The last 18 months have been a turbulent time for many industries, and the full impact of lockdowns and interruptions to trading has yet to be seen. With news this week of UK gas prices reaching an all-time high, business energy suppliers will inevitably be experiencing additional challenges in recovering debts. With some price increases reported to be as high as 40%, many customers may struggle to keep on top of their bills, which may result in even more companies becoming insolvent.
One key challenge for utility suppliers will therefore be determining who is liable for a debt due once insolvency arises. The following article will hopefully assist in providing some clarity.
What problems can arise when a commercial tenant becomes insolvent?
A commercial tenant entering insolvency proceedings can be problematic for a utility supplier. Often, their supplies will still be consumed after the tenant company enters administration or liquidation by somebody doing something as innocent as switching the on the lights.
Where a company becomes insolvent, utility suppliers can be left unsure as to who will be liable to pay for their ongoing supply. It can be very difficult to identify the liable party in these circumstances, as neither the landlord, insolvent tenant, nor the insolvency practitioners want to take ownership.
If the account remains in the name of the insolvent tenant, any termination clauses within the supply contract will be void where triggered by insolvency events, meaning that a supply cannot be disconnected when payments are being defaulted on. Therefore, it is important that liability for the supply reverts to either the landlord or the insolvency practitioners as soon as practicable.
Usually, commercial lease agreements will contain an express obligation holding the commercial tenant liable for any gas, water, and electricity supplies. Where a company enters insolvency proceedings, the administrator or liquidator will have the option to surrender or disclaim the lease, releasing the insolvent tenant of any contractual obligations set out in their lease agreement.
Where the lease is effectively no longer in place following a surrender or disclaimer of the lease, there are three common scenarios where a new party can be held liable for the ongoing utility supply.
1. Vacant premises
Generally, the landlord will be liable where there is no tenant in occupation of the premises. This general rule will also apply in the case of insolvency where the lease has been either surrendered or disclaimed, and the insolvency practitioners have decided against using the premises to conduct their administration or liquidation.
In circumstances where it is not possible to determine which party is currently in occupation of the premises, and the landlord or insolvency practitioners cannot be contacted, a practical solution would be to conduct a site visit to determine whether the premises are vacant or not.
2. Administrator in occupation of the premises
An administrator does not have any statutory powers to disclaim a lease or any ‘onerous’ property like a liquidator does, but an administrator will often make an informal offer to surrender the lease in the very early stages of the administration.
Where the lease is surrendered by deed or by operation of law (where the tenant has vacated the premises with evidence of the keys being returned to the landlord), and the administrators decide to use those premises to conduct the administration, the administrators will then be liable for the utility supplies. This is the best possible outcome for a supplier as any utility bills will be classed as an expense of the administration, which rank higher than most in the priority of payments.
If the lease is not surrendered by the tenant or their administrator, any utility bills produced after the date of insolvency will be a provable debt and regarded as an unsecured claim against the administration. This means that all overdue utility bills, pre and post administration, will be regarded as an unsecured debt where the insolvent tenant remains bound by the contractual obligations set out in their lease.
Where a landlord rejects a surrender of lease, utility bills arising after the company enters administration will remain a provable debt, meaning a proof of debt form must be completed and sent to the administrators.
In such circumstances, a common-sense remedy may be worth considering. Having an open conversation with the landlord about the commercial implications of holding onto an insolvent tenant may convince them to accept the surrender of the lease, allowing them to market and re-let the property as soon as possible.
Whilst the landlord would then be liable for the gas and electricity in any interim periods where the property is vacant, there may be opportunity for discussion surrounding a suitable tariff to suit their needs which would still be more cost effective than their cost of having to reconnect the premises in order to re-let should disconnection ensue. If the supply in question is water, the landlord can be encouraged to fill out the vacant premises declaration to prevent charges accruing assuming the premises are unfurnished.
3. Liquidator in occupation of the premises
Liquidators do have statutory powers to disclaim property, which can include contracts like lease agreements. However, exercising these powers through the courts can be both costly and time consuming. This usually means that a liquidator may offer to voluntarily surrender the lease before making any formal application to disclaim the lease in order to preserve as many of the company’s assets as possible.
Whether the lease has been disclaimed or surrendered, the main effect from both of these actions is that the tenant will usually be released of their contractual obligation to pay for the utility supplies at that property. This means the landlord will be liable for any periods where there is no tenancy in place and the liquidators do not use the premises.
If the premises are used to administer the liquidation, the liquidators would take on liability for the utilities for as long as the premises is being used for that purpose, as they are classed as an expense of the liquidation. Whilst a liquidator’s expenses are not quite top of the priority list, they do outrank preferential and unsecured creditors.
In the rare circumstances that the lease is not disclaimed and the liquidators are not using the premises for the liquidation, payment of utility invoices will be treated as an unsecured claim against the liquidation.
The below should assist in identifying what should be requested in order to validate a surrendered/disclaimed lease:
- Deed of surrender
- Request sight of what is normally referred to as a ‘Surrender of Lease Agreement’
- Surrender by operation of law
- Request evidence of the date when the keys were returned to the landlord
- Notice of disclaimer
- Normally form ‘NDISC’ will be filed on Companies House
Once you have ascertained the date in which the insolvent tenant’s liability has ceased, you must then seek to discover whether the landlord or the insolvency practitioners will be held liable from that date onwards.
During any vacant periods, it is important to contact the landlord early to arrange a contract and ensure that standing charges, which cover the costs incurred supplying the property, are paid even when the property is vacant if relevant to the supply in question.
The above insight article should go some way to assisting business utility supplier in making an informed decision on where liability ought to sit, and who should be pursued to cover these expenses.
Ultimately, if the supply continues to be used and a willing party will not accept liability and make payment, disconnection options may be explored.
For more information and support on pinpointing liability of debts due during insolvency proceedings, or to arrange a confidential discussion about your debt recovery requirements, please call us on 01332 226 474 or email