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Housing Administration and Ordinary Administration

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Housing Administration and Ordinary Administration solicitors LLP 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.
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