Insolvent Housing
Associations
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:
1. T
hey 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;
2. 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.
By Darren Stone
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