Clifford Chance

In the first case heard by UK's Court of Appeal (CoA) under the post-Brexit subsidy control regime, the CoA's judgment overturned the Divisional Court (DC) on the issue of delayed commencement of proceedings, but ultimately upheld the substance of the DC's judgment on the appropriate standard of review and the application of the principles under the UK subsidy control regime.

Background

The retail energy supplier Bulb ran into financial difficulty and went into special administration in 2021. Administrators were appointed to sell Bulb's business. Octopus submitted a bid that was reliant on substantial government funding. In October 2022, the Secretary of State (SoS) approved the provision of funding to Octopus to acquire Bulb under the interim UK subsidy control regime pursuant to the Trade and Cooperation Agreement between the UK and the EU (TCA). In November, the SoS approved the transfer of Bulb's business to Octopus under an energy transfer scheme.

British Gas, E.ON, and Scottish Power (appellants) applied for permission to seek judicial review of the SoS's decisions. The DC refused permission for the claim to proceed, including because the appellants had not brought their challenge promptly, as well as on other public law and subsidy control grounds. The appellants (minus Scottish Power) appealed that judgment to the CoA.

The appeal

How quickly does an appellant need to act?

Before the DC, the appellants sought an order quashing and unwinding the transaction, or alternatively financial compensation. The DC had refused the application for permission to seek judicial review given the appellants had taken three weeks to bring the application. Applications for judicial review are required under CPR Pt 54 to be brought promptly, and in any event within three months of the decision concerned. The DC had considered that three weeks amounted to an undue delay in the specific circumstances of this case highlighting that the appellants understood that an unwinding of the transaction would be "catastrophic" and accordingly there was a need to act promptly.

Before the CoA, however, the appellants recognised that that there was now no possibility of reversing the transfer, leaving only a claim for financial relief. As a result, the concerns relating to unwinding the transaction were not applicable, and a three-week delay was not sufficient to justify refusing the appellants permission to seek judicial review.

The CoA also suggested that for appeals of subsidies under the now applicable Subsidy Control Act 2022 (SCA), which lie to the Competition Appeal Tribunal (CAT), interested parties can 'buy time' by requesting information from the relevant public authority to enable them to decide whether to bring a claim. The CoA noted that, ordinarily, a court will not find a delay where there is an outstanding request from the party seeking judicial review. However, the court could still refuse permission if it considers that the interested party had sufficient information to bring a claim.

What standard of review should courts apply?

The CoA also tightened the standard of review that courts should apply when reviewing subsidy control decisions. Disagreeing with the DC, the CoA found that while public authorities must decide whether subsidies are proportionate, this does not mean that courts are required to apply a "proportionality" standard when reviewing a subsidy decision.

Rather, the standard of review is the ordinary public law grounds of judicial review, namely whether the decision was "rational", ultra vires, or subject to a procedural error or unfairness. This is generally considered to be a high bar, and less intrusive of the SoS's decision-making power than is possible in a proportionality analysis which the DC considered was appropriate. The CAT is very likely to apply the same rationality standard when considering appeals under the SCA – however how this standard of review will be applied in practice remains to be seen.

What evidence can public authorities rely on?

On the substance, one of the key issues was whether the sales process was open, non-discriminatory, transparent, and competitive. The DC found that it was and that, therefore, the SoS was entitled to place weight on the sales process when deciding that the subsidy that resulted from the sales process was the minimum level necessary.

The appellants argued that the process was flawed because potential bidders, other than Octopus, were not informed about the availability of government support to aid the transfer. However, the CoA dismissed this argument, noting that all potential bidders were informed about the possibility of government support and were asked to specify the amount they required. Octopus was not given any preferential treatment, and the government was not required to disclose to other bidders what it was willing to offer Octopus.

The appellants also argued that those taking the subsidy decision were not experts in this field and overly relied on the advice of non-government parties. For example, they relied on the administrators' view that the Octopus deal offered "the best value for money" and would minimise wider market disruption. The CoA found that the SoS was entitled to regard the outcome of the sales process as significant evidence in determining whether subsidy control principles were met and was entitled to take into account the advice that he received in making that decision.

As such, public authorities may feel empowered to identify experts in their field, rely on their expertise, and place reliance on the outcome of the sales process when going through similar processes.

How restrictively should the rules on economic emergencies and restructuring subsidies be interpreted?

The final point of contention concerned restructuring subsidies. While acknowledging that the impact on energy prices caused by the Russian invasion of Ukraine was an economic emergency, the appellants claimed that Bulb's insolvency occurred before the invasion i.e., the subsidy was given to a business that was already in trouble, albeit exacerbated by the emergency. The appellants argued for a restrictive reading of the requirement that the subsidy "respond[s] to a national or global economic emergency" such that this only applied where the subsidy is offered to all those affected.

The CoA rejected these arguments, noting that they focused too narrowly on the issues faced by Bulb as an entity. Rather, the economic emergency that the SoS was addressing was the dire predicament faced by Bulb's customers, which, without intervention, might be left without an energy supply and the substantial energy costs could destabilise other energy suppliers, leading to broader and more serious consequences for consumer confidence in the energy retail market.

Conclusion

The CoA's judgment provides a fact-specific application of the rules on prompt commencement of judicial proceedings, and the practical realities of economic emergencies. Though the CoA overturned the DC's relatively harsh judgment on the question of undue delay, it remains the case that judicial review must be brought promptly – potentially within weeks – if it is to survive a contested permission application.

The judgment will reassure public authorities, as it underscores the legitimacy of relying on expert advice and the outcomes of an appropriate sales processes.

For those considering an appeal, the judgment highlights the high threshold required to bring a successful challenge. The emphasis on rationality and procedural fairness means that appellants must present compelling evidence of the irrationality of the decision and/or any procedural errors that may have occurred, or otherwise that an error of law was committed. For example, merely showing that the decision maker could have made a better decision will not be enough; appellants will need to demonstrate that the decision was irrational.