Lenders’ fears calmed as DTI closes insolvency loophole for associations

The government implemented changes to the 1986 Insolvency Act on Wednesday, guaranteeing that housing associations cannot enter administration if they go bust. Associations will go into receivership instead.

If housing associations were allowed to enter administration, it would be more difficult for lenders to reclaim their money.

Doubts had been raised about the status of associations after a High Court ruling in which Salvage Association, a pensions provider established by royal charter, was allowed to enter administration (HT 19 September 2003, page 15).

Lenders feared that the ruling in 2003 would apply to other bodies not registered as companies, such as industrial and provident societies – about 80% of social landlords are industrial and provident societies.

But the Insolvency Service, an agency of the Department of Trade and Industry, has confirmed that amendments to parts 1 and 2 of the 1986 act will ensure that only limited companies can enter administration.

“These changes will ensure that the EC Regulation [on Insolvency Proceedings] is implemented properly and remove the difficulties regarding the funding of registered social landlords,” a DTI statement said.

Bob Wilson, head of finance policy at the National Housing Federation, said the loophole in the act had “spooked” lenders.

“[The act] raised the spectre of a loophole that could have cut across lenders’ rights to restitution in getting their funds repaid,” he said. “Lenders were vexed about this.

The loophole could have significantly affected the confidence of lenders as well as their willingness to lend to housing associations.”

Wilson added that if the loophole had remained, the cost of borrowing for housing associations would have increased.

Piers Williamson, chief executive of the Housing Finance Corporation, said: “Most lenders had assumed this was on its way, but this is important in underlining confidence.”

In 2002, before the Salvage case, the NHF successfully lobbied for an amendment to the Enterprise Act, which meant insolvent associations would go into receivership.

In the wake of the Salvage ruling, the Council of Mortgage Lenders began to investigate lenders’ concerns that industrial and provident societies would go into administration. Banks were worried that, in such cases, the administrator would have been less likely to prioritise the needs of lenders.