What kind of company are we keeping?

The legal technicalities of what happens when a housing association gets into serious financial trouble have been a real issue for the social housing lending market over the past 20 years.

When significant amounts of private finance started to be required by housing associations in the 1980s, problems surfaced around the creation of floating charges and the implications for future borrowing arrangements.

Changes introduced by the 1986 Insolvency Act had made it important for lenders to corporate borrowers to take a floating charge – or a form of security granted over the whole of the assets of a body corporate – in order to preserve the right to sell assets held as security.

But as it dawned on everyone that floating charges were becoming a problem in the context of housing associations’ future borrowing, lenders became comfortable that they didn’t really need them for the majority of housing associations.

That was because the associations were industrial and provident societies and not subject to the relevant parts of the Insolvency Act: sections 1(4) and 8(7) define what is a “company” for its purposes and, as originally enacted, industrial and provident societies were excluded.

However, with effect from May 2002, the definitions were rewritten because of changes in European law.

A statutory instrument (2002/1240) provided that a reference to a “company” also included any “legal person”. It emerged that this might mean that, for this purpose, industrial and provident societies could be treated as if they were companies. The provisions, which are in the 2002 Enterprise Act, import the definition of “company” in Article 3 of EC Regulation 1346/2000 into the 1986 Insolvency Act.

European law

This view was confirmed by a court judgment in May 2003 – another example of European law having a significant impact on housing associations, to add to the many relating to procurement, employment, health and safety and other assorted subjects.

The judgment concerned was in a case called Re Salvage Association, which itself followed from a decision in Re BRAC Rent-a-Car International Inc. The logic of both of these cases has been questioned but for the moment, and in the absence of a superior court decision or amending legislation, they appear to represent the law as it stands.

The Salvage case concerned the members of the general committee of an association incorporated by royal charter in 1876. They applied for an administration order for the purposes of implementing a voluntary arrangement and a more advantageous realisation of the organisation’s assets than would have been effected on a winding up.

In order to do so, the court had to decide whether a corporate body that was not a company registered under the Companies Acts was subject to the relevant provisions in the 1986 Insolvency Act by virtue of the imposition of Article 3 of the EC Regulation.

The judge decided that the jurisdiction of the court to make an administration order applied to companies in the extended sense referred to in Article 3, namely “company or legal person”.

Unless the government takes swift action, the cost of finance for housing associations could be adversely affected

The judge said the association was just such a company. The royal charter by which it was incorporated made the association a legal person separate from its members, enjoying perpetual succession, having a common seal, capable of suing and being sued in the courts and having the power

to do “all matters and things incidental or appertaining to a body corporate”.

It followed, in the judge’s view, that the court had jurisdiction to make an administration order in relation to the association.

This broad interpretation, if the decision stands, will undoubtedly include industrial and provident societies.

Time and effort

Lenders to housing associations are worried about what this change means for them.

A lot of time and effort had been put into persuading the government to change other parts of the Enterprise Act to prevent the very difficulties this court decision has now thrown up.

The government had been happy to see housing associations operate outside the general law relating to insolvency. Some while ago there were indications that the government would promote amending legislation to correct the decision in the case, but as yet this has not emerged.

Until such time as the law is changed, it seems lenders will view housing associations as riskier and less attractive than would otherwise be the case.

It is possible, unless the government takes swift action, that the cost and rates of finance for housing associations will be adversely affected. It is also possible that availability of funds, for some, may be affected.

We must hope that the necessary legislation is forthcoming quickly once parliament reconvenes after the summer.