The Housing and Planning Act changes what happens to insolvent housing associations, says Séamas Gray in an article for Inside Housing.
Traditionally, when a company becomes insolvent, it enters one of several types of insolvency processes and its assets are typically sold to the highest bidder to raise as much money as possible to distribute to the company’s creditors.
In relation to a housing association, this might well mean a sale outside the regulated sector with the knock-on effect of an immediate reduction in available social housing.
Parliament has debated this issue. The proposed solution is the Housing and Planning Act. While the relevant sections of the act are not yet in force, those involved with housing associations would be well advised to study the legislation now as the changes it brings will significantly alter who leads the insolvency process and may well affect creditor returns.
The ‘default’ regime
While the act does not prohibit the current insolvency processes available to creditors and housing associations, the social housing regulator (the Homes and Communities Agency or HCA – ultimately the Secretary of State) will have 28 days to intervene by applying for a new housing administration order (HAO) before such other insolvency processes can commence.
Accordingly, the HAO will be the effective ‘default’ insolvency regime for housing associations (other solutions only being possible upon HCA consent or delay beyond this 28 day period).
New HAO objective
Administrators must usually act in the best interests of creditors. However, an HAO administrator must also – so far as possible – keep the social housing in the regulated housing sector.
Originally, it was proposed that the new objective take primacy in cases of conflict. However, following much parliamentary debate, it was decided that the original objective should retain its primacy. This was (and is) considered highly important to lenders remaining in the sector and to avoid the possible counter-productive result of undermining the applicable MV-ST valuation methodology (which assumes that assets can theoretically be sold outside the sector) thus forcing more housing associations into insolvency.
What does this mean in practice?
It will be difficult for administrators to balance their new objective against their original objective. Even without the intense potential political pressure likely to be applied, administrators will likely seek to justify acceptance of a lower offer within the sector against higher offers that are not. When the difference is small, creditors are unlikely to complain. When significant, the competing creditor, regulator and political pressures on administrators (and lenders) will be intense.
While it is unclear what appetite the HCA will have to intervene (which may well wax and wane with the issues of the sector and against other more pressing political issues), the HCA will still retain the whip hand. Accordingly, lenders will be well advised to liaise with the HCA early to ensure that any proposed solution has HCA buy-in so as to minimise the possibility of delays, unplanned outcomes and lower recoveries.