Although the specific provisions are not yet enacted, the Housing and Planning Act 2016 introduces a new special administration regime for the social housing sector. The new regime enables the courts to appoint an insolvency practitioner if a registered provider becomes insolvent. The requirement for the regime was established following the review of how the regulator dealt with the financial trouble that hit Cosmopolitan back in 2012.
It is envisaged that only the Secretary of State, or HCA with the consent of the Secretary of State, can apply to court for an administration order and for the appointment of an administrator who will be a licensed insolvency practitioner.
In response to this new regime we expect that most lenders to the sector will pay significantly more attention to banking covenants, potential covenant breaches and to their security position. Lenders will need to be comfortable that, in the unlikely event of the failure of an association, they will be able to recover their lending in full plus associated costs. Associations may see more enquiries from their lenders in this regard and lenders may request an independent business review. They are likely to take an active interest in any In-depth Assessments and will want to monitor progress against recommendations. It is likely to be harder for the smaller or weaker associations to obtain funding, and we expect this to be a factor in driving further merger and consolidation activity within the sector.
Our recent survey showed real optimism within the sector but while there are reasons to be positive, history tells us that stability is unlikely to linger. Continued welfare reform, Right to Buy updates, deregulation and ambitious homebuilding targets will continue to exert day-to-day pressures on providers. Brexit and the prospect of a second independence referendum in Scotland will only compound uncertainty.
Good governance is perhaps now even more critical than ever and registered providers must embed flexibility within strategies and regularly review their risk registers if they are to sidestep potential economic shifts. Board members need to be aware of their duties and responsibilities in relation to the Company Directors Disqualification Act 1986 and the Insolvency Act 1986.
- Have board members acted appropriately and quickly enough when it should have been apparent to them that the association was in financial difficulties?
- Should they have been aware at an earlier stage that there was no reasonable prospect that the association would avoid an insolvency?
- Have they caused the position of the association’s creditors to worsen?
The insolvency practitioner who is appointed as an administrator has a statutory duty to carry out an investigation into anyone who has acted as a board member in the 3 years leading up to the appointment of the administrator, and to consider their conduct. They have the ability to bring certain actions against the board members personally, including wrongful trading and misfeasance. If successful this can lead to personal liability on behalf of the board members.
The administrator can also look into transactions carried out by the association with a view to considering whether they were transactions at an undervalue or potentially preference actions. These actions can be brought not only against statutory directors but also shadow directors and defacto directors. A detailed and robust system of recording and strong governance will be a key factor in any rebuttal of potential claims.
Furthermore following the repeal in the Housing and Planning Act 2016 of the requirements to obtain consent from the HCA, the board members of those associations which are registered charities must comply from 6 April 2017 with Part 7 of the Charities Act 2011 with regards to any land disposals and also to using property as security for mortgages or other loans. Whilst this should be a relatively straight forward process and largely based around self-certification this requirement further enhances the importance of good governance. All associations which are charities, either registered or exempt, must continue to apply with their general legal duties when disposing of land.
For your clients with a strong board and healthy balance sheet there will be opportunities in the sector for them to partner in various ways and to varying degrees, merge or acquire those weaker associations. For any of your clients who may feel vulnerable in certain areas we can assist. We have a national, dedicated, multidisciplinary team who can share the benefit of our knowledge and experience to address your issues and opportunities in these challenging times.
View the full results of our Health of the Sector survey here.