Insolvency reform in the water sector: Staying afloat in a rising tide

Next month marks the hotly anticipated sanction hearing for the Thames Water restructuring plan. We take this opportunity to look back at the key legislative changes made last year, as well as those earmarked for the future.

2024 legislative changes

New legislation was introduced last year to amend the special administration regime for the water sector.

The key changes to the existing regime were as follows:

• Expansion of purpose: Prior to the new legislation, the only purpose for which a water company could be put into special administration was business continuation through the exercise of a transfer following which the water company would exit to liquidation or dissolution. If a special administration is commenced on the grounds that the company is or is likely to be unable to pay its debts, then this purpose has now been expanded to include the rescue of a company as a going concern.
• Hive down: The method by which a transfer of business can take place has also been expanded with the introduction of the ‘hive down’. The hive down allows a company to transfer part of its undertaking to a subsidiary, following which the subsidiary can be sold on via a share sale, making it a more easily acquired asset for a buyer, stranding debt in the old company and providing a tax efficient and easier way to carry out a transaction. Creditors will have no control over whether their debt is left stranded in the old company or transferred to the new company. This includes trade creditors with pre-existing contractual arrangements in place.
• Availability of restructuring tools: Restructuring tools have been made available to the water sector, including restructuring plans, CVAs and schemes of arrangement. Practically, creditors could now find their debts are compromised or rescheduled without their consent under any of these mechanisms. Until the first sanction hearing takes place in respect of Thames Water in February 2025 it is unclear whether the court will impose any difference in standard on water companies for a restructuring plan to be sanctioned.
• Priority of government administration funding: Government funding provided to a water company in special administration will be paid as an expense of the administration, ahead of the special administrators’ own remuneration and expenses.

While the above changes were implemented through limited amendments and the integration of existing insolvency legislation, the Secretary of State for Environment, Food and Rural Affairs noted there would be new, more targeted legislation passed with the aim of directly addressing existing issues in the water sector and giving more powers to the regulator. As a result, the Water (Special Measures) Bill was introduced into Parliament on 4 September 2024 with its first reading in the House of Lords.

The Water (Special Measures) Bill

The Water (Special Measures) Bill is currently at committee stage following its second reading in the House of Commons on 16 December 2024 at which the Secretary of State for Environment, Food and Rural Affairs described the bill as an “early Christmas present”.

The bill has been presented by the government as a mechanism to “strengthen significantly the power of the water industry regulators” and to “deliver on the government’s commitment to put failing water companies under special measures”. It introduces a number of new proposed measures across the water industry, with two concerning the special administration regime in particular:

• the proposal for the government to be notified of winding up petitions at least 14 days beforehand thereby ensuring the government has sufficient time to consider making a special administration order in lieu of a winding up order; and
• the proposal for the government to recover its debt from any regulated water company, or a number of them, in event that the government provides funding to support a special administration. This means that a water company entering the special administration regime could affect the financial standing of an unrelated and well-performing company or companies in the water sector.

We are following the progress of this bill with interest and are mindful of the government’s comments that this bill “is not the full extent of the government’s ambition, with wider transformative change across the whole water sector to follow”. No doubt the outcome of Thames Water’s restructuring plan will weigh heavily on policy-makers over the months ahead.

This article was co-authored by Faadil Patel and Emily Scaife.