For RPs, administration is the new insolvency

The new insolvency regime for registered providers (RPs) was brought into force by two statutory instruments – the Insolvency of Registered Providers of Social Housing Regulations 2018 and the Housing Administration (England and Wales) Rules 2018.

Before 5 July, if specified insolvency procedures occurred in relation to an RP, a moratorium – under the Housing and Regeneration Act 2008 (HRA) – of 28 working days, extendable with the consent of the secured creditors, was automatically triggered.

During such moratoria, the Regulator of Social Housing (RSH) could make proposals for managing that RP’s property, which if agreed by the secured creditors, would bind all the RP’s creditors. At the end of the moratorium if no proposal or extension was agreed, the RP’s secured creditors could enforce their security, but, to date, this has never occurred.

For RPs incorporated under the Companies Acts, the normal corporate administration process under the Insolvency Act 1986 also applied, but this was not available to RPs incorporated as co-operative and community benefit societies.

Many RPs have diversified their businesses and taken on more debt to finance building more homes.

Such increased exposure led many to conclude that a more robust RP insolvency regime was required.

Investigations into the Cosmopolitan collapse found the existing regime unfit for purpose, particularly if a large and/or complex RP got into financial difficulty. Hence a bespoke administration regime for RPs has been created.

The secretary of state – and with their consent, the RSH – can apply to the court for a housing administration order and the appointment of a housing administrator, who must be a qualified insolvency practitioner.

The court will only grant a housing administration order if satisfied that the RP is unable, or likely to be unable, to pay its debts, or that it would be just and equitable in the public interest to wind up the RP.

Consent from the RP’s creditors is not required but notice of the application must be given to specific individuals. If the application is granted, the housing administrator’s appointment must be gazetted as soon as reasonably practicable.

Any creditor of the RP can apply to court to replace the housing administrator or end the housing administration if it considers a housing administrator is not meeting their duties.

Once appointed, the housing administrator will manage the RP’s affairs, business and property in order to achieve two objectives.

The first objective is to rescue the RP as a going concern or achieve a better result for the RP’s creditors as a whole than would be likely if the RP were wound up without being in housing administration.

If neither of these are reasonably practical to achieve, the first objective permits a sale of the RP’s properties in order to make a distribution to its secured or preferential creditors, as long as said sale does not unnecessarily harm the interests of the RP’s creditors as a whole.

The second objective is to ensure that the RP’s social housing remains in the regulated sector for as long as it is owned by a RP.

The first objective takes priority over the second, but the housing administrator must try to work towards both objectives and not do anything which would result in a worse distribution to creditors than would be the case if the administrator was not required to pursue the second objective.

During a housing administration, there will be a moratorium on the enforcement of security and any other insolvency measures without the consent of the housing administrator or the court.

A housing administration order will expire after one year unless it is extended by the court following application by the housing administrator or with full creditor consent.

On the expiry of the order, the housing administrator can make recommendations to the court regarding the next steps for the RP.

The court will then decide what order to make, with reference to the two objectives. There is no statutory requirement for the transfer of property and liabilities to another RP.

The HRA moratorium provisions still apply to RPs, although the period for any such moratorium is now 28 days rather than 28 working days. The 28-day HRA moratorium will be triggered when any insolvency measure is commenced, during which the RSH and/or the secretary of state can apply to the court for a housing administration order.

With the new regime in force, the regulator’s preferred proposal during such moratorium is expected to be the appointment of a housing administrator, particularly for larger RPs.

However, the regulator can still make other proposals during the HRA moratorium if it can reach agreement with each secured creditor within the 28-day period and the secretary of state does not apply for a housing administration order.

While the new housing administration regime will hopefully remain unused, it does provide the sector with increased certainty and clarity.

In particular, an obstacle in resolving the Cosmopolitan collapse was its size and finding a single RP to accept its whole property portfolio and all its debts within a short period of time.

The new regime with a year’s moratorium provides more time and more options to find the right solution for a large RP in financial difficulties.

Equally, objective two demonstrates that this new regime aims to protect RPs’ housing stock and, although objective one takes priority, housing administrators must work towards both.

From a valuations perspective, no real change is anticipated. As objective one will take priority and creditors’ interests will therefore be protected, valuers have confirmed that the market value subject to tenancy valuation can be retained.

To date, very few RPs have found themselves in financial difficulties and no funder in the sector has suffered a loss.

The most high-profile cases – Ujima, Presentation and more recently Cosmopolitan – were all resolved by the regulator transferring those RPs’ properties and liabilities to another RP.

However, as RPs have become larger and more complex, a more robust insolvency regime is required. Many have therefore welcomed this new regime as providing further certainty and clarity to the sector.

Patricia Umunna, partner, Winckworth Sherwood social housing finance team and Marie-Louise King, partner, Winckworth Sherwood commercial disputes team