The Building Safety Act 2022 and insolvency: onerous obligations for insolvency practitioners

Andrew Mace explores the obligations on insolvency practitioners imposed by s125A Building Safety Act 2022.

Plenty has been written and continues to be written about the Building Safety Act 2022 (“BSA”) but there has been very little discussion about its effect in insolvency.  This is perhaps unsurprising; as originally enacted, and prior to the addition of the new s.125A  (inserted into the BSA on 24 July 2024 by the Leasehold and Freehold Reform Act 2024), there was a solitary mention of insolvency in s.125 , which gave insolvency practitioners the power to apply for an order requiring an associated company to contribute to the assets of an insolvent company. That provision has now been repealed, with s.125A being enacted instead.  s.125A differs radically from s.125; far from conferring  a power on insolvency practitioners, the BSA 2022 imposes onerous duties upon them. This article considers those duties.

In this article insolvency practitioner (“IP”) has the meaning prescribed in s.125A(8) BSA, namely:

(a) an administrator;
(b) an administrative receiver;
(c) a receiver appointed by the courts or by a mortgagee;
(d) a liquidator;
(e) a trustee in bankruptcy.

I will address the following questions:

1. What is a relevant building?
2. What are relevant defects / relevant steps?
3. What does an officeholder have to do?
4. What is a Higher Risk Building (“HRB”)?
5. What additional issues does an IP have to consider when appointed in respect of a relevant building or HRB?

What is a relevant building?

The definition of “Relevant Building” is contained in s.117. It is itself a matter of some complexity. For present purposes, and subject to some statutory exceptions, it suffices to say that it is a building which is at least 11m high or comprises of at least 5 storeys.

If an IP is appointed in respect of the owner of a  Relevant Building then there are additional issues to be considered beyond the usual obligations involved in an insolvency appointment, as detailed below.

Obligation to identify relevant defects or relevant steps

Being appointed in respect of a Relevant Building brings an obligation to consider if there is a Relevant Defect or if Relevant Steps  (a concept introduced on 31 October 2024 by the Leasehold and Freehold Reform Act 2024)  need to be taken pursuant to s.120 BSA:

“120(2)  Relevant defect”, in relation to a building, means a defect as regards the building that—

(a) arises as a result of anything done (or not done), or anything used (or not used), in connection with relevant works, and

(b) causes a building safety risk.

 

120(4A) “Relevant steps”, in relation to a relevant defect, means steps which have as their purpose—

(a) preventing or reducing the likelihood of a fire or collapse of the building (or any part of it) occurring as a result of the relevant defect,

(b) reducing the severity of any such incident, or

(c) preventing or reducing harm to people in or about the building that could result from such an incident.”

The IP needs to determine if there is already in place, or pending, a Remediation Order in respect of the Relevant Building .

Remediation Orders

 S124 deals with remediation orders:

“(1)  The Secretary of State may by regulations make provision for and in connection with remediation orders.

(2)  A “remediation order” is an order, made by the First-tier Tribunal on the application of an interested person, requiring a relevant landlord to do one or both of the following by a specified time—

(a)  remedy specified relevant defects in a specified relevant building;

(b)  take specified relevant steps in relation to a specified relevant defect in a specified relevant building.”

Before its repeal on 24 July 2024, s.125 BSA provided a mechanism for an IP to seek a contribution to the costs of remediation from a “body corporate or partnership associated with the company”. An IP is likely  entitled to invoke s.124 if they have been appointed over “a relevant person”, namely “a person with a legal or equitable interest in the relevant building or any part of it” as provided by s.124(5).

A s.124 BSA contribution cannot be sought against an individual.

Higher Risk Buildings

In respect of a higher risk building (“HRB”) as defined by s.65 BSA,  there are additional points to consider.

Section 65 BSA defines “higher-risk building” as:

“(1) In this Part “higher-risk building” means a building in England that—

(a) is at least 18 metres in height or has at least 7 storeys, and

(b) contains at least 2 residential units.”

Section 72 BSA introduces the concept of an Accountable Person:

“s72 Meaning of “Accountable Person”

(1) In this Part an “accountable person” for a higher-risk building is—

 (a)  a person who holds a legal estate in possession in any part of the common parts (subject to subsection (2)), or

 (b)  a person who does not hold a legal estate in any part of the building but who is under a relevant repairing obligation in relation to any part of the common parts.”

Interestingly, under s72(2) BSA, “A person (“the estate owner”) who holds a legal estate in possession in the common parts of a higher-risk building or any part of them (“the relevant common parts”) is not an Accountable Person for the building by virtue of subsection (1)(a) if…” an RTM or somebody else is under a relevant repairing obligation in relation to all the relevant common parts.” Thus an IP might find themselves appointed over an Accountable Person by reason of that entity’s contractual obligations and not because the entity is the estate owner. An IP needs to be aware of this significant risk when taking appointments concerning properties and the property industry.

There are extensive obligations on an Accountable Person (and there might be more than one Accountable Person in respect of an HRB) which involve assessing and managing risks of fire and structural failure in an occupied building. Obviously any IP so appointed must take all relevant professional advice in this regard.

Will an IP ever be an “accountable person” under s72 BSA?

As an IP ordinarily acts as agent of any entity they are appointed over then it is unlikely the IP themselves will be an Accountable Person. They might be appointed over an Accountable Person but the Accountable Person remains the entity over which they are appointed.

That is not to say the IP can disregard the obligations of the Accountable Person.

As the IP is in control of the Accountable Person he might face liabilities as a result of not complying with the duties above although, following the decision in Palmer, R (on the application of) v Northern Derbyshire Magistrates’ Court & Anor [2023] UKSC 38, any liability which might depend on holding a position as  “…director, manager, secretary or similar officer of the body corporate” will not apply to an IP, particularly with respect to criminal sanctions.

As the language of s.161 BSA 2022 mirrors this the same approach can be expected to be taken.

An IP might, however, incur costs and fines which rank as expenses in the insolvent estate. As expenses must be paid before the fees of an IP can be paid there is a very real prospect of a financial impact on an IP who allows or causes an Accountable Person to breach their obligations. Moreover, an IP might face claims in negligence relating to their failure to consider and address the BSA 2022 obligations arising from a particular appointment.

In respect of liabilities which fell within the scope of expenses of an administration within rule 12.2 or rule 2.67(1)(f) of the prior Insolvency Rules 1986, Neuberger L J, at paragraph 105 in Nortel Companies & Ors, Re [2013] UKSC 52, found (in respect of statutory pension liabilities):

“First, there is no question of such a liability resulting from any act or decision taken by or on behalf of the administrator or any act or decision taken during the administration. The liability self-evidently arises out of events which occurred before the insolvency event.”

The same reasoning will apply to the Insolvency Rules 2016 and it can be seen there will be potential for something to be an expense if the liability results “from any act or decision taken by or on behalf of the [IP]  or any act or decision taken during the [appointment]”.

The situation is different where a Trustee in Bankruptcy is appointed in respect of an “accountable person” or where an application for a vesting order is made under s145 Insolvency Act 1986 because in both situations the assets of the insolvent estate vest in the officeholder.

Reporting Requirements

Where an IP is appointed over a Responsible Person (defined in s.125A as an Accountable Person or someone who would be an Accountable Person if s.72 BSA applied to other Relevant Buildings which are not HRB)  there are reporting requirements under s.125A BSA following the appointment. There are further reporting requirements to the Health and Safety Executive in respect of a HRB.

The information to be provided within 14 days of appointment is:

(a)  the name and address of the person in relation to whom the insolvency practitioner is appointed;
(b)  the address of each higher-risk building or relevant building for which the person is a responsible person (but see subsection (7));
(c)  an official copy of the register of title and title plan relating to each registered estate or interest the person holds in such a building, if any (but see subsection (7));
(d)  the nature of the practitioner’s appointment;
(e)  the practitioner’s name, address, telephone number and email address (if any);
(f)  so much of the information set out in the table in rule 1.6 of the Insolvency (England and Wales) Rules 2016 (S.I. 2016/1024) as is known to the practitioner.

Building Safety Fund and Cladding Safety Scheme

An IP should  consider making an application to the Building Safety Fund (“BSF”) or Cladding Safety Scheme (“CSS”) where applicable in respect of Relevant Defects.

The BSF and CSS were set up to aid the timely remediation of Relevant Defects and fund Relevant Steps. They  provide funds in respect of which grant applications can be made by the Relevant Landlord. Grant applications  can be made even if there are potential claims against insurance policies or other third parties. The existence of other sources of funding for the works is not an automatic barrier to a grant application.

In Redrow PLC & Ors, R (On the Application Of) v Secretary of State for Levelling Up, Housing and Communities [2024] EWCA Civ 651 it was determined, [at 48]:

“48. …On the contrary, the BSF guidance required the Responsible Entities to demonstrate only that they had taken “all reasonable steps” to recover the costs of the works from those responsible (through, amongst other things, insurance claims). The BSF guidance did not require the Responsible Entities to demonstrate they had pursued all other claims to final resolution and financial recovery…”

“50. …the…BSF guidance … expressly envisage that the making of unresolved claims

against third parties may well co-exist with the carrying out of remedial works pursuant to BSF funding. That is why the BSF guidance refers to the requirement that the Responsible Entities pay the government any amounts recovered “up to the amount provided through the Fund” anticipates that such claims may be ongoing at the time of the application, the allocation and the works themselves…”

 

Additional issues to consider

The existence of the BSF and CSS introduces additional considerations for an IP.

Take, for example, a Relevant Building owned by a company in insolvency where a lender has security over the building but there is a significant shortfall between the current realisable value and the secured debt along with problems finding a buyer.

An IP can either try to sell the property at a significantly reduced price (with the consent of the secured creditor or an order of the court) or seek funding from the BSF in order to remedy the defects in the building thereby protecting the occupants and providing a greater return to creditors in the event of a sale which might, in fact, result in a return to unsecured creditors.

If the IP doesn’t even consider the possibility of seeking funding from the BSF or CSS then they expose themselves to potential criticism and claims for any avoidable losses suffered by creditors.

It might be the case that an IP ultimately feels they have no other option but to disclaim an interest in a property where permitted under ss178 or 315 Insolvency Act 1986 but that will be the subject of another article.

As always the best course of action for an IP appointed over a building or a management company in respect of a building is to seek professional guidance on whether the building is a Relevant Building and who the Responsible Person(s)  is/are.   As can be seen above the obligations resulting from the BSA 2022 as amended are extensive.

If you would like more information on this topic or to discuss instructing Andrew Mace, please contact David Clayton.