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Energy Bill [HL]

My Lords, I raised this issue in Grand Committee and briefly on Report when my noble friend Lady Northover was kind enough to say: "““I think the best way to take this forward is by consultation. If he would like to discuss the details with officials, we could see what, if anything, needs to be addressed””.—[Official Report, 2/3/11; col. 1163.]" With the help of her officials, I did just that. I had a very interesting telephone conversation and subsequently a paper from a very helpful lady, Dawn Armstrong, in the Department of Energy and Climate Change. Briefly, the issue concerns the power of the Government to put an energy supplier into special administration. It is built on extending the powers in Section 157(2) of the Energy Act 2004 as adapted and applied by Clause 93. Section 157 is headed ““Powers of Court”” and subsection (2) states: "““The court may make an energy administration order in relation to a company only if it is satisfied— (a) that the company is unable to pay its debts; (b)—" and these are the critical words that I am unhappy with— "““that it is likely to be unable to pay its debts””." Then there is a third ground on which it might be appropriate to wind the company up in the public interest. The Insolvency Act, on which these words were originally based, included the words, "““likely to become unable to pay its debts””," but in those circumstances it was only on an application by the directors of the company. Under Clause 93, it is a power of the Secretary of State, or of Ofgem with the consent of the Secretary of State, to apply to put a company into what is called special administration under this Act. Ms Armstrong sent me an extremely helpful note, much of which I accept. For the benefit of what I hope will eventually be a debate in another place on this subject, I shall read part of it out. She wrote: "““Administration under the Insolvency Act 1986 is a business rescue procedure, with the survival of the company as its primary objective. If entry to administration were only available to a company that could not pay its debts at the date of commencement, the rescue of viable businesses might be jeopardised. For this reason, administration can also be entered when a company is likely to become unable to pay its debts. The clauses in the Energy Bill on special administration follow these principles. The energy supply company administrator’s primary objective is to rescue the company as a going concern. Therefore these provisions apply the same tests for insolvency as the Insolvency Act””." She used the words ““the same tests””. Yes, they are the same tests, but not by the same process. That is basis of the anxiety. I accept that there is a need for a process. There is no question about that. When you have a large energy supply company supplying millions of customers and it seems unlikely to meet its obligations, obviously the authorities must step in and do something about it. The second point made in the paper, which I had perhaps not entirely appreciated, was that this applies only to supply companies and would not affect the generating part if it were in a separate company in the group. I am not sure that I wholly understand that because it is difficult to imagine a supply company unable to pay its debts if the company is otherwise solvent, but that point might need to be taken. The third point made in the paper is that it is a court process and not just a peremptory decision made by the Secretary of State or by Ofgem. It is a decision to take the matter to the court and for the court to decide. I will return to that in a moment. My noble friend Lord Marland wrote to me on this matter. He wrote: "““Of course The Secretary of State and Ofgem would no doubt want to discuss any application for an energy supply company administration order with company directors in advance. And directors will be able to contest the application in court. However, enshrining a duty to consult directors in the legislation could lead to delay and it is important that the Secretary of State has the flexibility to act quickly””." I think that my noble friend might have misunderstood the purport of my amendment. I should thus like to make four points about that, and no doubt my noble friend Lady Northover will be able to reply. First, in my discussion with her official, she made the point that she thought that all but a very few of the energy suppliers were worried about this. Since then I have made inquiries and have been told that the energy suppliers are solidly behind this amendment. I have had letters from two or three of them to confirm that point. It is not true to suggest that this is somehow only a minority concern. The industry’s points of opposition to the special administration threshold—because that is what we are talking about—are vigorously maintained. Secondly, the official’s note is a perfectly adequate summary of the principles of the special administration regime. It also properly acknowledges that this regime does not disapply the provisions of existing insolvency law. However, it does not seem to acknowledge that the test for putting an energy supply company into special administration is set at a very low threshold: that is, lower than the threshold at which Ofgem can revoke a company’s licence under the licensing provisions. If a licence is revoked, the practical effect is to put the company into special administration. It is certainly, in at least one crucial respect of its business, the inability of the directors to carry it on. I made further inquiries about the licence. Is it different or does it cover broadly the same process? Ofgem can revoke an energy supplier’s licence on a number of grounds, including if the company has committed an offence while making its original application or if it has failed to comply with a final enforcement order in respect of a breach of a condition or something of that sort. However, the ground that is relevant to this amendment is that which applies when the company is in financial difficulty. In that event, Ofgem can revoke the company’s licence if the company is unable to pay it debts. There is no permission or discretion to revoke the licence if the company is likely to be unable to pay its debts. Why is it necessary, therefore, to put this provision about, "““likely to be unable to pay its debts””," into the administration procedure under this Bill when it does not exist under the licensing provision? More than that, the licensing provision sets out clearly what the court needs to be satisfied with before it withdraws the licence. The company is not to be deemed to be unable to pay its debts unless at least one written demand by a creditor for a sum of more than £100,000 has remained unpaid for at least three weeks. Nor is the company to be deemed to be unable to pay its debts even if such a written demand is outstanding, provided that the company is contesting it in good faith and with due recourse to all appropriate legal process. That seems to be quite different from what we are being asked to legislate in Clause 93. This power of the Secretary of State to go to the court and apply for a special licence is questionable. The contrast between that power in the Bill and the power to revoke a licence seems very stark. In the power to revoke a licence, there is no reference to the company being unlikely to be able to pay its debts, and the definition of what constitutes an inability to pay its debts is detailed and specific. Neither of these applies to the provision in the Bill. That point was not made during the earlier debates. The third point, which I did make, was that we have had practical experience of the use of the power to put a company into administration if it is deemed to be unlikely to pay its debts. That happened in the case of Railtrack. There was an accountant’s report, which was all that was necessary, to suggest that Railtrack was going to be unable to pay its debts, so off went the Government to the court, and we all know the history after that. This has been widely commented on. It was not, even at the time, entirely bona fide. A political objective was being sought. It is that kind of thing that is causing concern and uncertainty in the industry. My last point is that my noble friend’s letter, which I referred to a moment ago, raises the idea that I am trying to enshrine a statutory duty to consult directors. He says it would cause delay. In the circumstances that we are considering, a week or two’s delay does not seem very important. However, my amendment does not impose a duty to consult. It says that the court can make a special administration order only if it is satisfied that the company is likely to be unable to pay its debts and that the directors of the company have accepted that to be case and have consented to the order on that basis. To put it bluntly, the directors will have their day in court and that is how it should be. This amendment provides the beginnings of a safeguard against the situation that Railtrack was put in whereby special administration was imposed on the company simply on the say-so of an accountant’s report. I entirely accept, as I said a few moments ago, that the authorities need to have the power to help a company to carry on its business if it is in difficulties for the protection of both the business and its consumers and, as my noble friend said, to spill over into other companies. A rescue package might have to be mounted, but I contend that this must be done in a way that does not sow uncertainty and raise the risks for investors and their suppliers. My evidence that that is the fear that the industry has at the moment is strong. The amendment seeks to enshrine a safeguard in the Bill to avoid that. I beg to move.