In the normal course of events when a company becomes insolvent it will be placed into an insolvency regime where the office holder will look to realise its assets and make a distribution to creditors, usually the highest bidder wins.
In relation to a Housing Association they will normally own property which if sold to the highest bidder would mean a sale to a party outside of the housing association sector, thereby reducing the availability of social housing. To date there has only been one reported case of an English Housing Association entering into an insolvency procedure. As a result it was apparent that greater powers needed to be given to the regulator.
When the Homes and Communities Agency (the current regulator) came into being they commissioned a report to look into their powers when it came to dealing with the insolvency of a large scale provider of Social Housing. The conclusion was that powers at their disposal were not sufficient. In particular the 28 day moratorium period, provided for by the Housing and Regeneration Act 2008, preventing disposals of land did not provide sufficient time to allow a deal to be agreed with the secured creditors to allow a transfer of the housing stock to an alternative provider.
The Housing and Planning Act 2016, which became law on 12 May 2016 provides for a new special administration regime for private registered providers of social housing (“Housing Associations”) in England. When in force in its entirety there are likely to be changes to who leads the insolvency procedure as well as to the possible returns to creditors.
The Act introduces the ability for the Secretary of State (or the regulator with the approval of the Secretary of State) to intervene by applying within a 28 day period for a new housing administration order (HAO) before any other insolvency processes can commence.
Upon hearing an application for a housing administration order, the court may make the order or an interim order, dismiss the application, adjourn the hearing or treat the application as a winding-up petition. The court may only make a housing administration order if it is satisfied that the Housing Association is unable, or likely to be unable, to pay its debts, or that it would be just and equitable to wind up the Housing Association in the public interest. Finally the court has no power to make a housing administration order in relation to a Housing Association which is in administration under Schedule B1 to the Insolvency Act 1986 or has gone into liquidation.
The effect of the HAO is that the the Housing Administrator has the same objectives as would apply in a normal administration process (“the Normal Objectives”), namely (a) rescue the registered provider as a going concern, (b) achieve a better result for the unsecured creditors of the registered provider as a whole than would be likely in a liquidation of the registered provider, or (c) realise property in order make a distribution to one or more secured or preferential creditors. Each of the above must be considered in order and unless the objective it is not reasonably practical to achieve the subsequent objective cannot be considered.
In addition to the Normal Objectives the new regime introduces ‘Objective 2’. The Normal Objectives retain priority but the new Objective 2 looks to keep social housing within the regulated sector, so that the housing stock remains owned by a Housing Association.
As suggested at the start of the article a sale to the highest bidder could well result in a sale to a bidder outside of the regulated sector, the Housing Administrator therefore has to work towards the Normal Objectives and the new Objective 2. To do this they have the following powers:
- They are not required to hold creditors’ meetings, and it follows that there is no requirement therefore that the Housing Administrator’s proposals are subject to creditor approval;
- Where a section 106 agreement contains a mortgagee exclusion clause, this is automatically extended to cover a disposal by a housing administrator.
As set out above, the new regime does not prohibit the use of the current insolvency processes available to creditors and housing associations. The social housing regulator and ultimately the Secretary of State will have 28 days to intervene by applying for a Housing Administration Order before such other insolvency processes can commence.
As with any Administrator the Housing Administrator must not only act in the best interests of creditors they will also have to, so far as possible, keep the social housing in the regulated housing sector. It will be a difficult balancing exercise to justify acceptance of a lower offer within the sector against higher offers from outside. Where the difference is small creditors are unlikely to take issue, however where the difference is significant they may not be so ready to accept the decision with disputes ultimately going to Court. There is also the question as to how lenders will react to the new regime when it comes to making a lending decision.
If the above has raised any issues or concerns for you please feel free to contact our Insolvency Law specialist Darren Stone on 01273 775533.