27 June 2018 | Comment | Article by Emma Poole
What should RSLs consider when setting up a subsidiary company?
Setting up a subsidiary company within a group structure is all in a day’s work for our corporate teams, but when that group involves an RSL, the process needs some careful handling.
An increasing number of organisations in the social housing sector are taking a new approach – reconsidering their “not for profit” title and instead looking at “profit for purpose”. A common theme involves setting up non-regulated, commercial subsidiaries but this can lead to a tricky legal minefield.
Having advised on the first of these to be set up in Wales, Hugh James have an experienced team to help navigate this path to ensure the governance arrangements are right from the outset and you avoid some of the potential risks involved in a commercial venture.
What do you need to consider?
- From Welsh Government - unique to our clients in Wales is the need for Welsh Government consent; this requires a business case to be submitted setting out the reasons behind the proposed changes.
- From Lenders – our banking team review existing loan arrangements to assess whether this consent or notification will be required and advise on the best approach.
Impact on charitable status
- Housing associations need to be aware of the cap on commercial turnover which might have tax implications that impact decision-making for the group.
- Are there charitable objectives and is it an appropriate investment?
- Investment mechanisms - lending arrangements can be complex as the parent can only lend money to the new subsidiary on full commercial terms and fully secured.
- There may be prohibitions in existing loan agreements on on-lending.
- Existing loan arrangements may be affected by the subsidiary funding and there may be tax implications.
- The control of the new subsidiary and how it is funded will be relevant for procurement purposes.
- Welsh Government have requirements and recommendations on subsidiary board make-up.
- What skills do you need? How do the business plans of the parent and subsidiary align? How will it be managed in practice and the correct people kept accountable?
- If the subsidiary is part of a joint venture, you need to make sure the relationship is adequately managed through an appropriately worded contract to cover every eventuality, including what will happen in a worst case scenario.
Many leaders within the sector are vocal about the need for housing associations to retain their central purpose of helping low income families or those in need to obtain decent homes, but there is a clear trend towards diluting those activities with more commercial ventures. Some may be tentative given the increased degree of risk that these decisions involve but greater risk can lead to greater reward and subsequently help to further to the social objectives that are at an organisation’s core.
If you would like to discuss this in further detail, or have any questions, please contact Emma Poole.
The information on the Hugh James website is for general information only and reflects the position at the
date of publication. It does not constitute legal advice and should not be treated as such. If you would like
to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.