The Housing and Planning Act 2016 (the “Act”) introduces special administration procedures for social housing associations which aim to protect the level of social housing in the UK. The new housing administration orders (“HAOs”) create an additional objective for insolvency practitioners to try to keep social housing in the regulated housing sector to maintain levels of social housing.
However, it remains to be seen whether the Act gives the Homes and Communities Agency (“HCA”) sufficient teeth to maintain social housing numbers without discouraging lenders from providing funding to social housing associations – and whether this objective will conflict with the overriding objective to obtain the best outcome for creditors.
What is an HAO?
When the relevant sections of the Act come into force (on a date to be appointed by the Secretary of State) they will essentially allow the Secretary of State to manage the insolvency of a social housing association. The failure of Ujima Housing Association in 2008 was a stark warning to the government that any such insolvency can severely affect the availability of social housing in the UK.
The Act will prohibit (1) the making of winding-up orders, (2) the granting of permission for voluntary winding up, (3) in court and out of court administrator appointments and (4) enforcement of security over a property of any registered provider of social housing, without first giving the HCA 28 days’ notice.
During these 28 days the Secretary of State or the HCA (with the Secretary of State’s consent) can apply to the court for an HAO. The HAO will appoint a housing administrator who must be a qualified insolvency practitioner.
The housing administrator has two objectives.
- The first objective, similar to the objective of an administrator of a company under paragraph 3(1) of Schedule B1 to the Insolvency Act 1986, is to:
- rescue the social housing association as a going concern;
- achieve a better result for creditors as a whole than would be likely if the social housing association were wound up (without first being in housing administration); or
- realise property in order to make a distribution to one or more secured or preferential creditors.
- The second objective is to ensure that the social housing remains in the regulated housing sector.
Importantly, the first objective takes priority over the second objective, but the housing administrator must, so far as possible, work towards both objectives.
The legislation further consolidates the priority of the first objective by making it clear that if by pursuing the second objective there will be a worse outcome for creditors, the housing administrator is not required to pursue the second objective.
When HAOs come into force, HCA will be able to apply to court in respect of insolvent companies, registered societies and charitable incorporated associations only, not unincorporated associations or charitable trusts.
Effect of HAOs
When the legislation was first introduced to parliament, the second objective took priority over the first objective. However, successful lobbying by lenders ensured that the position of creditors remains paramount, in a large part to ensure lending remains commercially attractive for lenders in the sector. Had this concession not been made, lenders would have either withdrawn from the sector or been forced to penalise the housing association through borrowing rates and/or loan-to-value covenants to ensure adequate protection.
HAOs will affect how insolvency practitioners approach appointments over social housing associations. There is an inherent conflict between the two objectives which administrators will have to balance. Whilst creditors will clearly expect the insolvency practitioner to maximise returns, the insolvency practitioner may still experience some political pressure to keep the housing as social housing stock, if at all possible.
It remains to be seen whether, when the legislation comes into force, HCA will have sufficient powers to force administrators to keep social housing within the social housing stock. Administrators will obviously be required to investigate and consider both social housing operators and external non-social housing providers as potential purchasers, but in the current climate, it is difficult to see a scenario where a social housing bidder will be able to offer a better return to creditors than a commercial bidder with greater access to funds.