We are grateful for the following blog by Joanne Clement KC and Barney McKay.
On Friday 31 March 2023, the Divisional Court dismissed three challenges to the Secretary of State’s consent to the transfer of Bulb to Octopus. The decisions under challenge were taken at the time before the Subsidy Control Act 2022 (“the SCA”) had come into force, and so were governed by the subsidy control principles set out in the Trade and Cooperation Agreement (“the TCA”), implemented in domestic law by section 29(1) of the EU (Future Relationship) Act 2020 (“the EUFRA”). However, the judgment also offers an insight into the Courts’ approach to reviewing the lawfulness of subsidy decisions more generally, and raises some important procedural questions about challenging subsidy control decisions in future under the SCA.
In 2021, the retail energy supplier Bulb encountered financial difficulty. In November 2021, the High Court made an Energy Supply Company Administration (“ESCA”) order. Joint energy administrators (“JEAs”) were then appointed to administer Bulb. The JEAs carried out a sale process to sell Bulb’s business. By April 2022, the JEAs had received two indicative offers, but no offer from Octopus.
In May 2022, Octopus re-entered the sale process and subsequently submitted a bid, premised on significant financial support from the Government (“HMG”). In short, this support consisted of a wholesale pricing adjustment under the Wholesale Adjustment Mechanism Agreement, by which HMG was to loan to Bulb for onward payment to HiveCo money to purchase energy in the period up to 31 March 2023, at an estimated cost of £4.5 billion, with repayments limited to the amount of the price cap set by Ofgem. In essence, this involved HMG assuming the role of HiveCo’s hedge counterparty. The JEAs recommended Octopus’ bid to the Secretary of State, who commissioned an independent review of the JEAs’ recommendation and a subsidy control assessment by BEIS to ensure the terms of the bid did not contravene the subsidy control principles in the TCA.
On 28 October 2022, the Octopus transaction was concluded. On 29 October 2022, central government published a press release confirming the Secretary of State’s approval of the acquisition of Bulb by Octopus (“the Funding Decision”) and, on 7 November 2022, the Secretary of State granted approval for the transfer (“the Approval Decision”).
The JEAs applied for a court order fixing the effective date of transfer. A hearing took place on 11 November 2022 at which British Gas Trading (“BGT”) – which had submitted a bid in early 2022 – asked the court not to fix an effective of transfer so that it could bring a public law challenge to the Decisions. On 21 November, BGT sent a letter before action to the Secretary of State. On 23 November, a different energy retailer, Scottish Power, also sent a letter before action to the Secretary of State. BGT issued a judicial review claim form on 28 November. On the same date, each of the Claimants issued an application for urgent consideration, stating that it was first appreciated that an urgent application might be necessary on 24 November 2022 (an assertion that the Court described as “disingenuous”). The other claimants filed a claim form on 29 November 2022.
On 30 November 2022, Zacaroli J fixed the effective time of the ETS as 23.58 on 20 December 2022. No applications were made for interim relief in the Administrative Court, and on the Effective Date of the ETS, the majority of Bulb’s assets were transferred to HiveCo, and the shares in HiveCo were transferred to Octopus BidCo. A “rolled up” judicial review hearing took place some two months later, between 28 February and 2 March 2023.
BGT and other rival retail energy suppliers (“the Claimants”) challenged the Decisions on various public law and subsidy control grounds. The central complaint was about the financial support from the Secretary of State for the transaction. In terms of the public law grounds, the Claimants contended (amongst other things) that the Secretary of State had misdirected himself that the M&A Process had been fair, open, non-discriminatory and competitive, had failed to act fairly, and had taken into account irrelevant considerations. In terms of the subsidy control grounds, the Claimants contended that the financial support provided by the Secretary of State (1) failed in various ways to satisfy the requirements of the subsidy control principles set out in Article 366(1) of the TCA; (2) was unlawful on the basis that the subsidy included an unlimited guarantee prohibited by Article 367(2) of the TCA; and (3) was unlawful under Article 367(3)-(4) of the TCA.
The Divisional Court held that permission to apply for judicial review would be refused on the grounds of delay under section 31(6)(a) of the Senior Courts Act 1981. Section 31(6)(a) provides that “where the High Court considers that there has been undue delay in making an application for judicial review, the court may refuse to grant (a) leave for the making of the application; or (b) any relief sought on the application, if it considers that the granting of the relief sought would be likely to cause substantial hardship to, or substantially prejudice the rights of, any person or would be detrimental to good administration.”
The Court considered that the need for urgency in bringing the challenge was apparent by 11 November 2022, and that the Claimants were obliged, but failed, to move very speedily in bringing their challenge after that date. The Court therefore concluded that the Claimants’ application for permission should be refused on the basis of delay alone.
The Divisional Court nonetheless went on to consider the substantive arguments.
- The Court held that permission would have been refused on the public law grounds in any event, as the grounds were not arguable. The Court considered that a “light touch” standard of review was appropriate given the commercial context in which the Decisions were taken. Applying that standard, the Court found that the allegation of procedural unfairness was unarguable, as the Secretary of State had received advice that the process which had been conducted by the JEAs was a fair one, that the bid which emerged from it was a market bid, and the Secretary of State was reasonably entitled to accept that advice. The remaining grounds received similarly short shrift.
- The Court would have granted permission on the subsidy control grounds, but these grounds of claim would have failed on the merits. The Court considered that whilst the compatibility of the Decisions with the subsidy control principles in the TCA was subject to review by the Court, this did not mean that decision-making was transferred to the Court. It was appropriate to afford the executive a wide margin of appreciation or judgment. Against this background, the Court held that the Secretary of State had not failed to satisfy the requirements of the subsidy control principles in the TCA.
The Divisional Court’s judgment raises a number of interesting procedural and substantive questions about the Courts’ approach to reviewing subsidy control decisions.
In terms of procedure, the Court’s conclusions on undue delay serve as a stark warning to challengers in future. The Court applied traditional judicial review principles in considering whether there had been “undue delay” in bringing the claim. This is because decisions of public bodies often affect not only the claimant, but third parties who have acted in the belief that the decision was valid, and public administration more generally. The more significant the decision, and the wider the impact, the more promptly claimants must act. The Court was concerned with when the claimants knew the “big picture” points they relied upon, and not the detail of matters which might enable them to support their grounds or disclosure of material to support them. Further, as is usually the case in very urgent challenges, the Court was not impressed by arguments that the Claimants had to write pre-action protocol letters. None of this is novel in a very urgent claim for judicial review (although there will be very few claims that require quite this degree of promptness).
What is perhaps of wider importance is the Divisional Court’s rejection of the submission that the relevant domestic time limits had to “give way” to Article 373 of the TCA, such that as long as the claim was brought within one month of the date on which the prescribed information was published or provided, no issue of delay can arise. Article 373(1) states that each party shall have in place an “effective mechanism of recovery” in respect of subsidies, but this is said to be without prejudice to other remedies that exist in that Party’s law. Article 373(2) of the TCA requires the UK to “ensure that, provided that the interested party… has challenged a decision to grant a subsidy before a court or a tribunal within the specified time period… recovery may be ordered if a court or tribunal makes a finding of a material error of law”. Article 373(4)(b) provides that for the UK, the “specified time period” shall be one month from the publication of the subsidy decision; and states that the time period may be “increased by legislation”.
The Court rejected this submission on the basis that Article 373(2) is expressed in “permissive terms”. In our view, the Court was correct to reject this submission. First, if it had any merit, it could only go to the remedy of recovery, and not the rest of the claim. But more importantly, the key word in Article 373(2) is that of “may”: i.e. recovery may be ordered. Article 372(2), therefore, did not prevent a court refusing such a remedy on discretionary grounds, such as delay, and these domestic procedural requirements as to undue delay are not incompatible with the requirements of the TCA. While there is a footnote to Article 373(1), acknowledging that a recovery order is a new remedy in judicial review claims for the United Kingdom and stating that “No beneficiary would be able to raise a legitimate expectation to resist recovery”, the Court considered that this did not purport in any way to require a change to the discretionary nature of judicial review remedies.
What are the implications of this decision for challenges to subsidy control decisions going forward?
- First, challengers are likely to face difficulties in securing relief if there has been undue delay. The vast majority of challenges to subsidy control decisions under the SCA will take place before the Competition Appeal Tribunal (“the CAT”). There is no “filter” of a permission stage before the CAT, and so there will be no question of the CAT refusing to hear a claim because it has not been brought promptly/there has been undue delay. However, section 31(6)(a) of the Senior Courts Act 1981 is still central to the remedies regime under the SCA. This is because section 72(2) confers upon the CAT the power to grant the same kinds of relief as are available in a claim for judicial review; and section 72(6) expressly states that in deciding whether to grant such relief, the CAT must apply the principles that the High Court would apply in deciding whether to grant that relief on an application for judicial review. Section 72(8) reflects the wording of section 31(6)(a), confirming that the CAT may refuse to grant any relief if it considers (a) that there has been undue delay in making the application; or (b) that granting the relief sought would be likely to cause substantial hardship to, or substantially prejudice the rights of, any person or would be detrimental to good administration. The CAT has an additional power to make a recovery order, but this power may only be exercised if the CAT grants relief under section 72(2). So, regardless of whether an application has been made within the time limits laid down in section 71 of the SCA, if there has been undue delay as described in Bulb in making that application, a successful challenger may find that they have won only a Pyrrhic victory, and walk away without any relief. Claimants will need to be very alive to the need to act quickly when challenging subsidy control decisions before the CAT.
- Secondly, although the Divisional Court was careful in applying section 31(6)(a) to the very specific facts of this case, there is a risk that the Court’s strict application of the “no undue delay” requirement will change parties’ approach to litigation in future. Faced with the risk that they may be denied a remedy if there has been “undue delay” in making an application, parties may decide to file protective proceedings, even before pre-action information requests have been answered, or answered in full. As any public procurement practitioner will know, this may necessitate a greater number of applications to amend pleadings and further costs.
- Finally, the judgment illustrates that interim relief is going to be crucial under the new regime. Would the Court’s conclusion on undue delay in Bulb have been different if interim relief had been obtained in November/early December so that the court would not have been faced with “total chaos” had it tried to unwind the transactions if the claim succeeded? As the Divisional Court noted, “the presence or absence of prejudice or detriment is likely to be a key consideration in determining whether an application has been made …with undue delay”. In future cases, can challengers avoid this prejudice/detriment by applying for interim relief and directions for a speedy trial? Of course, whether the CAT would be prepared to grant interim relief, given the modified American Cyanamid principles that apply in judicial review claims, is another question – perhaps one for another article.
In terms of the substance of the challenges, the Court’s judgment raises interesting points about the standard of review that will be applied by the courts in determining whether public authorities have complied with the requirements of the SCA.
- The Divisional Court concluded that the relevant standard of review of a subsidy control decision is that of proportionality, and not irrationality. This was on the basis that Article 366 of the TCA sets out the subsidy control principles, and each Party must have in place an “effective system of subsidy control that ensures that the granting of a subsidy respects” those principles. One of those principles is that subsidies are proportionate and limited to what is necessary to achieve those objectives. Article 366(3) then states each party shall ensure that these obligations are implemented in its law in such a manner that the legality of an individual subsidy will be determined by the principles. The Divisional Court considered that this meant the principle of proportionality must be complied with. We have considerable doubts about the correctness of this conclusion. Although it is a subsidy control principle that a subsidy should be proportionate, it does not follow from Article 366(3) that the courts must apply the principle of proportionality when “reviewing” whether that subsidy is lawful. All that Article 366(3) requires is for the “legality” of the subsidy to be assessed. Article 366(3) does not require the Court to determine for itself whether each “principle” has been complied with. However, in practical terms, very little turns on this distinction, even under the TCA regime. As the Divisional Court recognised, an enhanced margin of appreciation or judgment must be given by the courts when reviewing subsidy decisions, as they involve “polycentric” or expert/economic/predictive assessments. Applying the approach in Drexler and JCWI, in practice, the outcome will not be “materially affected” by the distinction between the concept of rationality and proportionality. The courts will apply a relatively “light touch” standard of review in this field.
- Does this mean that the CAT will apply proportionality as the standard of review under the SCA? In our view, the most likely answer is “No”. Bulb was concerned with interpreting the subsidy control provisions in the TCA itself, as the TCA was implemented in domestic law through section 29(1) of the EUFRA. Now that the SCA is in force, section 29(2) of the EUFRA confirms that section 29(1) does not apply (as the SCA is an “equivalent provision… which is for the purposes of …implementing to any extent the TCA”.) It is therefore for the courts to interpret the SCA in accordance with its terms (save that, as the SCA was implemented to give effect to the subsidy control provisions of the TCA, where there is an ambiguity in the SCA, it is likely that the domestic courts will seek to interpret it in light of the TCA).
There is no such ambiguity in the SCA. The main application of the subsidy control principles comes in section 12 – a public authority (a) must consider the subsidy control principles; and (b) must not give the subsidy “unless it is of the view” the subsidy is consistent with those principles. The CAT must “review” a subsidy decision, and must apply the same principles as would be applied by the High Court in determining proceedings on judicial review. In other words, the CAT is determining the lawfulness of the public authority’s judgement that the subsidy is consistent with the principles. The common law has not yet developed to the point where it recognises proportionality as a ground of judicial review. However, for the reasons given by the Divisional Court in this case, the distinction will make very little difference in practice. The margin of appreciation in subsidy control decisions is so wide that any proportionality analysis would collapse into rationality anyway. Any argument that the CAT, as a specialist tribunal, should apply a more intense standard of review is likely to fail in light of the Court of Appeal’s judgment in British Sky Broadcasting v The Competition Commission  EWCA Civ 2.
- The standard of review then essentially determined the outcome on each of the individual grounds of challenge.
- The Divisional Court held that the Secretary of State was entitled to conclude that the process embarked upon by the expert advisors, JEAs and Lazard, was an open, competitive and non-discriminatory bidding process (and thus provided an evidential basis for the conclusion that the transaction either involved no subsidy, or that the subsidy was the minimum necessary and so compatible with the subsidy control principles). The Secretary of State was entitled to treat the only bid which emerged from the process as a fair reflection of the value which the market placed on Bulb’s business in the prevailing circumstances. There had been a detailed counterfactual and benchmarking analysis carried out, and E&Y had evaluated the overall process and had not identified any issues of concern.
- It was a matter of judgment whether HMG support was proactively publicised to bidders at the outset or left to the bidders to formulate their requirements.
- There was no unfairness because information provided to one bidder in the context of specific negotiations with that bidder was not automatically shared with other bidders. This was a matter of commercial judgment and it would not help to obtain the best price if negotiating positions had to be shared generally.
- The Secretary of State had taken account of relevant considerations, and had not taken account of irrelevant ones.
We understand that two of the claimants are seeking permission to appeal, challenging the Divisional Court’s conclusions on delay and subsidy control (but not the conclusions on the public law grounds). It is a case of “watch this space” to see how matters progress. While an appeal may clarify the issues we have highlighted above, we find it hard to envisage how the appeal could result in any practical remedy for the Claimants. Counsel for BGT was recorded as suggesting as long ago as 11 November 2022 that reversing the transaction would create “total chaos”. It was always going to be difficult to obtain any relief once the Decisions had been implemented. The more time that passes, the more difficult it becomes.
If this judgment is upheld, then it will clearly have implications for challenges under the SCA. The Divisional Court’s decision on delay suggests that challengers must be alive to the need to act swiftly to avoid being denied any practical relief. The CAT will need to consider whether proportionality is a ground of review in challenges under the SCA. Even if it adopts the same approach as the Divisional Court, it is likely that the same “light touch” standard of review will be adopted. While the claims failed on the facts in Bulb, the “light touch” standard of review will not immunise decisions from challenge under the SCA. A public authority will still need to establish that it has asked the right questions, considered all relevant matters, obtained appropriate evidence (often requiring expert advice) and reached rational decisions on each of the subsidy control principles.
Joanne Clement KC, 11KBW
Barney McCay, Landmark Chambers