Legislation soon to take force creates a new special administration regime for private providers of social housing, introducing changes that will transform restructuring in the sector.
When a company becomes insolvent, it will usually enter one of a number of types of insolvency process and – typically – this will result in its assets being sold to the highest bidder in order 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 of the housing stock to a third party located outside the regulated sector, resulting in an immediate reduction in available social housing.
Following the high-profile collapse of Ujima Housing Association in 2007 and the near failure of Cosmopolitan Housing Group in 2012, this became a political hot potato. The intended solution now takes the form of the Housing and Planning Act 2016, which became law on 12 May 2016. The Act creates, among other things, a new special administration regime for private registered providers of social housing.
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 the landscape of social housing restructuring and, in particular, who leads the insolvency process, which may well affect creditor returns.
The “default” procedure
The Act introduces the concept of the housing administration order (HAO). An application for an HAO (including who is to be appointed as administrator) can only be made by the secretary of state or the social housing regulator, the Homes and Communities Agency (HCA), with the consent of the secretary of state.
The new regime applies to all companies, registered co-operative or community benefit societies and charitable incorporated organisations in this sector (it does not cover unincorporated associations or charitable trusts).
While the new regime does not prohibit other forms of insolvency procedure in relation to housing associations (including conventional liquidation, administration or the appointment of administrative receivers – which are still permissible in relation to housing associations), an HAO is still expected to become the default insolvency procedure, in more ways than one, for housing associations. This is because none of the traditional insolvency solutions will be possible unless the HCA/secretary of state expressly consents, or in the event that the HCA/secretary of state takes no action following the requisite 28 days’ prior notice (of intention to commence some other insolvency procedure).
New HAO objective
In a conventional administration, the administrator must perform their functions with the objective of satisfying one of three hierarchical purposes (the original objective), namely, to:
- rescue the company as a going concern;
- achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up; or
- realise property in order to make a distribution to one or more secured or preferential creditors.
This original objective is repeated in the Act. However, under the new regime, achieving the original objective is but one of two aims that the administrator must focus on. Upon an HAO being made, the administrator will have a new second objective he must try to achieve, namely: “to keep social housing in the regulated housing sector” (that is, to try to ensure that the social accommodation continues to be owned by a housing association).
When the new regime was originally proposed, it was intended to give this second objective priority over the original objective 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 encourage lenders to remain in the sector and to avoid the possible counterproductive result of undermining the applicable MV-ST (market value subject to tenancy) valuation methodology (which assumes that assets can theoretically be sold outside the sector), thus lowering asset values and forcing more housing associations into insolvency.
What does this mean in practice?
While housing association creditors, through much lobbying at the time, have retained the priority of the original objective over the new objective, it is unclear how administrators will deal with such potentially conflicting objectives.
It is likely that administrators will seek to justify accepting a slightly lower offer that would retain the assets in the regulated sector over a slightly higher offer that would not. When the difference is small, this is unlikely to lead to significant creditor complaint or dispute. However, when the price differential is significant, the competing creditor, regulator and political pressures on administrators (and lenders) will be intense and, if not resolved amicably, such inherent conflict might only be resolved by the administrator making an application to court for directions.
The changes also introduce a significant policy shift from the Insolvency Act 2000 by putting the decision-making power in the hands of the HCA and the secretary of state rather than creditors and other stakeholders (as is the usual insolvency position in the United Kingdom).The appetite of the HCA to intervene on receipt of a creditor’s notice (of intention to commence an insolvency procedure) will not necessarily be clear to creditors and, indeed, this itself might become hostage to the prevailing political issues of the day – and a week is a long time in politics.
As an HAO is now the default insolvency regime for housing associations, however, what is certain is that those involved in the proposed rescue of a troubled group would be well advised to consult with the HCA at an early stage to ensure that any proposed solution obtains the prior approval of the HCA. This may avoid delays, unwelcome headlines and the serious risk of lower recoveries.
This article, authored by partner Séamas Gray and associates Tristan Cox and Namdi McEwen, originally appeared in the 23 January issue of Estates Gazette.