company insolvency pro bono scheme

By Alex Ewing, Bar Vocational Studies, City Law School.

Introduction

The water industry has been in the headlines in the past couple of years, with negative attention surrounding “sewage dumping, water leaks, hosepipe bans and billions of pounds paid out to investors.”[1] In this context, there have been calls for action to be taken against water companies.[2]

As part of its response to the mismanagement in the industry, the Government has introduced the Water (Special Measures) Bill. The Bill introduces a number of measures to better hold water companies to account and restore public confidence.[3] The Department for Environment, Food and Rural Affairs introduced the Bill by saying that “there is a lack of public trust in the industry and widespread concerns about underinvestment in infrastructure, levels of pollution, and failures to address illegal spills of sewage”.

This blog post will look at one particular measure in the Bill, namely the proposed changes to the rules around Special Administration Regimes for water companies. It should be noted that, at the time of writing, the Bill is still progressing through Parliament, so some of the specifics could be subject to amendment.

What does the Bill do?

The Bill proposes a whole raft of changes across the water industry, with the focus on strengthening the power of the water industry regulators and targeting failing water companies. In terms of Company Insolvency law, the most consequential changes relate to Special Administration Regimes (SARs) for water companies, and in particular the way in which funds are recovered at the end of a SAR.

A “Special Administration Regime” refers to the use of a bespoke administration process for companies that operate in sectors where there is a wider public interest. A special administrator is appointed to achieve objectives which differ, in some respects, from standard administrations. SARs are used in respect of energy supply companies, railway services, postal services, water companies and more. Because of the nature of these utility industries, the focus is primarily on protecting consumers.

When a SAR is needed, the government spends money. This can be operational costs, and it can also be because, for example, critical infrastructure needs to be maintained. The Special Administrator must also be remunerated. Once the SAR ends, the government will look to recoup the money it has spent. However, as the Government explicitly states in its policy paper: “there may be a risk that taxpayers’ money is not fully recovered from the proceeds of a SAR”.[4] This is partly because the Secretary of State does not currently have the powers to require water companies to repay any shortfall incurred through the transfer of a company following a SAR. Thus there is a risk that any recovered costs would go to shareholders and investors before the taxpayer would regain money.

Accordingly, the Bill introduces a power for the Secretary of State to modify water company licences in order to recover a shortfall in government costs at the end of a SAR. Ministers will be granted a lot of flexibility. They will be “able to decide if they want to use this power and whether losses are recovered from a single company, some or all water companies”.[5]These changes essentially bring the situation for the water industry in line with energy companies.

Points of interest for law students

It is useful for students of Company Law to be aware of the use of Special Administration Regimes. In particular, is helpful to have a general idea of their key features and how they can be contrasted with a normal administration process.

In respect of SARs in the water industry specifically, it is instructive to note that the proposed changes in the Bill follow off the back of changes made earlier this year which, broadly, sought to bring the legislation in line with other industries (and modern insolvency practices).[6] The proposal in the Bill to make it easier to recover money at the end of a SAR is another important step in this direction. It can be said that the Government is clearly taking the idea of water company insolvency seriously and it is an area to watch for those interested in Insolvency Law. 

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[1] https://www.theguardian.com/business/2023/jun/28/what-went-wrong-at-thames-water-and-what-could-a-bailout-look-like

[2] https://committees.parliament.uk/committee/517/industry-and-regulators-committee/news/194330/failures-of-regulators-water-companies-and-government-leaving-public-and-environment-in-the-mire/

[3] DEFRA, Water (Special Measures) Bill: Policy Statement, (5 September 2024) https://www.gov.uk/government/publications/water-special-measures-bill-policy-statement/water-special-measures-bill-policy-statement

[4] DEFRA, Water (Special Measures) Bill: Policy Statement, (5 September 2024) https://www.gov.uk/government/publications/water-special-measures-bill-policy-statement/water-special-measures-bill-policy-statement

[5] DEFRA, Water (Special Measures) Bill: Policy Statement, (5 September 2024) https://www.gov.uk/government/publications/water-special-measures-bill-policy-statement/water-special-measures-bill-policy-statement

[6] https://www.dlapiper.com/en-gb/insights/publications/2024/02/navigating-troubled-waters-updates-to-water-insolvency-legislation-amid-growing-concerns-about-the