AES Barry Ltd. v TXU Europe Energy Trading

MR. JUSTICE PATTEN:

1 This is an application by A.E.S. Barry Ltd. for an order under s.11(3) of the Insolvency Act 1986 for permission to commence proceedings in the Commercial Court against the respondent company ("the Company") which is in administration. The effect of an administration order under s.11 is to introduce automatically a stay of all existing and future proceedings, and also to prevent the enforcement of any property or other rights against the Company during the administration.

2 In this particular case the purpose of the intended action is, it is said, to resolve, through the medium of the court, various issues of construction arising under an agreement entered into between A.E.S. Barry and the Company on the 18th October 2002. The agreement in question was what is commonly referred to as a type og power purchase agreement ("PPA") under which, for a period of six years, in return for the payment of a fee the Company agreed to supply gas to operate the power station in Barry, South Wales, which is owned and operated by the applicant. As part of the agreement the Company took the resulting electrical output and of course bore the commercial risks involved in selling that on in the market.

3 The administration order was made on the 19th November 2002, both in relation to this company and I believe at the same time in relation to a number of other companies in the TXU group. I understand also that some of those companies are now in liquidation. The administration order specified three of the statutory purposes: the approval of a voluntary arrangement under Part 1 of the Insolvency Act or, secondly, the sanctioning of a s.45 scheme, or thirdly, the more advantageous realisation of the Company's assets than would be effected on a winding up.

4 In the event, the Company's assets have now been disposed of so that the administrators, as things stand today, simply hold a fund which I understand is well in excess of £1 billion, which will be used to make distributions to the Company's creditors in the event that the administration comes to an end in a s.45 scheme.

5 The PPA provided that the making of an administration order was an event of default entitling the applicant to serve what is referred to in the agreement as an "early termination notice" under clause 23.2. That has the effect of bringing the PPA to an end and of crystallising the Company's liabilities to AES in the form of what is described as an early termination payment. This is defined by means of a complicated formula set out in clause 23 of the agreement, which it is unnecessary I think for me to set out in detail in this judgment. In summary, it requires the parties to calculate the net present value of all projected revenues, to add various costs and the value of certain other obligations, and then to deduct what is described and defined in the agreement as the "net present value of the post-tolling revenue". It is, I am told, the interpretation of those words, and ultimately the implementation of those provisions in terms of calculating the payment to be made, that has led to the dispute between the parties.

6 Under clause 23.3.3 of the PPA the parties are required to attempt to calculate the quantum of the early termination payment, but in the event that there is non-payment of that sum or a dispute about the amount of the early termination payment then either party has the right to refer the matter to an expert pursuant to clause 36 of the agreement. Clause 23.3.3 goes on to provide that the expert will then be instructed to calculate the early termination payment in accordance with that clause and with schedule 13 of the agreement.

7 The definition of "post-tolling revenues" is set out at the beginning of the agreement and is extremely complicated. I do not intend to attempt to paraphrase it. It involves reference to a number of hypothetical assumptions which it is unlikely, as I see it, that a court could sensibly attempt to interpret without some evidence and understanding of the way in which business of this kind under these agreements was carried out between the companies at the relevant time.

8 The provisions of schedule 13 to the agreement to some extent bear this out by providing that the expert, if appointed, to determine the amount of the payment and, in particular, the amount of the post-tolling revenues (which is an essential component of that calculation) shall be instructed to appoint somebody referred to as the economic consultant as his adviser in order to determine the post-tolling revenues or, if applicable, something that is referred to as the "forecast spread". Attached to schedule 13 is a letter of instruction to the economic consultant which sets out the detailed matters that he is required to consider as part of that exercise.

9 Mr. Collings, on behalf of AES, submits to me that the failure of the parties so far to agree the amount of the early termination payment is largely due to an inability to resolve what are essentially questions of construction on the agreement. The purpose therefore of the Commercial Court proceedings which are exhibited in the evidence in draft is to seek the court's determination on a number of such issues which, when resolved by the court, it is anticipated will enable the parties then to resolve their differences.

10 It is, however, accepted that in the event that that proves impossible either party would be free, if they chose, to refer the matter to the expert for determination in accordance with the procedures that I have just referred to. There is therefore no certainty that even at the end of the Commercial Court proceedings there will necessarily be a rapid resolution of this dispute.

11 On behalf of the administrator, Mr. Trower submits that the matter is in fact not as straightforward as that. He says that the selection of issues to be determined in the Commercial Court will not in fact achieve a resolution of all the matters in dispute, and that even to resolve those matters it will be necessary for the court to receive factual evidence in relation to the position as understood by both parties at the time they entered into the agreement; in other words the usual factual matrix and, secondly, possibly expert evidence dealing with the technical aspects of the calculation.

12 I have taken the view that it is unnecessary for me and probably impossible for me to resolve on this application the precise degree of complexity which is potentially involved in those proceedings. In order to do that I would have to perform the very task which it is proposed to set before the Commercial Court judge, and I certainly do not intend to do that in the context of this application. It is enough I think for me to indicate that, on my preliminary review of the proceedings set against the agreement which they are intended to interpret, I am far from convinced that this is a straightforward and simple matter of construction that can be resolved on a minimum amount of evidence and largely on the basis that the judge can simply read the agreement and decide what it means.

13 That has some relevance I think in relation to the timetabling of the action. The evidence on behalf of the applicant is that if I were to give leave to commence these proceedings now the evidence which already exists in draft on behalf of AES could be completed on both sides during the course of the long vacation with a CMC early next term, and a two-day hearing probably no later than the end of October. However, if my initial view is correct and the litigation turns out to be more complicated than that, it seems to me likely that that is an extremely optimistic timetable, and that the resolution of the action may not occur until much later in the year at the earliest.

14 The application, however, can, in my judgment, be resolved without having to decide on the precise degree of complexity involved in the Commercial Court litigation. The moratorium imposed under s.11 is primarily concerned to avoid the assets of the Company from being removed by creditors whilst the administrators continue to attempt to achieve the statutory purposes for which the administration order was made. In the most ordinary type of case that would be the more advantageous realisation of the assets, and it is obvious in that context why the moratorium is necessary. There may be cases, and indeed there are reported cases, where applications of this kind are made even in those circumstances, such as, for example, in the case of a lease which is forfeited on the insolvency of a Company where the landlord seeks to regain his property free from the shackles of the administration order. But in a more ordinary case, where the creditors' claim is simply a monetary one, the court has to carefully scrutinise whether or not it is appropriate to allow that claim to be determined and enforced in advance of the achievement of the statutory purposes and the conclusion of the administration, either by a scheme or, if all else fails, by an order for the liquidation of the Company.

15 The relevant principles to be applied are set out in the judgment of the Court of Appeal in the reported case of In re Atlantic Computer Systems plc [1992] Ch.505. There, at p.542, Lord Justice Nicholls, giving the judgment of the court, set out what he regarded as being the general principles to be applied in relation to the exercise of the undoubted discretion which exists under s.11(3). The Court of Appeal was careful to emphasise that these are simply principles for the guidance of the court and are not intended in some way to override the general discretion vested in the court under the provisions of the statute. Nonetheless they are a useful guide as to the matters which one ought to consider when coming to exercise the discretion.

16 The first principle is that it is in every case for the person who seeks leave to make out a case for him to be given leave. That is supplemented in relation to cases such as the present by what is said under the third sub-paragraph, that is to say, that in all cases other than where a proprietary claim is being asserted it is a matter of balancing the legitimate interests of the creditor pursuing the matter and of the other creditors of the company. More particularly, and I quote:

"... the purpose of the prohibition is to enable or assist the company to achieve the object for which the administration order was made. The purpose of the power to give leave is to enable the court to relax the prohibition where it would be inequitable for the prohibition to apply."

17 Although, as I have already indicated, the most common and obvious purpose of the embargo placed by s.11 on the taking of proceedings is to preserve the property of the company, the statute nonetheless does also have the effect, as in this case, of preventing a creditor from taking any form of proceedings relative to its claim during the course of the administration. This means that unless the court intervenes by making an order under s.11(3) the statute prevents a creditor seeking to pre-empt, for example, adjudication of its claims in the context of a s.45 scheme by going to the court in advance and asking for a judicial determination of those matters.

18 That is precisely what I am faced with on this particular application. Mr. Collings, on behalf of his clients, says that they have in reality become wearied by the delay involved in processing their claim. They have intimated to the Company, through its administrators, a claim of something in excess of £60 million pursuant to the provisions of clause 23 of the agreement. The original response to that was to deny the claim in its entirety, but that has now been modified to accepting that there is a claim but disputing its quantum.

On the evidence before me it is suggested that the difference between the parties may be as much as £30 million.

19 The purpose of this application is to avoid AES becoming embroiled, Mr. Collings says, in the machinery that will be provided under a scheme for determining disputed claims.

His case is that if I give permission it will be possible to go to the Commercial Court during the course of this year and to obtain a crisp determination of the issues of construction which concern the parties, thereby enabling them to resolve, by agreement, their differences. If that can be done by the time the scheme is approved and implemented it will enable AES, he says, to seek payment of a dividend as a fully recognised creditor in the sense of a creditor whose claim is not in dispute, thereby avoiding any delay in the payment of a dividend. It will also have the additional bonus that when the scheme comes to be voted on AES will be recognised in terms of its voting rights as a creditor in the full sum to which is entitled and not simply in relation to the provisional sum assessed by the administrator for voting purposes.

20 The application therefore, so far as it requires me to be satisfied of a good and proper reason for lifting the embargo, is based on two matters. The first is the prejudice and inconvenience to AES of having to wait for the determination of its claim until after the scheme is put in place and the machinery of the scheme then subsequently operated, and, secondly, as I have said, its inability to be accorded its full voting rights pending the resolution of the dispute.

It is also, and I should mention this for completeness, said that AES has what Mr. Collings described as a legitimate interest in establishing its position as a creditor, but

I think that it is difficult to attribute to that any particular weight beyond what is contained in the other two points that I have mentioned.

21 That therefore is one side of the balancing exercise. The other side is essentially the administrator's concern that if permission is given by the court to this particular creditor to determine the disputes about the quantum of its claim in advance of the scheme it is likely to act as a green light to other creditors in a similar position. I should mention that there are at least eight other creditors with PPAs, not identical but similar in substance to the one under consideration, and possibly other creditors, who wish to seek an adjudication by the court of their claims rather than to await the implementation of the scheme. That will lead to a disorderly set of arrangements under which the administrator will be concerned to deal in parallel proceedings with claims that he says ought properly to be dealt with centrally as part of a scheme acquiesced in by all creditors and sanctioned by the court as the correct means of resolving claims and bringing the administration to an end.

22 There is also a suggestion by the administrator, Mr. Bloom, that if litigation of this kind becomes sufficiently widespread it may cause either resentment or at least a lack of confidence on the part of the creditors in the scheme machinery as a means of resolving disputes, with the result that it could imperil the approval of the scheme and lead,

I suppose, ultimately to a liquidation of the Company.

23 I think that that concern is overstated. It seems to me that it is in the interests of none of the creditors that there should be a liquidation rather than an orderly end to the administration. I think that the real objection to what

Mr. Collings proposes is essentially two-fold: first of all, that it will run contrary to the arrangements set out in the administration order and reinforced by the provisions of s.11, which are that the administrator should be free to run the Company free of claims of creditors with a view to disposing of the Company's assets in order to realise a sum for distribution at the end of the administration to creditors; and then to process the claims of creditors either through a scheme or voluntary arrangement or, alternatively, if there is no possibility of that, by seeking an order for the liquidation of the Company.

24 It seems to me that it will only be in exceptional cases, and I do not rule out that there may be such cases, but it will be in exceptional cases that the court gives a creditor, whose claim is simply a monetary one, a right by the taking of proceedings to override and pre-empt that statutory machinery. That is the first objection, and it is of course an objection in principle. But the second answer to the application put forward by the administrator in this case is that there is in fact no real prejudice to this particular creditor in allowing the administration to run its course and in requiring AES to prove for its claim through the ordinary machinery of the scheme. The reason for that is that the scheme, I am told in the evidence and on instructions, which will be put forward for the approval of the creditors and ultimately the court, will contain a right for any creditor whose claim is disputed either to have that adjudicated upon by some form of expert determination or to submit the dispute to the court. Therefore there is no intention, and I think in reality no possibility, as Mr. Collings accepts, of AES, or indeed any of the other creditors, being deprived of access to the court if I allow the administration to run its course unimpeded by any interim court proceedings.

25 The second point in relation to the alleged prejudice to AES is that it is also, I am told, the administrator's intention to include as a term of the scheme provision whereby AES and other creditors in a similar position, part of whose claim is in dispute, will receive an interim dividend in relation to the undisputed part, and will then have a sum set aside globally to meet the balance of their claim, if established, to which will be added interest. The result of this would be that if AES is able, through the machinery provided under the scheme, to make out a claim for any sum over and above what the administrator is prepared to agree it will receive in due course a final dividend based on that sum with the proportionate amount of interest attributable to it.

26 In those circumstances, I am not satisfied that there are any good reasons in this case why I should relax the prohibition imposed by s.11 so as to allow the Commercial Court proceedings to go ahead. If it is necessary to go that far, for the same reasons I am not satisfied that it would be inequitable for the prohibition to apply.

27 I should also mention that, so far as the voting point which Mr. Collings relies upon is concerned, it is accepted by him, very properly, that his clients are more likely than not to vote in favour of the scheme regardless of what voting rights they are given by the administrators.

28 In those circumstances, and for those reasons, it seems to me that that head of prejudice really is of very little weight in determining whether or not to lift the prohibition.

29 For those reasons, the right order is for me to dismiss the application.

MR. TROWER: In those circumstances, as your Lordship has dismissed the application, the next matter which arises relates to costs. It was actually listed for more than a day but, notwithstanding that, the parties have exchanged costs schedules, and can I first of all ask your Lordship, as a matter of principle, to say that I should have my costs of the application, and on the assumption that that is the order your Lordship will make, could I hand up the costs schedule that we have served. (Document handed)

MR. JUSTICE PATTEN: Have you got a copy of this, Mr. Collings?

MR. COLLINGS: Yes, thank you, my Lord.

MR. TROWER: My Lord, this costs schedule discloses total costs, as your Lordship sees of £144,000. I think, just for comparative purposes, the other side's were £99,000 on theirs. This is clearly an application which has given rise to fairly substantial costs.

MR. JUSTICE PATTEN: How does an application of this kind generate costs of £144,000?

MR. TROWER: My Lord, my instructions in relation this can I think be summarised as follows. This application was taken very seriously indeed by the administrators because although, as your Lordship has found, at the end of the day the likelihood of the scheme failing as a result of it being successful was relatively slim, it was plainly, on the administrator's view, going to undermine the conduct of the progression towards the approval of the scheme were such an application to be successful.

There was a great deal of review of work required for the purposes of assessing how the application in this insolvency -- well, what it required was a large amount of

co-ordination, information-gathering and drafting at the end of the day to ensure that what the court was told on this application accurately reflected the position in relation to the insolvency as a whole.

My Lord, in my submission, at the end of the day although it does seem like a rather large sum of money, reflecting the importance of the matter to the general body of creditors and the size of the administration, it is a figure that is not completely out of order, if indeed not out of order at all. It is the kind of thing that one might expect to see given the very large sums of money at stake.

My Lord, it is difficult I think to ----

MR. JUSTICE PATTEN: Well, what are you asking me to do,

Mr. Trower? I am certainly not -- well, I will hear what

Mr. Collings is going to say, but, given the very large sums involved, I am certainly not going to try and assess the costs myself.

MR. TROWER: If that is your Lordship's view, and I am not going to urge that if that is your Lordship's reaction, but the other alternative is for it to be sent off for detailed assessment with your Lordship making an interim order ----

MR. JUSTICE PATTEN: And it may be between two City firms and, for all I know, my concerns might turn out not to be as serious as

I may think. I do not know, you may be able to agree it,

but ----

MR. TROWER: Yes. I think all one can say about it is that although it is obviously a lot of money Norton Rose's bill of costs was a lot of money as well.

MR. JUSTICE PATTEN: I have not looked at those.

MR. TROWER: It is £99,000, so it is less, and I accept that, it is plainly less, but it is still a very large sum of money for a ----

MR. JUSTICE PATTEN: You are asking for your costs.

MR. TROWER: I am asking for my costs.

MR. JUSTICE PATTEN: And the ordinary order would be that those should be assessed, if not agreed, on the standard basis in the usual way.

MR. TROWER: In the usual way, and would your Lordship send it off for detailed taxation forthwith, because I think that is required. I am not quite sure what happens in an insolvency process. And I would ask for an interim order as well.

I quite appreciate your Lordship does not want to summarily assess them.

MR. JUSTICE PATTEN: No. But before I call on Mr. Collings, what are you saying the interim payment should be?

MR. TROWER: Fifty per cent.

MR. JUSTICE PATTEN: Right, Mr. Collings, what do you say about that?

MR. COLLINGS (Who was not situated near a microphone): So far as my own bill of costs is concerned, because my learned friend draws some comfort from the fact that we managed to achieve two-thirds of the size of his bill, our bill also included the proceedings in the Commercial Court and leading counsel's advice in relation to that. I am not sure it actually probably should have done, but my learned friend's is simply in relation to this one day application.

MR. JUSTICE PATTEN: First of all, are you opposing paying their costs?

MR. COLLINGS: My Lord, the only point I would make in relation to that, because costs prima facie follow the event, is, as you will appreciate, my Lord, we were taken very, and I hope in due course, presently surprised, not just only today but in due course, by the fact that our claim will at least be paid in relation to the undisputed part and that the remainder will attract interest, and that is a very real difference.

I cannot say whether it would make all the difference to this application or not so far as we are concerned, and nor can

I say that it would have made all the difference to your Lordship because there were other important aspects of your Lordship's judgment; for example, the really statutory machinery points, which was your Lordship's first point, and also the ability to go to court. But that was a very real difference.

I cannot say of course as to the ----

MR. JUSTICE PATTEN: No, all right. Anyway, that is helpful.

MR. COLLINGS: That is as much as I can say in relation to that.

MR. JUSTICE PATTEN: Yes. Now, what about the money?

MR. COLLINGS: It is a very large sum. In a case ----

MR. JUSTICE PATTEN: I am going to send it off for detailed assessment. I am not going to assess it. It is normal, as you know, for an interim payment ----

MR. COLLINGS: Absolutely, that would be very appropriate.

MR. JUSTICE PATTEN: So it is really a question of how much.

MR. COLLINGS: We would say if our bill is £99,000, on an interim payment on account you could normally start there, and I think in cases like Miles Technology you would normally for about 40 per cent. So we were thinking in the region of about £40,000, and certainly not half of 144, which as an interim payment on account of what is said to have been expended on the application is a fantastic amount.

MR. JUSTICE PATTEN: Yes.

MR. COLLINGS: I remember a case in the Court of Appeal, Magnus v. Home Office, where Lord Wilson talked about proportionality in relation to the assessment of costs, and there some costs of a one-day hearing were £65,000, and he put an exclamation mark after that in his judgment, and I think to get an interim payment on account of one-day costs in excess of £60,000 would be sort of a fortiori.

MR. JUSTICE PATTEN: All right.

MR. COLLINGS: That is a fair sort of area, and I could not resist an order for payment on account of costs unless your Lordship thought that I had some point in ----

MR. JUSTICE PATTEN: Yes.

MR. COLLINGS: ---- or a percentage reduction.

MR. JUSTICE PATTEN: Yes, all right, thank you. Do you want to say anything else, Mr. Trower?

MR. TROWER: My Lord, just on the interest points, about how important it is to Mr. Collings's clients. They raised the interest issue in Mr. Collings' skeleton for the first time. Nobody had ever raised this point with us before. I am told

I cannot say that, but ----

MR. JUSTICE PATTEN: I need not trouble you on the incidence of costs, Mr. Trower.

MR. TROWER: Then I shall not say any more on that.

So far as quantum is concerned, 50 per cent. of ours is less than 75 per cent. of theirs, so I would think moderate, in my submission, to say 50 per cent.

MR. JUSTICE PATTEN: I will dismiss the application with costs. I am going to order a detailed assessment of costs of the application, and I will order the applicants to pay the sum of £50,000 by way of interim payment within 14 days.

Is there anything else that I need to deal with?

MR. TROWER: Detailed assessment forthwith?

MR. JUSTICE PATTEN: Yes, I was going to direct a detailed assessment. Nothing else? Thank you very much.

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