France Telecom: lessons for UK employers following 'institutional harassment' ruling
Out-Law Analysis | 25 Jul 2018 | 11:11 am | 6 min. read
The new administration regime for social housing will have an impact on security for lenders to social housing providers. Even though the rules enable the secretary of state to over-ride enforcement of security by appointing a housing administrator, a secured creditor will retain priority over other creditors in the usual way. Secured creditors should not see a reduction in the value of their investment from stock being locked in the social housing sector because they can argue that the usual administration objectives should prevail.
The value of housing association assets when in distress could be affected by the fact that under the new rules normal insolvency appointments will not be valid until 28 days' notice to the Regulator of Social Housing has expired or been waived. We can expect to see significant pressure on the Regulator to waive the full notice period in those circumstances.
If the Regulator or the secretary of state instead choose to appoint a housing administrator, insolvency practitioners considering taking such an appointment must resolve how they can juggle pursuing the usual administration objectives whilst also seeking to keep social housing in the regulated sector. In practice it is likely that the Regulator will work in the background to facilitate deals with alternative registered providers to keep stock as social housing, but that could create tension with the housing administrator's primary objective – could the housing administrator generate greater realisations by selling elsewhere? The first housing administration to actually occur could prove to be a fascinating case study.
Why are there new rules on housing insolvencies?
The insolvency of Ujima Housing Association in 2007 and near-failure of Cosmopolitan Housing Group in 2012 prompted the creation of special rules for insolvencies of housing associations.
In 2008 the Housing and Regeneration Act addressed concerns that the Regulator did not have the powers to intervene effectively. It introduced a moratorium on creditor enforcement and insolvency leading to a disposal of land and enabled the Regulator to appoint an interim manager during that moratorium and a manager thereafter in order to implement the Regulator's proposals.
A report commissioned by the Regulator in the aftermath of Cosmopolitan's near-failure found that the Regulator’s powers were still not sufficient. In particular it said that the 28 working day moratorium on disposals of land that applied on the commencement of an insolvency process was not long enough for a deal to be agreed with secured creditors and for housing stock to be transferred to other registered providers. The report recommended, amongst other things, that the legislative framework should be amended to allow for a special administration regime.
Then in October 2015 the Office for National Statistics classified housing associations as part of the public sector. The legislative changes in the Housing and Planning Act 2016 (HPA16) are part of a wider de-regulatory package designed to enable housing associations to be re-classified as private sector bodies.
Other changes that came into force on 5 July 2018 are contained in the Housing and Planning Act 2016 (Commencement No. 9 and Transitional and Saving Provisions) Regulations 2018, the Housing Administration (England and Wales) Rules 2018 and the Insolvency of Registered Providers of Social Housing Regulations 2018.
What are the new rules on housing insolvencies?
The new special administration regime is referred to in the HPA16 as “housing administration”. It is limited in that only the secretary of state, or the Regulator with the consent of the secretary of state, may apply for a housing administration order in relation to a registered provider of social housing that is a company, a registered co-operative or community benefit society, or a charitable incorporated organisation. A housing administrator must be a licensed insolvency practitioner. An application can be made at any time, but to grant a housing administration order the court must be satisfied that either the registered provider is unable, or is likely to be unable, to pay its debts; or that it would be just and equitable, disregarding the objectives of the housing administration, to wind up the registered provider in the public interest, the secretary of state having certified this as appropriate.
Registered providers, other than entities registered as co-operative or community benefit societies, could already take advantage of all of the corporate insolvency processes prescribed by the Insolvency Act of 1986 (IA86). This includes administrative receivership, by virtue of an exception to the general prohibition on the appointment of administrative receivers by holders of qualifying floating charges. The Insolvency of Registered Providers of Social Housing Regulations 2018 extend the application of Schedule B1 IA86 to societies and charitable incorporated organisations solely for the purpose of housing administration, and make certain necessary amendments to the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 and the Land Registration Rules 2003.
The objectives of housing administration
There are two objectives of the new housing administration regime.
Objective one is normal administration:
a) to rescue the registered provider as a going concern;
b) to achieve a better result for the registered provider’s creditors as a whole than would be likely if the registered provider was wound up, or
c) to realise property in order to make a distribution to one or more secured or preferential creditors.
Objective two is to keep social housing in the regulated sector so that the social housing continues to be owned by a private registered provider. In a similar way to an ordinary administration, the housing administrator must aim to achieve objective 1(a) unless either it is not reasonably practicable to achieve it, 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 reasonably practicable to achieve objectives 1(a) or (b), and this does not unnecessarily harm the interests of the creditors as a whole.
Objective one takes priority over objective two, following intensive lobbying by secured creditors. The housing administrator must, so far as possible, work towards both objectives, but must 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 two.
Restrictions on insolvency procedures
The new rules say that no step may be taken by any person other than the secretary of state for the winding up of, entry into ordinary administration by, or enforcement of security of, a registered provider unless 28 days’ notice of that step has been given to the Regulator and elapsed, or the Regulator has waived the requirement;
During that 28 day period the secretary of state or the Regulator with the secretary of state’s consent may apply for a housing administration order. The court has no power to make a housing administration order in relation to a registered provider which is already in normal administration under Schedule B1 IA86, or has gone into liquidation.
Moratoria on disposal of land / creditor action
The interim moratorium on the disposal of land under the HRA08 is retained, and during that period the Regulator retains its power to appoint an interim manager, or a manager, with the agreement of the registered provider’s secured creditors;
From the date of issue of an application for a housing administration order, an interim moratorium on certain types of creditor action, including enforcement, winding up, or ordinary administration, applies until the application is either dismissed, or a housing administration order takes effect.
Upon the making of a housing administration order, a housing administrator is appointed and the registered provider becomes subject to a moratorium that prevents creditors from enforcing claims against it for the duration of the housing administration.
Financial support for registered providers in housing administration
Where a housing administration order has been made in relation to a registered provider, the secretary of state may, subject to repayment conditions,:
Powers of housing administrator
There is no requirement for the housing administrator to obtain creditor approval for its proposals, and nor do creditors have the power to establish a creditors' committee. Where a section 106 agreement contains a mortgagee exclusion clause, this is automatically extended to cover a disposal by a housing administrator such that the relevant planning obligation(s) will not be binding upon the purchaser.
James Cameron is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com
France Telecom: lessons for UK employers following 'institutional harassment' ruling