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The new special administration regime for social housing providers in England

Out-Law Analysis | 08 Sep 2016 | 11:51 am | 5 min. read

FOCUS: The new special administration regime for private social housing providers in England is intended to address the deficiencies of the previous regime. It was introduced by the 2016 Housing and Planning Act.

The special administration regime is referred to in the Act as 'housing administration', and is aimed at private registered providers of social housing in England ('housing associations'). It is limited in that only the secretary of state, or the Homes and Communities Agency (HCA) with the consent of the secretary of state, may apply for a housing administration order and appoint a licenced insolvency practitioner (IP) as housing administrator.

Secondary regulations are required to bring the provisions of the new regime into force, and a commencement date has not yet been confirmed. That is not expected to happen until the autumn.

Currently, housing associations, other than entities registered as cooperative or community benefit societies, can take advantage of all of the corporate insolvency processes set out in the 1986 Insolvency Act. The 2008 Housing and Regeneration Act (HRA) contains additional provisions that apply to housing associations including, in particular, a moratorium on disposals of land, which is triggered by creditor enforcement or insolvency.

The high-profile failure of Ujima Housing Association in 2007 is the only reported insolvency of an English housing association to date. It highlighted the severe deficiencies in the regulation of housing associations at that time, and resulted in the regulator being given greater powers to intervene should a housing association get into financial difficulties in the future.

The creation of a special administration regime for housing associations was first proposed in 2014, as part of a report commissioned by sector regulator the HCA in response to the near-collapse of Cosmopolitan Housing Group ('the group'). That report concluded that the HCA did not have sufficient powers to manage an insolvency process had the group, which had formed following a series of mergers, ultimately failed. In particular, the 28-working-day moratorium on disposals of land introduced by the HRA did not allow sufficient time for a deal to be agreed with the group's secured creditors that would have allowed its housing stock to be transferred to other housing associations.

The new legislation also forms part of a wider de-regulatory package designed to enable housing associations to be reclassified as private sector bodies, following their classification by the Office for National Statistics (ONS) as part of the public sector in October 2015.

The housing administration regime has two objectives, which are set out in the Act. In order of priority, these are:

  • objective 1, which is the same as ordinary administration; and
  • objective 2, which is to keep social housing in the regulated sector - that is, so that the social housing continues to be owned by a housing association.

Objective 1 is the first priority, but the housing administrator must work towards both objectives as far as possible. The housing administrator must also not do anything that would result in a worse distribution to creditors than would be the case if the administrator did not need to pursue objective 2.

How this balance will be achieved in practice remains to be seen, and the convoluted drafting leaves the matter potentially open to disputes to be resolved by the courts in due course.

The objective of ordinary administration is:

  • (a)      to rescue the housing association as a going concern; or
    • (b)      to achieve a better result for the housing association's creditors as a whole than would be likely if it was wound up; or
    • (c)      to realise property in order to make a distribution to one or more secured or preferential creditors.

In a similar way to an ordinary administration, the housing administrator must aim to achieve objective 1(a) unless either it is not reasonable practicable to do so; or objective 1(b) would achieve a better result for creditors as a whole. The housing administrator may aim to achieve objective 1(c) only if it is not reasonable practicable to achieve objectives 1(a) or (b), and this does not unnecessarily harm the interests of the creditors as a whole.

When the legislation began its passage through parliament, objective 2 was put forward by the government as being the primary one. However, this was reversed following lobbying by secured creditors and other stakeholders. There is an inherent conflict between t objective 2 and the interests of secured creditors, even if secured creditors may be reluctant to enforce security over assets in the social housing sector.

Once in force, the new housing administration regime will apply to companies, registered cooperatives and community benefit societies, and charitable incorporated organisations. It will not apply to unincorporated associations or charitable trusts.

The main features of the new regime include:

Restrictions on other insolvency procedures

No step may be taken by any person other than the secretary of state for the winding-up, entry into ordinary administration by or enforcement of security of a housing association, unless 28 days' notice of that step has been given to the HCA and elapsed, or the HCA has waived the notice requirement.

During that 28-day period, the secretary of state or the HCA with the consent of the secretary of state may apply for a housing administration order.

Notice must be given to any administrative receiver, any person who has appointed or is entitled to appoint an administrative receiver, and any holder of a qualifying floating charge as soon as possible after an application for a housing administration order is made.

Interim moratorium on disposal of land

The new regime preserves the moratorium on disposals of land introduced by the HRA. The moratorium runs from the date of issue of an application for a housing administration order until either the application is dismissed, or the housing administration order takes effect. It also now covers certain other types of creditor action including enforcement, winding up or ordinary administration.

During the interim moratorium period, the HCA retains its power to appoint an interim manager, or a permanent manager with the agreement of the housing association's secured creditors. Secured creditor consent is not required for the making of the housing administration order.

Once the housing administration order is made and the housing administrator appointed, the moratorium becomes permanent and prevents creditors from enforcing claims against the housing association.

Powers of the court

On 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.

The court has no power to make a housing administration order in relation to a housing association that is in administration, or that has gone into liquidation.

Financial support for housing associations in housing administration

Where a housing administration order has been made in relation to a housing association, the secretary of state may:

  • make grants or loans to the housing association, in order to achieve the objectives of the housing administration process;
  • indemnify persons in respect of liabilities, loss or damage incurred in connection with carrying out functions by the housing administrator;
  • guarantee the payment of interest, repayment of capital or discharge of any other financial obligation of the housing association in connection with the borrowing of any sum while the order is in force.

All of the above may be made subject to repayment conditions.

Powers of a housing administrator

A housing administrator is not required to hold creditors' meetings, and therefore the housing administrator's proposals are not 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.

The Act does not remove the exception for housing associations under the 1986 Insolvency Act which permits the holder of a qualifying floating charge to appoint an administrative receiver to a housing association. However, this assumes that the interim moratorium has ended without application being made for a housing administration order, as this would otherwise be blocked by the permanent moratorium.

Stephen O'Grady and Jack Isaacs are restructuring law experts at Pinsent Masons, the law firm behind Out-Law.com.