New water industry Special Administration Regime

The UK has introduced changes via a series of new statutory instruments to update the water industry special administration regime (SAR).  An explanatory memorandum published by Defra says that the update has been made “in light of developments in the general insolvency and restructuring legislative regimes since the water industry SAR regime was introduced.”

Special administration is a process in which the objectives under a normal administration are modified to include public interest objectives. The process typically enables an insolvent company which provides vital public services, (e.g. water, energy, rail), to be put into special administration with a requirement that the public service will be provided pending rescue or transfer to new owners.

The use of a SAR comes into play when a water company becomes insolvent or fails to carry out its statutory functions or licensed activities to such an extent that it is inappropriate for the water company to hold its appointment or licence, (a performance SAR).

Defra’s memorandum states:

“The water industry SAR is seen as the ultimate enforcement tool in the case of performance SARs, and in both insolvency and performance SARs ensures consumers are protected from the impacts of financial distress and that water and wastewater services will continue to be provided.”

Either the Secretary of State or Ofwat, (with the Secretary of State’s consent), may apply to the High Court for a special administration order. If granted, a special administrator is then appointed to manage the water company.

While the special administration order is in force, the affairs, business, and property of the water company will be managed by a person appointed by the High Court on the application of Ofwat or Defra pending:

1. either, the transfer of the relevant parts of the water company’s undertaking to another water company or companies, or
2. the rescue of the water company.

The Flood and Water Management Act 2010 (Commencement No. 10) Order 2024 commences the rescue and hive down provisions. The new rescue provisions expand the key objectives of a SAR to include rescue, thereby allowing an “otherwise viable” water company to enter special administration, restructure its debts, and then exit the SAR “as a going concern.”

Under the existing regime, the special administrator can only transfer the regulated business to a new owner and the old water company would exit to liquidation or dissolution. The new legislation changes this, meaning that existing shareholders would potentially be able to retain a stake in the company. A further change enables special administrators to transfer a water company’s assets to a subsidiary and then allow them to sell the shares in the subsidiary. The aim of this change is to ringfence the value and potential tax savings to attract buyers, and therefore allow for a maximised value on any sale. The change may help the government avoid the costs of temporary or permanent renationalisation of the water company, on the basis that a restructuring that still retains existing shareholders is regarded as ‘easier’.

Defra’s explanatory memorandum about the changes says:

“Hive-down is a common, commercial restructuring practice to ringfence value and attract potential buyers, as it will enable the administrator to hive-down the regulated business to a subsidiary to benefit from potential tax savings.”

Commenting on why the SAR is being changed, the memorandum says:

“Given the recent market instability in the energy and banking sectors and the need for HMG intervention in certain instances, e.g. Bulb’s special administration, Defra reviewed its powers should a water or sewerage undertaker or qualifying water supply licensee become insolvent or not meet its statutory duties, and the government had to apply for a special administration order.

“This work flagged that by bringing the SAR into line with wider developments in the general insolvency and restructuring legislative regimes it could deliver better value for money. As such the Secretary of State Defra is commencing and implementing these provisions to bring it in line with other SAR regimes.”

The new measures are:

• Flood and Water Management Act 2010 (Commencement No. 10) Order 2024 – in effect from 12 January 2024
• The Water Industry Act 1991 (Amendment) Order 2024 - in effect from 23 February 2024
• The Water Industry (Special Administration) Regulations 2024 - in effect from 14 March 2024
• The Water Industry (Special Administration) (England & Wales) Rules 2024 – in effect from 19 March 2024.