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Housing Administration and Ordinary Administration – Your Questions Answered Just before Christmas, Brandon Lewis MP announced amendments to the Housing and Planning Bill (the Bill) to introduce a new special administration regime for all private RPs, which is to be known as “housing administration” (HA). The Bill also extends ordinary administration to RPs which are community benefit societies CBSs( ). The Bill reached the report stage in the House of Commons on 5 January 2016.

In this briefing note we explain (i) what the implications are for registered housing providers (RPs) and creditors, of both HA and ordinary administration, (ii) what the new HA regime is designed to fix and the current insolvency regime and (iii) how HA will work, if implemented. DCLG are currently engaged in a period of dialogue with interested parties, as to the acceptability or otherwise of the draft proposals, and therefore remain subject to further amendment. What are the implications of housing administration and extension of ordinary administration for RPs and creditors?

1. Will the extension of housing ordinary administration. Lenders might administration lead creditors to see this as sufficient for them to call for a require floating charges in the future? floating charge. The short answer, we believe, is “no”. But the HCA or Secretary of State has Under the existing ordinary administration a 28 day window to seek an HA order. regime under the Insolvency Act 1986 If it does so, the HA order “trumps” i.e. (IA) that currently applies to companies prevents the lender either seeking or (ordinary administration), the holder of a blocking ordinary administration. Lenders qualifying floating charge in respect of might take the view that in view of this, a company’s property may appoint an there is marginal benefit to them in taking administrator of the company. However, a floating charge. under the Bill, an application for an We are discussing this issue with the HA order cannot be made by anyone HCA and National Housing Federation other than the Secretary of State or the as it is important to ensure that lenders housing regulator (HCA). don’t start taking floating charges. Moreover, under ordinary administration, 3. Will it have an adverse impact on the holder of a qualifying floating charge valuations of properties? over an RP which is a company can Quite possibly, because of the following appoint an administrative receiver features of HA: who can block the making of an administration order. This will not extend (i) the objective of HA is to ensure that to a power to block an HA order. an RPs social housing remains in the regulated sector (i.e. owned by 2. Could the extension of ordinary a private RP). The sale of voids to administration to CBSs lead to a non-RP would be contrary to this lenders taking floating charges? objective and therefore a secured Many loans to RPs which are CBSs creditor could not rely on a sale of state that in the event of certain changes voids to repay debt. in insolvency law the lender can call (ii) there is no automatic end date for for a floating charge. If a lender takes a an HA (as explained below) and general floating charge it can either seek therefore there is no certainty that a ordinary administration itself or appoint property could be sold, or in what an administrative receiver and block timescale. This could have important knock- apply to the court for an HA order. on implications for asset cover ratio Once an HA administrator is appointed, compliance in loan agreements, there is an automatic moratorium bond issues and private placements. which means that it is not possible 4. Could the proposals trigger the for a creditor to bring or pursue legal Material Adverse Effect event proceedings against the RP or its assets of default in RPs’ existing loan while the HA subsists. This includes an agreements? absolute restriction on enforcement of Clearly, this will depend on the definition security except with the consent of the of Material Adverse Effect in the loan HA administrator or with the permission agreement. However, as there is no of the court. A creditor who has a automatic end date for HA, a creditor monetary claim is unlikely to be granted would only be able to enforce its security permission. once the HA has been ended by the As explained below, creditors also have Secretary of State, the HCA or the HA no right to approve an HA administrator’s administrator making an application to proposals for achieving the purpose of court. HA. It has been suggested that a creditor’s If an application for an HA order security may not be enforceable and this has been made or an HA order is in could fall foul of the Material Adverse place, no resolution can be made for Effect definition if it includes the LMA the winding up of the RP or for the standard language of a “material adverse appointment of an administrative receiver effect on the validity or enforceability and ordinary administration will not be of, or the ranking of any security granted. Any administrative receiver that granted pursuant to any of the security has been appointed must refrain from documents or the rights or remedies of performing its functions. any lenders under any of the security The Bill also contains some unusual documents”. provisions relating to the termination of Having said that, lenders may be HA, as explained in more detail below. reluctant to call a default under the 6. … And what about ordinary Material Adverse Effect event of default, administration? Will creditors resist it, as it could lead to an HA, which may not as before? be an attractive option to lenders. Secured creditors may well consider that 5. What does housing administration introduction of ordinary administration mean for a creditor of an RP? for RP/CBSs is unwelcome, as it greatly Under the Bill, a creditor may not take extends the period in which they cannot any step to enforce its security or to enforce their security, as compared with wind-up an RP unless notice of intention moratorium. However they should bear to do so has been given to the HCA and in mind that if ordinary administration at least 28 days have elapsed since the is in the offing, the HCA may well notice was given. intervene and put the RP into HA. So The HCA will be given 28 days’ notice of ordinary administration may well have any impending enforcement of security little application in practice. Creditors are or winding up and in that period can more likely to focus on the impact of HA. What HA is designed to fix and the current insolvency regime

We understand that these changes The Bill is to extend a number of are being introduced as a result of ordinary administration provisions the Altair look back report and the to RPs which are CBSs. Currently, recommendations arising out of the a CBS which is an RP falls outside Ujima and Cosmopolitan failures. ordinary administration. In 2014, ordinary administration was extended Up to now, the main protection for to CBSs, but a CBS which is an RP an RP in financial difficulty has been was specifically carved out. Currently moratorium under sections 144 to 159 if a funder to a company RP takes a Housing and Regeneration Act 2008 floating charge over substantially all (HRA 2008). Where specified steps are its assets it can block administration. taken in relation to an RP – including It seems that this will extend to CBSs receivership on liquidation – there is (though the Bill is not yet consistent on an automatic moratorium. The HCA this). can make proposals for management of the RP’s property by an RP. If the The main funders to RP/CBSs have proposals are agreed by all secured resisted several previous attempts creditors whom the HCA can locate to bring RP/CBSs within ordinary after reasonable enquiries, they bind administration. They felt that the all creditors. Moratorium is relatively moratorium protection was sufficient. If short – 28 working days, which can they had to take floating charges as a be extended with the consent of all route to block administration, this would such secured creditors. This gives disrupt the security structure which has secured creditors some comfort, in served this sector for many years. that they can enforce their security The government has previously allowed unless a proposal has been agreed RP/ CBSs to fall outside administration during moratorium. But the moratorium and it may well be open to persuasion period may not be sufficient to permit a again. On the other hand, it is now suitable solution to be worked through. seeking “backstop” protection for social The HA regime will give a longer period. housing, through the HA regime. HA In the Bill, a number of the provisions of will “trump” ordinary administration in the IA relating to ordinary administration any event so arguably the impact of will apply (with amendments) to introducing ordinary administration for companies that are in HA. There will RP/ CBSs is considerably less than it need to be further legislation to apply was. these provisions to CBSs that are in HA. We assume here that this will be done. How HA will work, if implemented

The rest of this briefing note sets out for companies and RBSs. Ordinary further general detail explaining how HA administration is initiated either by a will work, if implemented. court order at a formal hearing or by What is housing administration and certain parties (including directors or what are its objectives? certain creditors) lodging prescribed documents at court. HA is an insolvency process by which an RP is placed under the control of The court can only make an HA order a qualified insolvency practitioner to if it is satisfied that (i) the RP is unable, enable them to achieve the objectives or is likely to be unable, to pay its debts of HA. HA applies to for-profit as well as (i.e. it is or is likely to be insolvent on non-profit RPs. a cash flow basis or a balance sheet basis) or (ii) that, on a petition by the The objective of HA is to ensure that Secretary of State, it would be just and the RP’s social housing remains in equitable (disregarding the objective of the regulated sector (i.e. owned by a the HA) to wind up the RP in the public private RP). To do this, the housing interest. administrator will seek to rescue the RP as a going concern, with The court cannot make an HA power to make transfers in limited order if an RP is already in ordinary circumstances. “Rescue” is not defined, administration under the IA or has gone but would presumably include making into liquidation. the RP a subsidiary of another entity The court also has power to make an which can provide the requisite financial interim order restricting the exercise of and other support. certain powers of an RP or its board or “Relevant transfers” can only be used committee members. where (in short) the transfer helps to The housing administrator rescue the RP as a going concern of The housing administrator must be a the RP and/or meet the objective of HA; qualified insolvency practitioner. It must or where the RP cannot be rescued as manage an RPs affairs, business and a going concern, or to produce a better property for the purpose of achieving result for the RP’s creditors as a whole the objective of the HA and must carry or for the RP’s members as a whole. out functions in the way which, so The members’ interests take second far as is consistent with the HA to do place to creditors’ and arguably are so, best protects (i) the interests of only really relevant to a for profit RP. the RP’s creditors as a whole and (ii) How does an RP go into housing subject to those interests, the interests administration? of the RP’s members as a whole. An application for an HA order can These factors differ from the only be made to court by either (i) moratorium provisions in the HRA 2008. the Secretary of State or (ii) with the Under moratorium, the HCA makes consent of the Secretary of State, the proposals to ensure the RP’s property HCA. Creditors do not have the power will be properly managed by an RP. Any to appoint an HA administrator. proposal by the HCA must be approved This differs from ordinary administration by all secured creditors who can be located after reasonable enquiries, so referred to above. Under ordinary secured creditors sit at “top table”. administration, creditors have the right But the HCA must have regard to the to approve those proposals (either with interests of creditors as a whole and or without modification). must so far as reasonably practicable How does the Bill work in avoid worsening the position of conjunction with ordinary unsecured creditors. administration and the moratorium We believe that references to “creditors provisions of HRA 2008? as a whole” (in relation to HA) could If an RP is a company or CBS, existing include the HCA in its capacity as a creditors and/or directors of the RP provider of grant, but only to the extent have a right to appoint an ordinary that grant has become repayable. administrator. A court cannot make What does the housing administrator an HA order in relation to an RP if it is do? already in ordinary administration under On appointment, a housing the IA. administrator takes custody or control However, under the Bill, the HCA of all the property to which he/she must be given 28 days’ notice of any thinks the RP is entitled. impending appointment of an ordinary A housing administrator’s rights and administrator and in that intervening powers are based on those set period will be able to apply to the court out in the IA that apply to ordinary for an HA order. A HA order blocks administration. It has wide-ranging ordinary administration. powers and can do “anything Under Section 145 HRA 2008, a necessary or expedient for the moratorium on the disposal of land by management of the affairs, business an RP begins, if certain steps are taken and property” of the RP. (including steps to enforce security, The housing administrator must also the winding up of an RP or the making make a statement setting out proposals of an ordinary administration order). for achieving the purpose of HA. The The moratorium lasts for 28 working statement of proposals cannot include days, or such longer period as may be any action which affects the right of a agreed by each secured creditor of the secured creditor of the RP to enforce RP who the HCA is able to locate after his security. It has power to revise making reasonable enquires. those proposals over time. However, Under the Bill, this moratorium will end if the housing administrator thinks that when one of the following occurs: (i) a revision is substantial, he/she must the expiry of 28 days, beginning with send a copy of the revised proposals the day on which the notice required to various parties, including the RP’s by Section 145 HRA 2008 is given (as creditors. It is not clear from the Bill opposed to working days), or such exactly when these revised proposals longer period as may be agreed by take effect. each secured creditor of the RP whom An important distinction between HA the HCA is able to locate after making and ordinary administration is that, reasonable enquires or (ii) an HA order under HA, creditors have no right to is made in relation to the RP or (iii) the approve the administrator’s proposals moratorium is cancelled by the HCA pursuant to Section 146 (5) HRA 2008. What does housing administration mean for a board member of an Contacts RP? When an RP goes into HA, the board Julian Barker member’s powers are curtailed. Partner A board member cannot exercise [email protected] any management power that could 020 7880 4365 interfere with the exercise of the HA administrator’s powers without prior consent from the HA administrator. If Andrew Cowan the RP ultimately comes out of HA and Partner resumes trading, the board members [email protected] regain their full powers. 020 7880 4350 Any officer of the RP (including employees) may be required to Gareth Hall provide a statement of affairs of the Partner RP to the HA administrator, including [email protected] details of the RP’s assets, liabilities 020 7880 4351 and creditors. It is an offence not to comply with this requirement. Jim Varley We think this may be helpful to Partner boards in this situation, who would be [email protected] concerned about their own position in 020 7880 4376 these circumstances, given the lack of directly relevant legal precedent. How and when does housing administration end? Under the existing ordinary administration regime under the IA, ordinary administration of a company automatically ends after one calendar year, unless the creditors or the court agrees to an extension. Under the Bill, an HA does not have an automatic end date. The appointment of an HA administrator only ceases on an application to court by the Secretary of State or, with the consent of the Secretary of State, by the HCA or the HA administrator. Devonshires Solicitors has taken all reasonable precautions to ensure that information contained in this document is materially accurate Therefore, in theory, an HA could however this document is not intended to be legally comprehensive and therefore no action should be taken on matters covered in this continue indefinitely. document without taking full legal advice.