Previous Section Back to Table of Contents Lords Hansard Home Page

Lord Lucas moved Amendment No. 197:

Page 1, line 17, at end insert ("which is a housing association").

The noble Lord said: My Lords, during Committee the noble Baroness, Lady Hamwee, asked why registered charities were not required to satisfy the same conditions for registration as industrial and provident societies or companies. The noble Baroness withdrew amendments on the understanding that we would come back with our own proposals.

The Bill as currently drafted would in fact enable any registered charity to become a registered social landlord, regardless of whether it had been established for, or had among its objects or purposes, the provision of housing. Registered charities have an excellent record in providing social housing and we want to encourage others to come forward. But it was not our intention that a registered charity should be automatically eligible for registration. I am grateful to the noble Baroness for pointing that out.

The noble Baroness suggested we might apply to registered charities the same conditions under Clause 2 as other bodies must satisfy. That would limit the additional permissible purposes such bodies might have in the way we debated in Committee. That is perfectly reasonable for bodies set up specifically to be housing associations or housing companies. But many registered charities provide housing as a logical extension of their primary objects. A number of charities (such as the YWCA) already operate successfully in that way. It would not be appropriate to seek to limit their objects or purposes to those listed in subsections (4) and (5). The objects of charities are already constrained by the very fact that they are charities.

Amendment No. 197 will require a charity to be a housing association. Clause 211 of this Bill (minor definitions) defines a housing association by reference back to Section 1 of the Housing Associations Act 1985 which is being retained. That Act defines a housing association as:

11 Jul 1996 : Column 479

It is also required to be non-profit making using a definition which is the same as Clause 2(2). That latter requirement is axiomatic for a charity. I hope that satisfies the point raised by the noble Baroness in Committee. I beg to move.

Baroness Hamwee: My Lords, I thank the Minister for his response to my amendment at the last stage. I confess that I would prefer to have won the last vote than to have gained this point on the drafting. Nevertheless, I am grateful to him for picking up the point. I support the amendment.

Lord Lucas: My Lords, I, too, would have preferred not to have had the effect of emptying the House in such a dramatic manner.

On Question, amendment agreed to.

Lord Williams of Elvel moved Amendment No. 198:

Page 1, line 21, at end insert ("and is properly capitalised").

The noble Lord said: My Lords, I have raised this matter in formal conversations with the Government. I am not clear about the capitalisation of local housing companies. As I understood it, from certain correspondence which I have received from the noble Lord, Lord Lucas, the Government propose that local housing companies should be, in normal words, "thinly capitalised"--in other words, there should be nominal capital put up by those who wish to participate in the shareholding. That is certainly justified if it is the Government's intention to ensure that tenants can be shareholders. There may be rich and poor tenants, but by definition I believe that tenants do not have sufficient assets to put large sums of money into companies. It may also be true that financial institutions themselves do not wish to put up large sums of equity. They prefer to make their money by lending on top of the equity.

That raises a problem which I have tried to discuss with the noble Lord, Lord Lucas, as I am sure he will remember. The problem is that if local housing companies are to work they will need money. If it is to be provided almost entirely in the form of debt, that debt will have a charge on the properties owned by the local housing company. That is inevitable because no financial institution will put up money without taking a charge on the property. That will give rise to a series of rather difficult problems because the directors of the company will be required under the Companies Act to act for the benefit of their shareholders and also for their creditors. I understand the point.

The creditors, who have a charge on the properties in a local housing company, will act in the interests of their own shareholders--in other words, they will wish to realise their security if and when they feel that the company itself is threatened. For instance, if there is a default on the loan agreement and one interest payment is missed, it will almost certainly be the right of the lending institution to put in a receiver. In that case the whole concept of local housing companies will come to a complete standstill. It does not seem to me that the Government have to date thought this through properly. That is why I move this amendment, having warned the

11 Jul 1996 : Column 480

noble Lord, Lord Lucas, that I was going to do so, in the hope that the Government have now given this matter consideration and that they can give a proper response to the problems that I have raised. I beg to move.

Lord Lucas: My Lords, indeed the noble Lord, Lord Williams, has raised an important problem. I hope that he and the House will forgive me if I answer him at rather greater length than he asked the question because I believe it is important that we set our views on this matter on the record to give noble Lords the opportunity to criticise them if they feel that that is appropriate.

The appropriate level of funding required by a company will differ from case to case. It is not something which could readily be put in legislation: nor is it necessary. Naturally, the criteria which the Housing Corporation will use to judge the suitability of companies for registration will cover their funding proposals. But to include a formal provision in the Bill is at best unnecessary, and might even be dangerous since it might be argued that the corporation had some liability if the company at some time became insolvent.

Housing companies will be set up either as companies limited by guarantee or as companies limited by shares. The companies will not be permitted to distribute profits, nor will they finance their activities by raising equity capital. We do not see that that will create any particularly new problems. Housing companies limited by shares will have some share capital, but it will be limited. It will be nominal or "thin", to use the word of the noble Lord, Lord Williams. I do not believe that £100 would be unusual. In this respect they will be no different from a large number of private companies which only have a very small issued share capital. This is not to imply that generally companies are under-capitalised. Capital other than equity--for example loans--must also be taken into account. Loan finance frequently provides a major source of capital. Housing companies can also be expected to rely heavily on loan capital to finance their activities.

We expect most housing companies to take transfers of stock from the public sector. They will hold assets in the form of bricks and mortar giving rise to income virtually from day one. These assets will be financed through debt raised to meet a purchase price reflecting the value of the assets, which will in turn reflect anticipated cash flow from rents and service charges. With the right business plans, there should be no problems getting such companies off the ground.

Housing companies which undertake the development of housing from scratch are in a somewhat different position. They may need to proceed more cautiously at first. But in addition to their ability to raise loans, they will be eligible for grants from the corporation, a significant part of which is payable at an early stage to help cover the purchase of land and provide working capital for fees and costs and to enable development to start. We agree that such companies may need to borrow initially to get themselves established, but reliance on such loans, or indeed on grant, will not mean that they automatically fall foul of the insolvency rules, which, of course, only come into play in the event of a formal

11 Jul 1996 : Column 481

insolvency. The test is generally whether a company can meet its liabilities as they fall due, not that debts could be met in full at any time. We think it highly unlikely that directors would commit their company to repayment of debts before it had established its income.

Clearly, in every case the company will need to manage its affairs correctly to ensure that it is in a position to meet its liabilities as they fall due. But it will receive grant as and when necessary to help meet development costs. We expect it will also take out loans over that period. In practice, therefore, capital, by way of loan and grants, will be available when required to meet its development liabilities. Future liabilities in relation to its loan debt will be met from rents and service charges and be backed by the sale value of the assets. I would add that because of the quite proper concerns of the noble Lord, Lord Williams, about the potential implications of insolvency provisions, my officials have been in contact with their counterparts in the Insolvency Service and, as regards the Companies Act aspect, with their counterparts in the Department of Trade and Industry. I understand that they take the view that there does not appear to be anything so intrinsically different about a housing company that would put it at greater risk of falling foul of the insolvency legislation than other companies.

We believe that housing companies will build on the experience of housing associations. There may in fact be little difference between them. We are comforted by the way in which housing associations, including Companies Act charities, have operated in this way for some years.

There is one aspect of the matter which concerned me personally and that is the question of whether one can rightfully advise someone to become a director of a housing company as a Companies Act company, given that it might be trading fairly close to the wind. There is no way in which we would wish to try to put a curb on the sort of advice which should be quite properly offered to someone who was considering becoming a director of such a company. Someone wishing to undertake that might seek advice from an accountant as to whether, in view of the company's business plan and the way in which it was set up, it carried an undue risk of personal liability in the event of insolvency or when things go wrong. That is something which would have to be taken into account. With a company which is taking on local authority housing there should be little difficulty because of the established nature of the business and the income that will be generated. The company would not be likely to get into difficulties so fast that it would run out of share capital. One can control the way in which one incurs liabilities to ensure that the income is coming in rather faster than that, one would hope.

If, there was such a danger--particularly, in the case of a housing company which was setting out to make new developments where there would be considerable danger of trading while insolvent (or at least infringing the Companies Act)--it would clearly be necessary for the company to seek capital, but not capital in the form of shares. We would expect it to have capital in the form

11 Jul 1996 : Column 482

of either land donated to it or of guarantees given by third parties so that the people who were directors of it and running it could be sure that they were able to pay their properly incurred liabilities, particularly to creditors.

I understand the spectre which the noble Lord, Lord Williams, raises about the way in which the Companies Act might bite on people operating a housing company. We agree that that is a real problem. Potential directors of the company, as well as directors, would have to ensure that the company had addressed those problems and had as a back-up access to finance by way of guarantee. That would give the directors the comfort they required which, in other companies, would be provided by share capital.

I hope that that gives the noble Lord an understanding of the way in which we see the system developing. We do not have any difficulty comprehending the concerns he has. We think that they are well placed concerns. They are concerns which should be shared by people who are putting a housing company together. However, we believe that in practice they will be overcome.

6 p.m.

Lord Williams of Elvel: My Lords, I am grateful to the noble Lord for his response. Since we are at Report stage I am unable to interrogate the noble Lord, as I would in Committee, and have responses to questions. I can have only one shot at answering what the noble Lord said.

Firstly, I would say that if I were asked advice from anybody who was thinking of becoming a director of a local housing company, I would certainly advise them against taking that position. The noble Lord said that somebody would ask accountants for expert advice. I would certainly advise--and I am sure my noble friend Lord Berkeley who is sitting with me on the Front Bench would equally advise--that nobody should become a director of such a company, not because it is a bad company, but simply because the structure of the company is such that any director of such a company will be permanently at risk.

The noble Lord, as I understood him, said that the income stream for the company would come from the assets which had been transferred against borrowings at the market value of the assets, say from local authorities, to give one example. That may be fine in terms of income stream but let us take the situation where the housing market falls away. It has happened in the past. It could happen again.

Let us say that Bank X has lent a large sum of money against the value of the assets that had been transferred to the local housing company. Bank X has lent at full value because there is no capital in the local housing company to pay for the assets that it is acquiring. So it has to borrow the whole sum of money from Bank X. It is, in effect, a 100 per cent. mortgage. If house prices deteriorate, any bank is certain to take a very close look at what is happening in that company. If there is any problem in that company, it will trigger its charge very quickly. It is only right to do so. As a banker, I should say, that is the way banks operate.

11 Jul 1996 : Column 483

I find this whole concept a little difficult to accept. I find it difficult to live with the idea that a thinly capitalised housing company may purchase its assets from whoever it is on the back of a loan which has a charge at 100 per cent. of those assets and may trade as such, even for non-profit. As I say, I would not become a director, and I would not advise anybody else to become one.

However, this is Report stage. If the noble Lord has any further thoughts, no doubt he will reconsider the matter at Third Reading. But it has been a useful debate in determining where the Government stand on the issue. I am not entirely satisfied that the Government--even with the benefit of advice from the insolvency service and the Department of Trade and Industry--have got it quite right yet. I believe that any company that operates under the Companies Act in the way that the noble Lord has described is in potential serious danger. However, in the light of the fact we are on Report, unless the noble Lord has anything else he wishes to say, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 198A had been withdrawn from the Marshalled List.]

Schedule 1 [Registered social landlords: regulation]:

Next Section Back to Table of Contents Lords Hansard Home Page