims against the failed supplier.  This discharges the obligation of the failed supplier to the customer in respect of that credit balance.  In short, the SoLR can claim in the insolvent estate of the failed supplier in respect of the honoured customer credit balances (and the customer cannot).  

The fact that a SoLR may receive a last resort supplier payment (LRSP) from the Authority which covers the whole or part of an amount equivalent to the honoured credit balances was considered from a double recovery perspective, it being argued that the expense incurred by the SoLR was essentially passed on to the Authority.  However, Mr Justice Zacaroli concluded that there is no defence of passing on as part of the English law of unjust enrichment.  The impact of this is that a SoLR is entitled to claim in the estate of the failed supplier notwithstanding it may already have recovered (or will recover) some or all of its "loss" in honouring customer credit balances via an LRSP.

Similarly, the judge did not consider that the honouring of customer creditor balances as part of the overall "bargain" of being a SoLR, (the consequence often being that the SoLR obtains a large number of new customers with the opportunity to increase revenue) in any way counters the argument of unjust enrichment.

Constructive Trust

Mr Justice Zacaroli did not answer any part of the final issue (being whether sums received by the failed supplier by a customer by way of direct debit between the making of the last resort supply direction and the appointment of an administrator or liquidator are held on constructive trust for the customer or the SoLR to the extent the SoLR has given credit for that payment) as he considered there were too many unknown variables.  He stated "if it could be established that a customer made a mistake which caused the direct debit payments to continue to be taken by the Failed Supplier and the Failed Supplier knew of that mistake at the time it took the payment then a constructive trust could be established".  This leaves office-holders in an uncertain position in the event such customer claims are received.

Conclusion

The judgment provides helpful directions to office-holders in how to treat claims from the Authority and the SoLRs and also helpfully clarifies that individual customers have no claim against the failed supplier where the SoLR has honoured their credit balance.

However, the consequential impact on other unsecured creditors of failed suppliers is less than perfect.  We understand that the Authority's claims for unpaid renewables obligations (and mutualisation payments where relevant) are often significant often running into the tens of millions of pounds, which will result in a material reduction in the expected dividend to other unsecured creditors from failed suppliers.  This is likely to be particularly galling in circumstances where the Authority in effect has received double recovery for what appears to be the same debt.  Similarly, we expect other unsecured creditors of failed suppliers to be equally disappointed that a SoLR is able to share in the finite funds available to unsecured creditors where it has received (or is expected to receive) a significant LRSP thereby reducing its overall loss.

Addleshaw Goddard LLP acted for the administrators of Contract Natural Gas Limited (in administration) (CNG).  CNG was an intervener in the directions application.