Bankruptcies Down, Protected Trust Deeds Up

The Accountant in Bankruptcy in Scotland have released their third quarter Statistics for 2017-18.

The figures show that the number of sequestration in Scotland have fallen, whilst the number of debtors granting protected trust deeds has increased.

There has also been a slight increase on the number of debtors who have entered debt payment programmes under the Debt Arrangement Scheme.

Speaking on the release of the figures, the Minister for Business, Innovation and Energy Paul Wheelhouse said: “The longer term trend for bankruptcy is very much a downward one and it is heartening to see this reflected in these recent figures.

“There is absolutely no doubt in my mind the UK Government’s persistence with its failed policy of austerity is causing real hardship and strain for financially vulnerable families all across Scotland. They face even more challenges once the impact of the UK Government’s reckless determination to pursue an economically damaging Brexit becomes known.

“However, these Accountant in Bankruptcy figures indicate the numbers of people falling into bankruptcy and signing protected trust deeds are around half of what we saw eight or nine years ago. The Scottish Government is doing what it can to mitigate the worst of these Westminster policies.

“The Debt Arrangement Scheme is the only statutory debt management programme in the UK and we are rightly proud of its success in providing a viable option for those seeking to pay their debts without plunging into insolvency.”

The full report can be accessed here.

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

Can Benefit Overpayments be Recovered during a Formal Debt Solution?

It is not unusual for clients in formal debt solutions to find they are still subject to debt recovery action by the Department of Works and Pensions (DWP) for benefit overpayments, when they believed such action should have stopped.

So can the DWP still recover overpaid benefits whilst a claimant is in a formal debt solution?

The answer depends on whether the debt owed is included in the solution or not.

How do you know?

Personal Insolvency

In terms of personal insolvency in Scotland, there are two types of formal solutions: the first is a protected trust deed and the second is sequestration (which includes bankruptcies accessed through the Minimum Asset Procedure).

In terms of both these solutions all debts are included up to specific dates. For sequestration, that date is known as the “date of sequestration”. So any benefits overpaid up to that date are included.

In terms of Protected Trust Deeds, the relevant date is the date when the trust deed was granted.

Date of Sequestration

What date constitutes the date of sequestration depends on the route that was taken to make the debtor bankrupt.

If a creditor makes the debtor bankrupt, then the date of sequestration is the date the petition to sequestrate the debtor was warranted by the court. This is also known as the first order date ; and is always before the date when the court awards the bankruptcy.

Where the debtor has applied for their own bankruptcy, the date of sequestration is the date the bankruptcy is awarded.

Can the DWP recover debts that are included?

In essence, the DWP don’t, although arguably they could during the bankruptcy or protected trust deed if they were to use direct deductions from benefits or a Deduction from Earnings order.

The Department of Works and Pensions recover benefits according to guidance (see here).

This guidance states in relation to personal insolvency, at paragraph 6.3:

Once the insolvency period has commenced, any deductions from benefit
should cease, and any deductions made after the start date of the insolvency should
be refunded to the debtor. This includes any monies recovered for a fraud debt

And at paragraph 6.7 in relation to sequestration, it states:

Where the recoverable overpayment period is entirely before the start date of the bankruptcy order, or where the overpayment period spans the bankruptcy order, recovery should be suspended until after the end date of the order. This is regardless of when the overpayment decision is made, for example a decision could be made after the order date. On discharge the outstanding balance is written off unless it is a fraud overpayment, when normal recovery action should commence.

What, is important, therefore, is the date the overpayment occurred, not the date that it was decided there had been an overpayment.

Protected Trust Deeds

In terms of Protected Trust Deeds, the law is similar, although the important date is not the date of sequestration, but the date the trust deed was granted.

It is also important to note the guidance only applies to trust deeds that are protected and not unprotected trust deeds. Recovery action, therefore, does not cease until the trust deed actually becomes protected.

It also important to note, that the overpayment is only written off when the debtor is discharged. If the debtor is refused a discharge by his Trustee, recovery action can be commenced again.

In terms of whether the debt is included or not, all debts are included providing they arose in a period prior to the trust deed being granted.

The relevant paragraph in the guidance is at 6.9, where it is stated:

The recoverable overpayment(s) must be included in the Protected Trust Deed and any debts not included will not be discharged at the end of the period. Recovery is suspended until discharge at which point any debt included in the Protected Trust Deed is written off unless it has been classed as fraud when normal recovery action can commence, or recommence. Unprotected Trust Deeds are not considered a form of insolvency and recovery will continue as normal.

The Debt Arrangement Scheme

The Debt Arrangement Scheme is different from protected trust deeds and sequestration, in that it is not a form of personal insolvency, albeit it is a formal debt solution.

Debts remain owed until they are paid off in full, although all interest, fees and charges are stopped from the date an application is made to the scheme, providing it is subsequently approved.

In terms of benefit overpayments, this is also covered by the DWP guidance at paragraph 6.15, where it states:

DAS is NOT insolvency, but is a government-run, voluntary debt solution administered by the AiB [Accountant in Bankruptcy], but not involving the courts. It allows the debtor to freeze any interest, fees and charges on their debts whilst repaying their debts in full over a longer period by way of a Debt Payment Programme. The debtor makes agreed regular payments to an approved payments distributor who then makes payment to DWP Debt Management if included in the DAS. If our debt is included in the DAS we would suspend recovery until the period ends, but where it is not included we would continue with deductions throughout the DAS period.

All debts are normally included in debt payment programmes, but unlike with trust deeds and sequestration, where they are included by operation of law, in the Debt Arrangement Scheme the claimant must notify their adviser they have the debt and the adviser must include it.

If the debt payment programme is subsequently revoked, the debt again becomes recoverable .

Too Late, Too Late for Debt Advice Services?

Too Late, Too Late for Debt Advice Services?

With levels of personal debt reaching pre-credit crunch levels and money advice services facing further funding cuts, is it too late for transformative change in support for such agencies? I considered the issue in December’s Journal of the Law Society of Scotland.

Money advice services in Scotland are in bad shape, arguably the worst they have been in since 2003. Unlike the years that followed 2008, however, when the sector rose to the challenge of the credit crunch, it is now questionable whether it could cope with another financial crisis.

With years of funding cuts and legislative reform, provision for free money advice services in Scotland is now fragmented, and in some areas, of little consequence to many of those they are supposed to help.

This was illustrated recently by the BBC documentary, Country Council, which spotlighted the challenges faced by Scottish local authorities in delivering services. In Argyll & Bute, a vast area that covers Helensburgh, Dunoon, Lochgilphead and Oban, the local money adviser, Des Middleton, was featured as one of only two employed to cover that huge swathe of the country. Across Scotland, however, it is not just councils that are facing cuts: some citizens’ advice bureaux are also looking at up to 100% of their core funding being axed in 2018-19.

Supply and demand

This dire situation comes just two and half years after the introduction of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS Act), which placed significant demands on money advisers and the work they undertake for their clients in assisting them to access formal debt solutions. These demands have seen the number of debtors accessing the Debt Arrangement Scheme fall by 46%, the number accessing sequestration drop by 23% and the number granting trust deeds decline by a third. Meanwhile, across the border, by contrast, individual voluntary arrangements are at their highest level in three decades.

UK consumer debt also continues to rise and is now again at pre-credit crunch levels, topping £200 billion for the UK. With inflation at 3% and interest rates rising, all the evidence points to a sector that will face increased demand in the coming years.

Much of this has been confirmed by a recent review, carried out by the Money Advice Outcomes Project, funded by the Money Advice Service and Improvement Service, which found that local authorities need to implement wide-ranging, transformative changes to maintain money advice services going forward and mitigate the effect of cuts.

National agency?

What form these transformative changes will take is up for debate, but there are some obvious mistakes that can be avoided. An overreliance on remote telephone and internet services would be an error, although they have their place. There will always be a class of clients who require face-to-face interventions and whom such remote services cannot satisfy. Evidence of this can be found in the recent admission by Stepchange, the national debt charity, that it lacks the capacity to provide face-to-face interviews for clients who are struggling to complete financial education modules introduced by the BADAS Act.

Transformation, however, could be aided by the creation of a new executive agency, that could act nationally as Scotland’s Money Advice Service. Such a body could be the recipient of the financial levy for debt advice which is collected by the Financial Conduct Authority from lenders and will be devolved in 2019-20. It could also ensure funding is invested and distributed in a way that not only increases the provision of local services, but could undertake strategic investment in new technology, such as open banking, which could revolutionise the way money advice services are delivered by providing a valuable tool to advisers. Such an agency could also prescribe a single set of national standards for advice agencies in Scotland, cutting back on duplication.

Equitable fees

Another obvious improvement could be reforming the current fee structures for formal debt solutions in Scotland. At present the Debt Arrangement Scheme only recovers half the £1.2 million it costs to deliver the service, but in 2016-17 distributed £37 million to creditors. A minimal increase in fees could easily recover the rest.

However, a more radical, transformative change could be achieved with the introduction of a statutory fair-share scheme, based on the voluntary one currently operated by clearing banks, for organisations like Stepchange. This allows organisations to retain a percentage of the funds collected to fund their services. On a statutory basis, such a scheme could allow private sector fees to be abolished and the Debt Arrangement Scheme to be provided free to clients, by the public, voluntary and, importantly, also the private sector, increasing capacity, but with no increased risk of consumer harm.

Fees for formal debt solutions on a wider basis should also be reviewed. In March 2017, the Scottish Government withdrew draft bankruptcy fee regulations, after evidence was provided by Govan Law Centre and me that showed they would, among other things, result in fee increases of up to 188% for debtors who had their homes sold. No replacement fees have since been forthcoming, although the Accountant in Bankruptcy remains committed to the principle of full cost recovery. It would appear, however, that that principle only operates when the fees are being charged to those least able to afford them – the consumers. Yet statutory debt relief and debt management remedies returned £80 million to creditors in 2016-17.

A fee of less than 1% on those funds could easily remove any bankruptcy application fees for debtors, and ensure access to justice is based on need and not ability to pay. A lesser amount could easily fund services like Govan Law Centre’s pilot Personal Insolvency Law Unit which operated between July 2016 and March 2017 and provided independent advice to those in formal debt solutions: a need the unit showed to exist, but which remains unsatisfied.

Past experience

The last time the free money advice sector in Scotland experienced the type of transformative change it currently needs was in 2003. It followed the introduction of the Debt Arrangement and Attachment (Scotland) Act 2002. Ringfenced funding of £3 million per year was provided until 2005 and was then increased to £5 million per year until 2007. Fortuitously, when the credit crunch hit and the Bankruptcy and Diligence etc (Scotland) Act 2007 was introduced, Scotland’s money advice services were able to cope.

As someone who has worked in the sector for more than 16 years, I witnessed that transformative change and how, with the rising tide of debt, all boats were lifted. However, with the current budget cuts, the consequences of the BADAS Act still looming over us and personal debt at record levels, the waterlines for Scotland’s money advice services are still submerged. If the opportunity to introduce meaningful change does come, I fear it will already be too late, too late.

Time to Rethink the Common Financial Tool

Time to Rethink the Common Financial Tool

In the first year of implementation of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS), the number of sequestrations in Scotland dropped by 44%; Debt Payment Programmes dropped by 50%; and although protected trust deeds fell only by 6%, they had dropped the previous year by 33%, with the implementation of trust deed regulations.

Two years on, those numbers have barely improved, with sequestrations still down 32%, trust deeds down 23% and debt payment programmes down 46%.

There is plenty of evidence to suggest this decline is substantially linked to changes introduced by the BADAS Act and not to falling levels of personal debt, which again are reaching pre-credit crunch levels.

There is also reason to believe,if changes are not made, the consequence of the current regime will be a build-up of personal debt over the next few years, as happened between the abolition of poinding and warrant sales in 2003 and 2008, before the introduction of low income, low asset bankruptcies led to a 140% increase in the number of sequestrations.

This time, however, it’s the introduction of the Common Financial Tool in Scotland and a proposed change from the Common Financial Statement (CFS) to the Standard Financial Statement (SFS) that threatens another blockage in the system.

What is the CFS and the SFS?

The CFS is a financial statement, which since being incorporated into Scots Law has been used to determine how much a debtor can pay in a bankruptcy, whether a trust deed should be protected or what debtors pay in debt payment programmes.

It adopts a similar approach to the Standard Financial Statement, which is now produced by the Money Advice Service and is what the Scottish Government are proposing should replace the Common Financial Statement.

Neither are tools for public use and although spending guideline are available to advisers, creditors, and the Accountant in Bankruptcy, they are not available to debtors. A bizarre situation and one where the legality of incorporating them into law must be questioned? Where else do we have secret rules in legislation? The situation is so bad, many advisers who are currently being consulted on the figures by the Accountant in Bankruptcy, have not yet seen them.

Both utilise trigger figures for certain categories of expenditure, such as food and housekeeping and stipulate these trigger figures must be used as spending limits. These limits can be exceeded, but where they are, additional evidence must be produced, showing good reason for any breaches.

Methodology for reaching trigger figures?

The methodology for determining the trigger figures takes the Living Costs and Food Survey produced by the Office for National Statistics, and looks at what is being spent by the group in the lowest 20%. It takes an average of what is spent by this group and these are how the trigger figures are arrived at. The fact this group is made up of many people dependant on mean tested benefits and whose spending levels are determined by their low level of income, rather than their needs, apparently has been overlooked. The survey only shows what people are spending, not what they need to maintain a reasonable standard of living.

A standard of living which, David Hilferty of Money Advice Scotland has said, if you use the methodology of the Standard Financial Statement, is not socially acceptable.

Consumer harm will rise

Money Advice Scotland has already voiced its concerns and research it has carried out shows the level of trigger figure breaches rise under the Standard Financial Statement,from one in nine under the Common Financial Statement, to one in four under the SFS.

The Scottish Government’s own research shows in thirteen percent of cases, people pay more under the SFS than they do under the CFS.

In conclusion

We are walking into a cycle of interest rate hikes, likely to begin in the next few weeks, and levels of inflation, likely to remain at 3% for the near future, still higher than anticipated wage level increases. There is evidence that a switch from the Common Financial Tool to the Standard Financial Statement will only further tighten access for consumers to debt solutions.

When the BADAS Bill was first announced, the policy objective behind it was to rebalance the law between debtors and creditors, the implication being the law had previously weighed more heavily in favour of debtors than creditors.

If the results of the implementation of the Act are to be judged, then they can only be considered a success if it was agreed too many debtors had in the past been accessing solutions; if this is not the case, then it can only be considered a failure, as substantially less consumers are now accessing remedies. People with no disposable income, people fearing for the future and people who live with the stress and pressure of unmanageable debts.

This cannot be correct. The Scottish Government has laid out the fundamental principles for their new social security system as being dignity and respect. These are admirable aims. Where is the dignity and respect, however, for debtors who are being forced to live at a standard, which for many people, is only possible if they are in receipt of income based benefits.

Instead there are other ways. There are consensual, open, and transparent budgeting tools, such as the Minimum Income Standard, produced by the Joseph Rowntree foundation and recently endorsed by the Supreme Court in the landmark decision on Employment Tribunal Fees. There is also the Reasonable Living Expenses model, created by the Insolvency Service of Ireland and based on a model created by the Vincentian Partnership for Social Justice.

It is time for the Economy, Jobs, and Fair Wok Committee, of the Scottish Parliament, to pull in the Common Financial Tool for review, before any further decisions are taken which may result in harm. A considered, evidence led review by the Committee could avoid months of preparatory work being undertaken to draft new regulations, which may then have to be rejected. Evidence should be taken from consumers who live under these budgeting limits and should be taken from advisers working with the common financial tool and from The Joseph Rowntree Foundation on Minimum Income Standards.

Scotland should adopt a Common Financial Tool model, which is open and transparent and like the Irish Reasonable Living Expenses, does not set a maximum spending limit, but a minimum standard of living which must be protected.

A reasonable standard of living which the Irish Reasonable Living Expenses states:

“…is one which meets a person’s physical, psychological and social needs…it does not mean a person should live at…luxury level, but neither does it mean…a person should…live at subsistence level. A debtor should be able to participate in the life of the community, as other citizens do…to eat nutritious food, to have clothes for different weather and situations, to keep the home clean and tidy [and] to have furniture and equipment at home for rest and recreation”

The Scottish Government’s consultation on the Future of Scotland’s Common Financial Tool is open to the 27th October and can be accessed here.

Personal Insolvency Seminar

Personal Insolvency Seminar

In the last ten years, over 183,000 Scots have been subject to Scotland’s Personal Insolvency Laws. In this seminar, Protected Trust Deeds and Sequestrations will be examined from the perspective of a money adviser

Since 2007, there has been three primary pieces of legislation that have largely dealt with this area of law, not including the consolidation act, the Bankruptcy (Scotland) Act 2016.

In that time, the law and practice relating to sequestration and protected trust deeds has seen substantial change, with a greater emphasis on adminstrative procedure, rather than judicial processes.

However, the courts continue to play a significant role in this area of law.

This one day seminar, is aimed at money advisers and legal practitioners who advise consumers on personal insolvency, before they enter an insolvency process, during those processess and after they have received a discharge.

It focuses on when insolvency is appropriate and when it is not; what form proposals can take and what are the rights and obligations of debtors who have been sequestrated or are party to a protected trust deed.

This seminar will be invaluable for practitioners who wish to gain an insight into the issues that debtors can face and will look at the law and practice that can enable them to negotiate and represent their client’s interests more effectively.

For more information see here.

Bankruptcy Fees Regulations revoked by Minister

Bankruptcy Fees Regulations revoked by Minister

Paul Wheelhouse, the Scottish Government Minister for Business, Innovation and Energy, has written to the Economy, Jobs and Fair Work Committee to state he will revoke the Bankruptcy Fees (Scotland) Regulations 2017.

Govan Law Centre and the Institute of Chartered Accountants of Scotland (ICAS) had opposed the fee increases, which increased the AIB fees for selling a debtor’s home by 188% in some cases.

In his letter to the Chairman of the Committee, Gordon Lindhurst, Minister Wheelhouse wrote:

In light of the issues raised, and my desire to ensure that we are able to best address the points raised by the Committee, I can confirm that the proposed regulations will be revoked and an appropriate revocation instrument will be laid in the Parliament today.

I particularly want to ensure that the Committee has comfort that any revised measures benefit from engagement with our key stakeholders. Therefore I propose that AiB will consult on our behalf on revised proposals, taking into account constructive points raised by the Committee in the evidence session, and your letter, before we bring forward a new set of regulations to the Committee, in due course, with a view to seeking the Committee’s support.

The Minister’s letter can be read here.

Opinion: Personal Insolvency

Opinion: Personal Insolvency

Despite the numerous reforms, casework has shown up many failings of the personal insolvency system in Scotland, and a structure based more on principles and less on regulation is needed. I considered this issue in the January 2017 edition of the Journal of the Law Society of Scotland.

Personal insolvency in Scotland is a dysfunctional market. Thousands of debtors and small creditors each year receive a poor service, which although maybe not representative of the whole industry, means significant numbers of service users are being failed.
Poor services take the form of some firms refusing discharges from protected trust deeds (PTDs) in up to 88% of cases, almost always meaning no dividend for creditors.
We have also found in a number of cases, particularly creditor sequestrations, where debtors have assets and may be solvent, justified concerns in relation to overbilling, with strong evidence of “time dumping” to increase fees. However, challenging such fees is prohibitively complex and costly, which leaves these cases impenetrable to any scrutiny.
Equally, statements that there is no desire for families to lose homes except where absolutely necessary sound hollow, when in almost two thirds of cases we have undertaken, this outcome is avoided once independent advice and assistance is provided.
In our experience, attempts to intervene have been less welcomed in cases where the Accountant in Bankruptcy (AiB) is the trustee than with private trustees, who tend to be more prepared to take a commercial, commonsense approach.
We have no way of knowing whether similar results would be produced over a larger group, but feel it is incumbent on the Scottish Government and the industry to find out. Even if not, it would bring a better understanding of the reasons why and the frequency with which people lose their homes: at present there is a dearth of such information among the plethora of statistics collected by AiB, indicative in itself of the importance afforded this issue.
Arguments for more regulation, however, predictably meet resistance from practitioners. They claim they are already overregulated: that resonates as true when you consider the layers of regulation that they need to comply with from professional bodies, AiB and, where it applies, the Financial Conduct Authority.
Practitioners are frustrated with the cost and burden of constant legislative change, which never seems fully to address the evil it targets, but takes a broad-brush approach to all in the industry, and does not reduce the scope for new controversial practices to be developed, such as in relation to trust deeds where the debtor is balance sheet solvent or is rich in equity, which does not get realised for creditors.
Yet bad practice continues: debtors are sold solutions, not advised; homes are lost when not necessary; dividend levels for creditors in PTDs, AiB is reporting, are plummeting. All of which means the arguments for further reform are overwhelming.
The problem is the market innovates and adapts faster than legislation and those with supervisory responsibilities, resulting in poor regulation despite the layers of rules. Equally, professional bodies protest they cannot discipline members, as those with supervisory responsibilities fail to report them, claiming no rules have been broken, while complaining they are unhappy with practices.
Even from discussions with AiB, it is hard not to sense that regulatory fatigue has set in. This at a time when all the evidence points to the need for further reform. Debtors feel a similar fatigue when trying to avoid the sale of their homes: a sense that obtaining independent advice is pointless, that there is no point engaging.
The inevitable conclusion is that a new approach is needed, one focused more on higher level principles and ethics than a strict rule based system. Less tinkering, but a peeling back of the layers of regulation to allow less burdensome but more effective oversight. Arguably, AiB needs to consider whether the remedies would be better served by their retreating from some areas where they are not effective.
Debtors need to obtain independent, specialist advice. Too often it is assumed every option has been exhausted, when it hasn’t. We have seen cases where debtors pay thousands, borrowed from family members, but are not linked to any specific process, like recall or abandonment of a property. Sometimes it is nothing short of a ransom payment to avoid action to sell a home, when the action is raised later anyway.
The personal insolvency industry needs change, but not just for the sake of it and not just more rules to correct for a lack of foresight last time, otherwise we will always be chasing solutions. It needs regulatory leadership to be provided which protects the interests of all stakeholders.
PTD13s – Discharge on Composition

PTD13s – Discharge on Composition

Can a debtor bring a protected trust deed, granted after the 28th November 2013 to an early end, without making 48 monthly payments or paying the creditors all monies owed to them?

This is a question I have recently been asked as the assumption is that since the Protected Trust Deed (Scotland) Regulations 2013 commenced, this is not possible. I answer it below.

Composition in Protected Trust Deeds

One of the most useful tools that the Personal Insolvency Law Unit have had at its disposal in assisting our clients has been discharges on composition. In many cases, it has allowed us to finalise a debtor’s Protected Trust Deed and release them from their obligations, whilst protecting their home, which they would have lost otherwise.  

To understand what composition is, it’s worth re-reading the comments of Sheriff Reid in the case of Allison Donnelly v Royal Bank of Scotland at paragraph 58:

“….a discharge on composition is a procedure whereby the creditors agree to an absolute discharge of the debtor, usually in return for part-payment of their debts.  Composition may be judicial or extra-judicial, and it may be general (i.e. it applies to all creditors) or partial (i.e. it applies to some creditors) (McBryde, Bankruptcy (2nd ed.), 18-62).  There is only one form of judicial composition and it is general in nature (Bankruptcy (Scotland) Act 1985, section 56 & schedule 4).  In any event, the essence of a composition is that it operates as a complete discharge, freeing the debtor from all debts and obligations for which he was liable at the date of sequestration, terminating the trust or sequestration process, and reinvesting the debtor in his estate to the same extent as it had vested in the trustee (Goudy, supra, 408).

Post 2013 Protected Trust Deeds

In 2013 the Protected Trust Deed (Scotland) Regulations, stated unless the conditions in regulation 4 to 10 were met a trust deed could not gain Protected status (regulation 3(1)).

The conditions required to be met under regulation 8 were:

  • Any payment period proposed in the Trust Deed must be for a minimum period of 48 months (regulation 8 (2) (a)); and
  • This could only be for a shorter period, where the shorter period allowed all the debtors debts to be paid in full (interest included). (regulation 8 (3)).

Termination of Protected Trust Deeds

However, this doesn’t mean a debtor has to pay all 48 monthly contributions or all the debts in full to obtain a discharge and bring the Protected Trust Deed to an end.

Regulation 24 (2) (Discharge of Debtor) states to obtain a discharge a debtor must be considered to have co-operated with his trustee and met all his obligations under the trust deed.

To meet his obligations a debtor may have to make all 48 contributions (although arguably if he can show his circumstances didn’t allow him to, there is still an argument he didn’t refuse to co-operate or that he failed to meet his obligations under the Protected Trust Deed).

We need to look at the Trust Deed document itself, which will vary. Most Trust Deed documents will, however, lay out the basis in which trust deeds can be terminated. This may be because the debtor has refused to co-operate (and, therefore will be terminated by the Trustee – grounds to refuse a discharge), but equally usually includes a clause that allows a discharge on composition.

So in short, Trust Deeds, even those granted after the 28th November 2013 can be brought to an early close. It is the Trust Deed document itself which outlines how Trust Deeds can be terminated. 

A debtor who seeks a discharge on composition is not failing to co-operate or failing in his obligations, but merely bringing the arrangement to an end in line with the provisions included in the deed, if it allows composition.

The conditions outlined in Regulation 8, only need to be satisfied for the Deed to become Protected.

Discharge on composition is an inherently sensible and equitable remedy that debtors can use, with the agreement of their creditors, when the circumstances of a case make it advisable.




PPI Claims in Trust Deeds: IP’s not likely to Re-open Cases

PPI Claims in Trust Deeds: IP’s not likely to Re-open Cases

The Director of Insolvency for the Institute of Chartered Accountants of Scotland (ICAS), has said he believes Insolvency Practitioners are unlikely to try and reopen closed Protected Trust Deeds to pursue claims for mis-sold PPI (payment protection insurance).

The opinion expressed in his blog comes in light of the decision of Lady Dorrian in the case of Doneen Ltd & Others v Mond.

The decision of the Inner House of the Court of Session held in that case that Insolvency Practitioners may not be able to re-open cases depending on the wording of the Trust Deed. The case revolved around the issue of whether the effect of a discharge of a trustee in a protected trust deed and a final distribution to creditors was the equivalent of a discharge in composition, which would have the effect of extinguishing not only the debtor’s liability for the debt, but the debt itself. The court found it may do so, depending on the actual wording of the protected trust deed.

It is important to note that this decision does not affect Scottish bankruptcies, where it is clear it is possible for trustee’s to re-open the case to ingather assets that would have vested with the Trustee in bankruptcy, had they been known about prior to the trustee obtaining their discharge.

It is likely the decision in Doneen Ltd & Others v Mond, will be appealed to the UK Supreme Court.

A seperate case, Donnelly v RBOS, remains on appeal to decide whether banks can set off PPI claims where the claimant had previously granted a Trust Deed and the Deed is now closed.


PPI Claims and Protected Trust Deeds

PPI Claims and Protected Trust Deeds

The recent decision of the Inner House in the Case of Douglas Davidson against David Mond addressed the issue of how a claim for mis-sold Payment Protection Insurance should be dealt with when the claimant had previously signed a Trust Deed and a final distribution in the Protected Trust Deed (PTD) had been made.

The issue in that case was whether a debtor who had made a successful claim for Payment Protection Insurance could receive the payment, or whether the funds should be paid to his former Trustee in a Protected Trust Deed.

In the case Mr Davidson had signed a Trust Deed on the 29th September 2006 and received his discharge from the Protected Trust Deed on the 5th November 2010, on the same date that the Trustee made a final dividend payment to the creditors of the Protected Trust Deed.

The Trustee then sought his discharge from the Creditors and received this on the 19th November 2010.

It appears to answer in the negative the long running question of whether a Trustee in a Protected Trust deed is able to re-open a Protected Trust Deed after it has been closed and both the Trustee and debtor discharged, to deal with assets which vested with him during the Trust Deed, but were possibly not known of at the time.

It also found that Mr Davidson, the debtor, was entitled to keep the payment protection insurance payment.

However, a similar case decided in Glasgow Sheriff Court earlier this year by Sheriff Reid, now being appealed, dealt with similar issues, but different facts and held the debtor was not able to keep the payment protection payment.

The issue is whether in light of the Mond decision, that case might now be dealt with differently.

Donnelly vs RBOS

In this Case, the Pursuer had also previously signed a Protected Trust Deed and like Mr Davidson had received her discharge, as had her Trustee in her Protected Trust Deed. However, when she subsequently made a claim for PPI, the claim was accepted, but as no Trustee was still in office the defenders sought to set her claim off against the original debt she had owed during the Protected Trust Deed.

In the case Sheriff Reid, in a lengthy decision held, the bank was permitted to do so, producing a different result to that in Mond.

Although normally, the rules of precedent would mean that the decision of the Inner House would supersede the decision of Sheriff Reid, the facts of each case are different, raising the issue of whether a creditors’ debt in a Protected Trust Deed continues in some form after a final distribution in a Protected Trust Deed and the Trustee has received their discharge.

In Donnelly, Sheriff Reid addressed a number of issues, which it is useful to summarise below:

  • He held that the obligation to pay compensation for PPI-mis-selling was a contingent obligation in the Protected Trust Deed, as it had as its source the original pre-insolvency credit agreements that were included into the Protected Trust deed. This meant although they had yet to be purified by Ms Donnelly making a claim, they did vest with the Trustee in the Trust Deed, even if they were not known of at the time.
  • He also held that by signing a Trust Deed for the benefit of her creditors, she had made a relevant acknowledgement of the debt that she owed to the bank, which interrupted the running of prescription for the purposes of the Prescription and Limitation (Scotland) Act 1973. He further held that the creditors claim in the Protected Trust Deed acted as a continuous claim for the purposes of the 1973 Act, meaning Miss Donnelly could not argue that the debt had become extinguished by operation of law and she could not claim there was no debt against which the PPI claim could be set off against.
  • He also held that the effect of the Trustee’s adjudication on the Creditor’s claim at the end of the Protected Trust Deed also had the effect of meaning going forward when prescription did start running again, the debt was no longer covered by short term prescription (5 years), but long term prescription (20 years).

However, he also made the observation that the effect of the debtor’s discharge in a Protected Trust Deed was not to extinguish the debt owed to the creditor, but only to prevent the creditors making any personal claim against the debtor for their debts; and to prevent any future property acquired by the debtor vesting in the Trust Deed for the benefit of the creditors.

The debt he held could only be extinguished by the creditors receiving full payment or through the debtor receiving a discharge on composition.

Sheriff Reid makes the analogy of the insolvent estate being like a fallen tree and the debtor’s discharge only severing the debtor from their insolvent estate, but the debts continue to be owed by the insolvent estate, or as he states:

“The insolvent estate remains ring-fenced and preserved for the purpose of being distributed among the unsatisfied creditors, however long that takes.”

This, however, is not what the Inner house found in the case of Mond, where it has to be cautioned the facts depended on the wording and construction of the Protected Trust Deed in that case.

Lady Dorrian in her opinion held the effect of the Trustee making a final dividend or distribution to creditors, which were held to be interchangeable terms, was to terminate the Trust Deed and reinvest the assets held in the estate back into the hands of the debtor.

The issue of a final distribution is not one that Sheriff Reid considered in Donnelly, although he did consider what the rights of the debtor were over any estate that was reinvested back to him after a Trustee received their discharge and noted from McBryde:

“Following the discharge of a trustee, an insolvent debtor re-acquires title to pursue and recover assets forming part of his insolvent estate, by virtue of his radical right to the estate.  However, while title may revive, it is, in nature, a bare title to sue.  The debtor can pursue and recover assets forming part of his insolvent estate but only as a constructive trustee for the benefit of the creditors. The beneficial interest in the assets remains with the creditors (McBryde, Bankruptcy, paragraph 8-75)”

Short of discharge on composition, or abandonment of an asset by the Trustee or payment in full of debts owed to creditors, it would, therefore, appear that any reinvestment of an asset into the hands of a debtor, such as a PPI claim, would only give the debtor the barest of rights to raise an action, but would not prevent a creditor using a right of set off where the debt owed to them exceeded the amount of the claim being made.

However, in Mond, Lady Dorrian observed:

“… the trust deed, as we have noted, is tied to, amongst other things, final distribution.  The final distribution acts not only as the trigger for a discharge of the debtor by creditors, but, in effect, a composition, whereby the trust deed (the voluntary equivalent of a sequestration) is ended and the debtor is entitled to be re-invested in any remaining trust estate.  As was explained in Flett v Mustard (Lord President Normand, p 275):

“If abandonment is out of the way, the only other mode by which retrocession can be established, short of full payment of the creditors, is by showing that there was a discharge on composition—Northern Heritable Securities Investment Co., Lord Watson at p. 39.  There may be a discharge of a debtor under a trust-deed for creditors which does not expressly bear to be a discharge on composition but which is intended to have that effect, and that intention may be found in the terms of the trust-deed and of the discharge. That was the view taken by Lord Trayner (at p. 570) in Kinmond, Luke & Co. James Finlay & Co.

It would appear, when the Donnelly appeal is heard, the case may now be decided differently. In the original case, Sheriff Reid had held the debt to the creditors continued until such time the debt was paid in full or there was a discharge on composition. However, Mond appears to now hold the final distribution, depending on the wording and construction of a Trust Deed, can amount to a discharge on composition.

As Lady Dorrian concluded in her decision: “The discharge in the present case has the same effect, terminating the trust and reinvesting the truster in any unrealised estate, which includes the PPI payment” 

Crucially, it is not just the claim that is reinvested, but the payment.

Note: A motion to remit Donnelly to the Court of Session was rejected on the 16th of June 2016. The appeal will be held by Scottish Sheriff Appeal Court.