In this post Alfred Artley of Monckton Chambers discusses the Divisional Court’s judgment in R (British Gas Trading Limited) v Secretary of State for Energy Security.
In a major judgment on the UK’s post-Brexit subsidy control regime, the Divisional Court has dismissed judicial review challenges brought by a number of energy suppliers to the government-backed takeover of Bulb by Octopus Energy. This post summarises the decision (full judgment here), and discusses some of the key points that may be of significance for future subsidy control claims.
Background
Bulb had been a major domestic energy supplier with around 1.5 million customers but in 2021 it ran into serious financial difficulty and was placed into administration under the special administration regime for energy companies. Bulb’s administrators subsequently launched a sale process, assisted by M&A advisers from Lazard. Discussions were held with a number of firms, two of whom made indicative offers in the first phase of the process. Octopus initially indicated that it would not bid, but was permitted to re-enter during the second phase. It made a revised offer at the end of July 2022, which the Secretary of State (‘SoS’) accepted on the recommendation of the administrators. This entailed significant government support for the business, in particular under a Wholesale Adjustment Mechanism Agreement (‘WAMA’), whereby the Government effectively assumed the role of Bulb’s hedging counterparty, advancing the company a loan worth an estimated £4.5 billion to purchase energy on the wholesale market, with repayments limited to the wholesale cost set by the Ofgem price cap.
The Proceedings
Three rival suppliers (British Gas, E.ON and Scottish Power) lodged judicial review proceedings against the sale, specifically the Secretary of State’s decisions (i) to provide funding for the transaction (the ‘Funding Decision’) and (ii) to approve the statutory energy transfer scheme via which Bulb’s business was transferred to Octopus (the ‘Approval Decision’). They challenged these decisions both on conventional public law grounds, mostly directed towards the fairness of the sale process, and also on the grounds that the support provided was in breach of the subsidy control principles set out in the post-Brexit Trade and Cooperation Agreement (the ‘TCA’).
The claims proceeded to a rolled-up judicial review hearing in the Divisional Court before Singh LJ and Foxton J. The Court refused permission on all grounds on the basis of undue delay in bringing the claims. It nevertheless proceeded to address the merits of claims, holding that permission would have been refused on all the public law grounds, which were not reasonably arguable; permission would have been granted on the subsidy control grounds, though these ultimately would also have been dismissed on their merits.
Discussion
The need for promptness in filing claims
The decision emphasises the need for subsidy control challenges to be brought as soon as possible after the impugned decision is taken, as here all the claimants were heavily criticised for their delay in issuing proceedings. The Funding and Approval Decisions had been taken on 27 October 2022 and 7 November 2022 respectively, but the claims had not been issued for another three weeks. This the Court said was unacceptable, citing R v Monopolies and Mergers Commission, ex parte Argyll Group plc [1986] and Donaldsons MR’s comment that “in the financial field, a delay even of a few days may be highly detrimental to the interests of third parties and good administration.” The Claimants had been objecting to what they perceived as the unfairness of the sale process and apparent subsidy to Octopus for some time before this, so it was incumbent on them to move very swiftly once the decisions were taken. Rather than waiting for further information to substantiate their claims, they should have issued proceedings as a matter of urgency setting out the essential basis of their claims, and then to amend their grounds as and when further material became available (paragraphs 138-145).
The Claimants’ submission that they needed to write pre-action protocol letters before instigating proceedings was also rejected. The Court noted paragraphs 6.2.4 to 6.2.8 of the Administrative Court’s JR Guide, to the effect that the protocol does not affect the CPR time limits for JR proceedings, and following the protocol does not justify a failure to bring a claim on time; thus in urgent cases, it may not be possible to comply fully with protocol, and pre-action letters may be dispensed with. Even if the Defendant had been guilty of unreasonable delay in responding to the pre-action correspondence, that could not be allowed to prejudice the interests of third parties (here in particular Octopus and Bulb’s administrators), who were required to rely on the validity of the decisions unless and until they were set aside (paragraphs 146-153).
The Claimants also advanced a timing argument based on the provisions of the TCA itself: Article 373(2) requires each party to ensure that provided a subsidy claim is brought within a specified time period, recovery may be ordered if the subsidy is found to be unlawful. Under Article 373(3), the specified time period is defined to be one month from the date on which certain information is provided, so the Claimants argued that no issue of delay could therefore arise. The Court rejected this for two reasons. First, it was only relevant to the remedy of recovery, not the other complaints or remedies sought: “That remedial tail cannot be allowed to wag the dog, which is whether the substantive grounds for judicial review have merit.” Second, the provision was in any event expressed in permissive terms: while the remedy of recovery had to be available in principle in domestic law, this did not prevent the Court refusing it on discretionary grounds, such as delay (paragraphs 154-158).
It is submitted that this reading substantially cuts down the scope of the protection afforded to interested parties that TCA would appear to provide. The natural of reading of Article 373 is that it confers a right to instigate proceedings and obtain a substantive decision on recovery provided the claim is brought with the one-month period. Such a time limit means timing is of the essence in any event, and if complainants are required to move still faster, as this judgment indicates, then it is not clear what purpose the time limit in Article 373 actually serves.
Nor is the domestic law emphasis on avoiding prejudice to third parties easy to reconcile with the footnote to Article 373, that where proceedings are brought within the time limit and the judicial review is successful, “No beneficiary would be able to raise a legitimate expectation to resist such recovery”: in other words, the beneficiary cannot have any legitimate expectation of being able to retain an unlawful subsidy.
Interpretation of the TCA
At the hearing there was some debate as to how far CJEU caselaw on state aid under Article 107 TFEU was relevant to the interpretation of the TCA. The Court did not provide a definitive answer to this question, but did nevertheless indicate when such caselaw was likely to be of assistance.
Article 4 of the TCA provides that the provisions of the agreement are to be “interpreted in good faith in accordance with their ordinary meaning in their context and in light of the object and purpose of the agreement in accordance with customary rules of interpretation of public international law, including those codified in the Vienna Convention on the Law of Treaties”. Article 31 of the Vienna Convention (‘VCLT’) in turn provides the general basis of which treaties are to be interpreted, and Article 32 permits supplementary means of interpretation, including the preparatory work of the treaty and circumstances of its conclusion where the interpretation under Article 31 (a) left the meaning ambiguous or obscure or (b) led to a manifestly absurd or unreasonable result.
As to the relevance of Article 107 caselaw, the Court held that “That question falls to be answered through the application of the VCLT. The principal interpretative tool is the text, and there can be no presumption that the terms of the TCA were intended to replicate, or materially depart from, EU State Aid law. However, it is permissible to have regard to supplementary means of interpretation to confirm the textual interpretation, or when the textual interpretation would engage one of the two provisos to Article 32. Where the language of the TCA substantially replicates the terms of EU law on the same subject, the settled meaning of the equivalent provisions under EU law may well be relevant in that context.” (paragraph 212)
‘Light touch’ review
The Court’s discussion on the appropriate standard of review in subsidy control challenges is also significant, being the first time this question has been considered by the UK courts. Article 366 of the TCA sets out the principles that each party’s subsidy control system must respect, including that “subsidies are proportionate and limited to what is necessary to achieve the objective”; the Claimants relied on this to argue that the ground of judicial review which must be made available in domestic law in order to implement Article 366 is not confined to rationality but must include the principle of proportionality. However, while the Court did accept this in principle, this was subject to the important caveat that “when it comes to applying the principle of proportionality, the context is very important. The consequence may be that in practice the outcome may not be materially affected by the distinction between the concept of rationality and the principle of proportionality.” (paragraph 235)
In the present context, the Court held that a wide margin of appreciation was called for. Though noting that the TCA was not part of EU law and the approach to the principle of proportionality was therefore a matter for domestic law, the Court nevertheless reasoned by analogy with previous EU law cases: in the state aid context, R (Sky Blue Sports and Leisure Ltd) v Coventry City Council [2016] EWCA Civ 453 held that a wide margin of judgment was to be afforded to a public authority when considering commercial circumstances in the private market, while as to the EU principle of proportionality more generally R (Lumsdon) v Legal Services Board [2015] UKSC 41 held that when considering measures of EU institutions exercising a discretion involving critical economic or social choices, especially where a complex assessment is required, the court will usually intervene only if it considers that the measure is ‘manifestly inappropriate’ (paragraphs 239-241).
Nor was it relevant to the standard of review that the Subsidy Control Act 2022 (‘SCA 2022’) had yet to come into force at the time when the subsidy was granted. This legislation designated the Competition and Markets Authority as the “operationally independent authority or body with an appropriate role in its subsidy control regime” required by Article 371(2) of the TCA, but as the Act had not been in force at the relevant time and the CMA had not therefore been required to scrutinise the subsidy; the Claimants therefore argued that the Court should step into the shoes of the CMA and conduct its own assessment, entailing a more intensive approach to the review of SoS’ decision. The Court, however, rejected this submission: in requiring only an ‘appropriate role’ for the independent body, the TCA left a wide margin of appreciation in implementing the obligation, while in the interim period before the SCA 2022 came into force it was left to each party under Article 366(3) of the TCA to determine how the subsidy control principles were implemented in its domestic law, provided that this was done “in such a manner that the legality of an individual subsidy will be determined by the principles”. This the Court was able to do in the present judicial review, but the TCA itself did not specify the manner in which the domestic law was required to determine the legality of the subsidy; rather that was a matter of domestic law, which in this case entailed proportionality in principle, but a relatively light touch standard of review (paragraphs 243-246).
The role of the bidding process in the context of subsidy control assessment
The Court rejected the suggestion that the competitive bidding process undertaken by the administrators and their advisers gave effect to “some independent public law duty of fairness for the benefit of those who have or might wish to have engaged in the process”. Rather the purpose of the bidding process was essentially evidentiary, showing that the transaction which resulted as the conclusion of the process either involved no subsidy because it was done on market terms, or else that the subsidy was the minimum necessary that the market required to transact. As the Commission Notice on State Aid (OJ C262) demonstrates, there are other means of establishing compliance with market conditions, including benchmarking and market data, and conversely where there was only one bid, this would not normally be sufficient to ensure a market price (paragraphs 247-249).
In the present context, the sale process had been conducted by expert advisers (Bulb’s administrators and Lazard), and the recommendation to accept Octopus’ offer was supported by counterfactual analysis and benchmarking by Lazard as well as an independent review. As such, SoS was reasonably entitled to conclude that the sale process had been conducted as an “open, non-discriminatory and competitive” bidding process and that he could treat the only bid which had emerged from it as a fair reflection of the value which the market placed on Bulb’s business in the circumstances (paragraphs 251-252).
Nor was the sale process flawed because the availability of government support had not been actively publicised to bidders at the outset; instead it had been left to bidders to formulate their own requirements. The Court held that this was a matter of judgment; indeed, it was “only too easy to see what criticisms might have been made if HMG had opened the process with a clear statement of its readiness to provide significant financial support to potential bidders.” (paragraph 253(i))
Unlimited guarantees
Finally, the judgment also gives some guidance on what constitutes an ‘unlimited guarantee’ contrary to Article 367(2) of the TCA. Two of the claimants had argued that the WAMA was such a guarantee, as the Government had thereby committed to fund the wholesale cost of energy for Bulb’s customers for six months. Noting that it had heard very little argument on the interpretation of Article 367(2), the Court referred to the relevant Commission Notices on guarantees under the EU state aid regime. While accepting that the concept went beyond the archetype of a promise to a principal to meet the liabilities of a debtor, it held that the concept could not encompass an agreement for the exchange of cashflows (as the WAMA was): this was, in commercial terms, a form of hedge or swap, which might involve cashflows in either direction, rather than a guarantee. Moreover, one of the perceived vices of unlimited guarantees under EU state aid law is that they cannot be measured when granted; however, there was nothing to suggest that the cost of the hedging arrangement under the WAMA could not be estimated within reasonable parameters based on ‘Day 1’ market prices (paragraphs 271-273).
Conclusion
This decision shows that EU jurisprudence on state aid may still have relevance as the domestic courts develop their own caselaw on the UK’s post-Brexit subsidy control system; but in stressing the ‘light touch’ standard of review and granting the decision-maker and their advisers a wide margin of appreciation, it will do little to encourage future subsidy control challenges. This is particularly so given the emphasis on the urgency, and it will be a brave claimant who issues proceedings even before they are fully aware of all the information relevant to the subsidy, as the judgment indicates may be required.
However, it is also important to note that this decision concerns a subsidy granted before the SCA 2022 came into force on 4 January 2023, so that statutory position has now moved on significantly since the events with which the judgment was concerned. Thus future subsidy challenges will now be heard by the Competition Appeals Tribunal (‘CAT’) rather than the Administrative Court, and given the tribunal’s specialist economic expertise, it may not feel obliged to apply such a ‘light touch’ standard of review, at least in practice. Similarly, in Bulb’s case there had been no CMA evaluation of whether the subsidy to Bulb complied with the TCA’s subsidy control principles; however, CMA evaluations are now required in the case of all significant grants, and although these are not binding on the decision-maker, it may be that the CAT proves more willing to intervene if the decision-maker has failed adequately to address criticisms made by the CMA in its report.
The issue of timing may also be less acute in the CAT. The Divisional Court relied on the requirement of promptness under CPR 54.5(1)(a) to refuse permission here, but there is no similar rule in the CAT. Rather section 71 of the SCA sets out the time limits within which subsidy challenges must be brought (one month after the requisite information is available), and there is nothing to suggest that complainants could be required to move any faster, just as (for example) questions of delay have never arisen for interested parties challenging mergers decisions within the statutory time period.
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