The Department for Environment, Food and Rural Affairs has quietly amended insolvency legislation to update the Special Administration Regime for water companies in England and Wales.

The changes have been made via a series of new or draft Statutory Instruments is to update the Special Administration Regime. 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 special administration (WISAR) 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 WISAR comes into play when a water industry 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 industry company to hold its appointment or licence (a performance SAR).

The new/draft measures are:

• Flood and Water Management Act 2010 (Commencement No. 10) Order 2024 – in effect from 12 January 2024
• Draft SI - The Water Industry Act 1991 (Amendment) Order 2024 - not yet in effect
• Draft SI - The Water Industry (Special Administration) Regulations 2024 - not yet in effect

The Memoramdum states:

“The WISAR 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 industry company.

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

i. either the transfer of the relevant parts of the water industry company’s undertaking to another water industry company or companies

ii. or the rescue of the water industry company

The Flood and Water Management Act 2010 (Commencement No. 10) Order 2024 commences the rescue and hive down provisions. The new rescue provisions will expand the key objectives of a WISAR to include rescue, thereby allowing “otherwise viable” water industry companies to enter a 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 industry company would then exit to liquidation or dissolution. 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 WISAR 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 WISAR 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.”