DTI will close loophole that could have pushed up borrowing costs for many associations
The government is to close a legal loophole that could have pushed up borrowing costs for housing associations.

It plans to clarify existing law on how organisations are treated if they go bust, to allay banks' fears that they could have trouble reclaiming money lent to associations.

A recent High Court case suggested that hundreds of bodies that are not classified as companies would go into administration if they became insolvent, rather than receivership.

This would include the large number of housing associations that are industrial and provident societies. Previously, it was thought associations could not go into administration.

Banks feared it would be more difficult to reclaim money they had lent to associations that were in administration than those in receivership. They warned that they might need to up charges to reflect the increased risk (HT 12 December 2003, page 14).

The Department of Trade and Industry plans to introduce secondary legislation to rectify the problem by making sure that only businesses registered under the Companies Act can go into administration.

It had been feared that the issue would require time-consuming primary legislation, but now the DTI believes it can be done by this faster method. It has yet to decide when the secondary legislation will be introduced.

Lenders welcomed the move. Piers Williamson, chief executive of the Housing Finance Corporation, said: "What is being proposed makes the situation far more straightforward. The consequence of it is that there is less uncertainty and the lending community calms down and gets on with lending more to the sector."

But he added: "In the short term, it's a recipe for lawyers to make money off the shades of grey because there are a number of technical areas of confusion."

In the case that triggered the review, the High Court ruled on 9 May 2003 that European law and the 1986 Insolvency Act allowed administration for Salvage Association, a pension provider established by royal charter (HT 19 September 2003, page 15).

A spokeswoman for the insolvency service at the DTI said: "We are looking at proposals to correct the amendment made in May 2002 to the Insolvency Act so that only companies can enter into administration. We are seeking views from interested parties in the sector."

Source

Housing Today