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Lord Whitty: The first amendment seeks to link the objective of energy administration directly to the fulfilment by the company of its licence conditions and its general duties. I understand my noble friend's argument that a company's administration should continue to comply with its licence conditions and we considered whether we should stipulate that in the Bill. However, we concluded that a direct reference to the licence conditions was unnecessary because the energy administrator would, in any event, need to be mindful of the company in administration continuing to comply with all the licence conditions. Otherwise the consequences for members and creditors of the company if it ceased to be licensed could be damaging. We therefore considered that it was not necessary to stipulate that in this context.

It is also unnecessary to link the objective to the fulfilment of the company's general duties, which are quite wide. The objective already links to maintaining and developing an efficient and economical system. Insofar as this is a general duty of the company, there is no need to refer to it again in the clause.

The approach as drafted focuses on the policy objective—which must be the main and overriding reason for introducing the special administration—that there should be no interruption to gas or electricity networks. In other words, the lights should not go out. That is the overriding responsibility of the administrator. Insofar as licence conditions can be complied with within that, clearly there is an expectation that the administrator would ensure that they were. It is important that that overriding responsibility should be spelt out; anything else may cause confusion.

The other two amendments relate to the interests of employees in the case of energy administration. The first deals with a requirement to notify the trade unions of an application. I appreciate that there may well be a general argument for that, which my noble friend Lord Brooke may wish to pursue, but the clause follows the precedent of existing insolvency law and adapts only where necessary for the purposes of energy administration. It would be odd if such a provision were written into this kind of administration if it was not generally provided in other administration circumstances.

Clearly the employees are subject to the same protection as in any other "ordinary" administration. It will be for the company to ensure that its employees are properly informed. That is the main area of communication with the trade unions.

Amendment No. 127 would require the energy administrator to exercise his powers in a way which protects the interests of employees, insofar as that is

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consistent with the objective of energy administration. That may be highly desirable but, again, we are following the precedent of existing insolvency law and adapting it only where necessary to meet a particular situation. Again, there is no real justification for treating employees of a protected energy company in energy administration differently from those in ordinary administration.

Of course, under existing insolvency law, employees can be classed as creditors under paragraph 99 of Schedule B1 to the Insolvency Act 1986, which is to be found in Schedule 16 to the Enterprise Act 2002. In that regard, their interests would be protected under energy administration just as would those of other creditors. Under paragraph 74 of that schedule to that Act, an employee who is a creditor of the company may apply to the courts if he believes that the administrator is acting unfairly to harm his interests as an employee creditor of the company.

My argument against the second and third amendments is that there is no reason for us to depart from the ordinary rules of administration in this respect. The text therefore follows that objective. The noble Lord, Lord Brooke, referred to a piece of legislation—I did not hear entirely what he said—and suggested that there is a precedent. Clearly if that is the case I shall look at it and consider whether it gives me any cause to modify that argument.

The noble Lord, Lord Lea, whose name is attached to the amendment, is not in his place. He has been campaigning for such legislation for trade unions for at least 35 years to my knowledge—it was in his evidence to the Donovan commission in 1966—but has never succeeded. He will not succeed through this back door either.

Lord Brooke of Alverthorpe: I thank the Minister for his response. I regret that my noble friend Lord Lea is not in his place to elucidate on the evidence put to the Donovan commission. I certainly do not remember the fine detail of that.

Taking the last point first, if we have raised a precedent that requires further attention, I should be grateful if my noble friend will take the matter away, discuss it with his officials and consider whether there is any opportunity for some variation of what has been stated to meet the precedent previously established.

As to my noble friend's other points, naturally we believe that the Government have recognised, so far as they can, that this is a special piece of work that must be undertaken by specially qualified people. That will ensure that the work is carried out and seen through fully by the best qualified and, in many respects, protected staff.

We have endeavoured in our representations to ensure that employees' terms and conditions are up to the best possible level, particularly in regard to protection of pensions. Indeed, in certain areas, we have tried to achieve minor breakthroughs to ensure that their best interests are protected. I recognise that the generality of applications will similarly apply in this area but I was hoping that we might look for some special changes for involved employees.

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It seems that we have not so far convinced the Minister with our arguments. I shall take away the points he made, reflect on them and consider whether to bring back further arguments at a later stage. Alternatively, we may accept the arguments put to us today. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 127 agreed to.

Clause 128 [Applications for energy administration orders]:

Baroness Miller of Hendon moved Amendment No. 125A:

    Page 100, line 5, at end insert—

"( ) Before making (or proposing to make) an application in relation to a company under this section, or consenting (or proposing to consent) to such an application by GEMA, the Secretary of State must—
(a) have consulted the directors of that company; and
(b) be satisfied that there is no reasonable prospect that the company would otherwise be able to avoid going into administration or insolvent liquidation within the meaning of section 214 of the 1986 Act."

The noble Baroness said: An energy administration order is defined by Clause 126 as one made by a court in relation to a protected energy company. It provides that while the order is in force, the affairs, business and property of the company are to be managed by a person appointed by the court. Clause 128 gives power to apply to the court for an energy administration order. It limits the power to apply for an order to the Secretary of State or to GEMA if the Secretary of State authorises it.

Under the Bill in its present form, there is a danger that an energy administrator might be appointed prematurely. I believe that the test for the exercise of the Secretary of State's power to apply for the appointment of an energy administrator is the same as the court will exercise in deciding whether or not to grant it.

Administrators cost a great deal of money, adding to a defaulting company's problems and depleting still further the funds available to the creditors. It should be recognised that a company in financial trouble can sometimes be rescued or reorganised without an administrator being appointed. This may involve, for example, a formal arrangement with creditors or an informal arrangement with one or more of them.

High profile cases in recent months have included British Energy and AES Drax. In the case of TXU Europe there was a six-week period before the appointment of the administrator. During that period, the orderly sale of the K supply business was achieved. Those three examples are from the competitive, as distinct from the monopoly, segments of the energy market.

However, the appointment of administrators, as distinct from an informal rescue, in any kind of business, including energy administrators, is likely to be a value-destroying step for any company. That is because administrators are bound to act in a somewhat rigid manner. They are not likely to stick out their necks by taking a commercial risk to carry on or

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further the business. Usually, an administrator will be an insolvency practitioner who will have little or no knowledge of the business, even if he has access to outside expert advisers.

It seems desirable, therefore, that the Secretary of State should be required to consult the directors of the company before, in effect, pulling the plug by taking the drastic step of applying for an energy administration order, or even by taking the commercially damaging step of announcing an intention to do so.

The amendment also prohibits the Secretary of State from applying to the court for an energy administration order unless he believes that there is no other reasonable prospect that the company would be unable to avoid liquidation. In other words, the amendment prohibits the Secretary of State from acting in haste. It requires the Secretary of State to consult with those who will know at least as much about the affairs of the company as his advisers and the headline writers in the financial press.

The amendment does not unduly restrict or delay the exercise of the Secretary of State's powers to apply for the appointment of an administrator. Consultation with the directors need not be a lengthy process. It could be carried out in a matter of hours or even in the course of a telephone call. It does not impose on the Secretary of State the responsibility of carefully considering whether it is better for an administrator to be appointed than to allow a rescue to be organised. But having to give consideration to that alternative is no bad thing. It is not a novel idea. It frequently happens in the ordinary world of commerce when a creditor has to decide whether it is better to seek a winding-up order or to appoint an administrator rather than go along with a rescue plan.

I recognise that there is an added dimension in the case of a failing energy company; that is, the need to ensure that there is a continuity of supply to customers. There is no reason to believe that a very short consultation with the directors would prejudice that. Neither would the requirement that the Secretary of State must take all relevant factors into account before deciding whether to apply for an energy administration order.

On the contrary: the effect on customers is one of the matters that the Secretary of State would undoubtedly want to take into account. This amendment, far from inhibiting or restricting the Secretary of State's power to act, will enhance it. By following the procedure laid down in the amendment, he will be protecting himself from a challenge in the courts about the way that he has exercised his discretion. I beg to move.

6.30 p.m.

Lord Triesman: Amendment No. 125A would require the Secretary of State both to consult the directors of a protected energy company and to be satisfied that there is "no reasonable prospect" that administration or insolvent liquidation could otherwise be avoided before making an application for an energy administration order. I have tried to fit in my

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mind what the noble Baroness, Lady Miller, said about how rapidly that might be operated in extreme circumstances. I must confess that at the moment I find it hard to reconcile the notion that it could be done in hours or on a telephone and still meet what I think is the quite serious test of no reasonable alternative, which might well be difficult. Of course, it could be brief—that is not inconceivable—but it would be difficult.

I hope that what I have already said illustrates that I completely understand the proposers' concern that the Secretary of State should not use premature powers or act precipitately—possibilities that have been described—and should not seek an energy administration order lightly. That is quite right. By any standards, that would be a very serious matter. The noble Baroness referred to the rights of the creditors and the desire to explore other options. The delays that are sometimes needed in order to consider what the alternatives might be were also mentioned. They are all serious matters.

I concur that the Secretary of State first should be satisfied that there is no reasonable prospect that the company can avoid going into administration or insolvent liquidation by means of a workout or some alternative solution. To do that he would no doubt normally consult the protected energy company and others, such as the regulator and insolvency experts, as appropriate.

However, it would not be appropriate to place either requirement envisaged by the amendment in the Bill. The purpose of the provisions for energy administration for protected energy companies is to ensure, as the noble Baroness said, that "the lights stay on". In the most extreme circumstances, there should be a provision to ensure that the lights stay on in the very unlikely event that such a company faces insolvency. I do not imagine that that would be an event which would occur with great frequency.

However, I say to the noble Baroness that were there to be any risk of the lights going out, by any standards, it would be an extremely dire and public event that would cause considerable consternation. For those reasons, it is important to think about the alternatives that we believe are already in the Bill.

I should add that I take very seriously the noble Baroness's argument that by and large administrators are averse to commercial risks. However, in the extreme circumstances of a real risk of the lights going out, I doubt whether anyone would take any risks on the side of Government because of the serious consequences.

In exceptional circumstances—clearly they would be very exceptional circumstances—this may require the Secretary of State to act with the greatest possible dispatch. It cannot be right to require him first to consult the directors of the company or fully to satisfy a test that "there is no reasonable prospect" that the company would otherwise be able to avoid administration or insolvent liquidation. As always, the Secretary of State will have to act within the bounds of

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administrative law. In any sense, that is a constraint that must remain. But he should not be further constrained at the point when that rather more remarkable and dramatic circumstance potentially could occur.

I would also observe that even where there is no consultation prior to the making of an application, there should be sufficient time before the hearing for the Secretary of State to discuss the application with the company. It would be possible for the Secretary of State to withdraw the energy administration application if, following discussions with the company, it appeared that energy administration was unnecessary.

The Secretary of State has a duty to serve notice of the application on certain interested parties listed in the Bill once the application has been filed at court. Therefore, there will be a short window in which to make representations to the Secretary of State before the hearing and a further opportunity to raise objections at the hearing. Alternatively, if the interested parties concur with the Secretary of State's judgment, it is intended that they will be able to waive this notice period under the energy administration rules.

I therefore hope to assure Members of the Committee that energy administration will not be sought lightly. The reason that the Secretary of State must have freedom to act quickly would be to keep the lights on. In those circumstances, the amendment is inappropriate. In conclusion of this point, I recognise that the circumstances I am describing probably would occur either not at all or very rarely. But the provision of a safety net of this kind in legislation is none the less, in our view, essential.

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