In this article, we explain the background and operation to a special administration regime that relates to registered providers of social housing (RPs).
These bodies are crucially important to the provision of affordable housing in the UK. They are subject to oversight by the Regulator of Social Housing. The sector has historically been very stable, with only a few incidences of RPs suffering financial adversity. However, no sector is immune from the vagaries of the economy or poor strategic or operational judgments.
Part of this risk is mitigated by the variety of tools that the Regulator has long had to oversee and intervene in operations that do not meet its standards. There has also long been a tool that gives the Regulator a chance to find a solution if an RP or one of its creditors takes a step towards a formal insolvency process. This is currently found in section 143 onwards in the Housing and Regeneration Act 2008 (2008 Act). Once initial steps to initiate an insolvency process are taken, that scheme prevents an insolvency process from continuing for a four week window within which the Regulator is able to make proposals for the ownership and management of the RP’s housing stock. It also involves what is perhaps confusingly referred to as a moratorium during this four week window. Regular visitors to or practitioners in the insolvency space will be familiar with this word in other areas of the insolvency legislation, most importantly in the context of administration. A moratorium in administration restricts creditor action, enforcement of security and claims generally for the period of the administration. A moratorium under the proposals scheme in the 2008 Act simply prevents the RP’s land from being disposed of without the consent of the Regulator.
The Regulator’s objectives are to protect the interests of those being housed, many of whom may be vulnerable individuals, and to protect the public money that often went towards the construction or purchase of the RP’s land and buildings. To do this, the housing stock must remain with the registered sector. That means that if the 2008 Act proposal process is engaged, another RP must be found who is willing to take some or all of the ailing RP’s housing stock into its own portfolio. If the Regulator makes proposals that involves some or all of the ailing RP’s housing stock to move to another RP, those proposals will be binding on everyone, provided all the RP’s secured creditors agree.
This is a potentially powerful tool. In addition, there are certain statutory provisions applicable to the registered sector that make this process easier than it would be if dealing with commercial entities. For example, certain RPs are able to carry out what is called a “transfer of engagements”. This is a transfer of all the RPs rights and liabilities to a third party assignee. Under ordinary contract law it is not possible to assign or transfer a liability or a burden. That is only possible if the party who is entitled to receive the performance of that liability is also party to the assignment (this is called a novation). However, a transfer of engagements is not so restricted: there is no need for the third party to be included in the process. It is, in effect, a statutory novation, whether or not the third party agrees.
However, whilst there are certain advantages to the process, which could potentially be very helpful in the right circumstances, it is not a panacea. The Regulator does not have carte blanche to impose its proposals. There are consultation and agreement requirements. There are also various practical issues that in theory could present challenges if a relevant situation arose and the use of these powers was under consideration. These start with the need within a short space of time to identify the RPs land interests, its secured creditors, the extent to which creditor consultation is required, its overall liabilities and any potential rescuer. Of course, these situations do not arise out of the blue, and it is likely that by the time that the use of the proposal powers arose, the Regulator will have been well aware of the situation. The Regulator has a number of powers in relation to ongoing governance which are likely to have been exercised. These include the ability to make appointments to an RP’s board. However, even though it is likely that some of these powers will already have been exercised and prior background work to a potential rescue will have been carried out, the timescales for the process remain very compressed. 28 days might sound feasible, but this period needs to include time to consider, potentially consult on, finalise and have proposals approved, whilst in the meantime lining up the prospective rescuer who may not feel there is sufficient time to make an informed bid for the assets. Whilst it is possible for the Regulator to extend the 28 day time period with the consent of the RP’s secured creditors, this remains an uncertain process. This is not least in part due to the fact that each secured creditor has to agree the proposals, which may not happen.
It was recognition of these potential shortcomings that led the Regulator to seek a more sophisticated tool. This ultimately culminated in the introduction of housing administration in the Housing and Planning Act 2016 (2016 Act). This is a “special administration” process. There are examples of other special administrations on the statute book. They all concern the provision of some public service and the special administration process in each case is designed to protect the delivery of that service, or those who are affected by it. These include examples in the banking, education and utilities sectors. Each are likely to have some common themes but there will be differences, some significant.
Housing administration follows the scheme of ordinary administration, but applies certain new provisions and disapplies others (s102 and schedule 5 of the 2016 Act and see also The Housing Administration (England and Wales) Rules 2018). Unlike ordinary administration, it is only available by court order, on the application or with the consent of the Secretary of State. The objectives of ordinary administration are:
- rescuing the company as a going concern, or
- achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or
- realising property in order to make a distribution to one or more secured or preferential creditors.
In housing administration, the objectives are the same as those in ordinary administration (i.e., those set out above), but also include an additional objective: to keep social housing in the regulated sector (ss96, 97 Housing and Planning Act 2016). However, whilst the housing administrator should work towards both objectives, the objective to keep social housing in the regulated sector only applies to the extent that it does not result in a worse outcome to creditors than would be the case were there no objective to keep the social housing in the regulated sector. This is a key difference to certain other special administrations, e.g., in the energy sector, where provision of the supply trumps many other considerations. It may be difficult in a specific case to determine the counter factual: i.e., what would have happened had there been no housing administration objective. This may provide some comfort to the housing administrator, should the housing objective be adopted in any such administration as it suggests that any third party challenge would, save in the clearest case, be speculative and uncertain.
The feel and look of a housing administration would otherwise look relatively similar to ordinary administration. The usual administration moratorium preventing creditor or claimant action against the insolvent entity would apply. Importantly, paragraph 71 of Schedule B1 of the Insolvency Act 1986 applies in the usual way. This prevents the housing administrator from disposing of any assets subject to a fixed charge without the consent of the relevant secured creditor or the permission of the court. Permission can only be given on terms that the net proceeds of any such disposal are applied to the sums secured by the security together with any additional sum that would produce the amount which would be realised by sale of the property at an undervalue. As any housing administration will be dealing with land, there is a high likelihood that this will be subject to fixed charges. Furthermore, there is often a difference in value between land that is subject to its existing use for housing and if sold on the open market, out of the regulated sector.
The three principal features mentioned above, namely the way the objectives work, the existence of the moratorium and the incorporation of paragraph 71 of Schedule B1 to the 1986 Act neatly encapsulate the most important concepts behind housing administration. The preservation of housing in the regulated sector is a highly important objective, but it does not trump other creditors' rights. The position of fixed charge creditors to the sector should not in the meantime be prejudiced. Secured lending provides lifeblood to the sector and prejudicing secured creditors' interests in one case could have much wider ramifications for the sector. However, where a housing administration may be appropriate, say in the case of a large and complex RP failure, the protection of the moratorium and much of the other process machinery of ordinary administration allows an orderly work through which will better protect the interests of residents and the sector.
Whilst this means that we might see housing insolvencies that do not justify housing administration, it is nonetheless notable that there has not been a single housing administration, despite the fact that the legislation has now been in place for some 8 years. This fact takes us back to the premise at the outset of this article, namely that the sector has been a stable one. All key stakeholders are keen to see this continue.
