Money Advice Update – August 2018

John McGleish v Graham Cameron Tough and Maureen Leslie

This case, decided by the Sheriff Appeals Court considered an obscure area of bankruptcy law, which has not seen much discussion, nor had much judicial consideration since its introduction in the Bankruptcy (Scotland) Act 1913.

The provision, now contained in section 78 (9) and (10) of the Bankruptcy (Scotland) Act 2016, (previously section 31(5) of the Bankruptcy (Scotland) Act 1985), relates to the non-vested contingent interests of the debtor.

The facts of the case were Mr McGleish and his wife took out a life insurance policy with critical illness insurance in 2001. They were then sequestrated in 2008 and received an automatic discharge in 2009. In 2010, Mrs McGleish passed away and her trustee took the proceeds from her life insurance policy.

The reason for this was the deceased’s interest in her life insurance policy was believed to vest with the trustee and was, therefore, a realisable asset that the trustee could use for the benefits of her creditors.

However, the argument put forward for Mr McGleish and which the Sheriff Appeal Court upheld, was that the life insurance policy constituted a non-vested contingent interest and, therefore on the discharge of Mrs McGleish in 2009, because of changes introduced by the Bankruptcy and Diligence Etc. (Scotland) Act 2008 (2008 Act), reinvested in her post-insolvent estate.

The argument being that the interest in a life insurance policy, which is only payable on death, only vests in the debtor on the purification of the contingency, which is death. The interest, therefore, is a non-vest contingent interest.

It is known that what constituted a non-vested contingent interest was never clear and even when the 2008 Act was passing through the Scottish Parliament one Scottish Government solicitor described it as unfathomable.

However, the argument has previously been made to the Accountant in Bankruptcy (AIB) that life insurance policies were non-vested contingent interests.

In one case that this author was involved in, they even gave a direction ruling against such an interpretation. It is, therefore, known that policies have been taken by the AIB, where it now is clear they had no legal basis for doing so.

Non-vested contingent interests now re-invest in debtors, not on their discharge, but if sequestrated after the 1st April 2015, on the expiry of 4 years from the date of their sequestration.

The Debt Arrangement Scheme (Scotland) (Amendment) Regulations 2018

The Scottish Government have put before the Scottish Parliament the latest changes being proposed for the Debt Arrangement Scheme.

The Regulations, which will be considered by the Economy, Jobs and Fair Work Committee, are aimed at increasing access to the Scheme, which in recent years has seen a substantial drop in the number of consumers applying to it.

They are also designed to reduce the likelihood of Debt Payment Programmes (DPPs) under the Scheme being revoked, after it was revealed that 2016-17 was the first year, in the history of the Scheme, which commenced in 2004, where more DPPs were approved than revoked.

The primary changes that are being introduced, are first to remove the requirement that debtors need to include all their debts in proposals to creditors.

This requirement was first introduced in 2013 and meant that even mortgage and rent arrears had to be included, despite the fact that although DPPs are diligence stoppers, they do not step creditors or landlords raising actions for repossession or eviction.

Although, the proposed changes do not exclude the possibility such debts can still be included, they allow, where they are omitted, for money advisers working with debtors to work with the debtor’s secured creditors and landlords to avoid any action for repossession or eviction. It may be that such changes will allow such creditors to obtain a priority status again and allow these debts to be cleared off quicker.

The other fundamental change that will be introduced will allow debtors to not have to offer their full disposable income to creditors when proposing a Debt Payment Programme. This change, it is believed, will be more controversial and some creditors may be inclined to object where they are offered only part of the debtor’s disposable income.

However, with the average length of a DPP now being over 7 years, the concern is that debtors are being expected to live on quite austere budgets, which although sustainable over the 4 year payment period in sequestration and protected trust deeds, is not suitable for longer term repayment plans. The counter argument to creditors who object to such proposals being that they will recover more through the Debt Arrangement Scheme, not only over its lifetime, but even in the first four years.

If passed the Debt Arrangement Scheme (Scotland) Regulations 2018 will commence on the 29th October 2018.

Common Financial Tool (Scotland) Regulations 2018

At the same time the new Debt Arrangement Scheme Regulations were laid in front of parliament, the Common Financial Tool (Scotland) Regulations were also laid.

The Common Financial Tool (CFT), first introduced on the 1st April 2015, is the income and expenditure tool that is used to determine how much debtors can pay towards their bankruptcy or protected trust deed. The preferred CFT is currently the Common Financial Statement ( CFS) that is produced by the Money Advice Trust, but the new regulations proposed this should become the Standard Financial Statement (SFS), which is owned by the Money Advice Service.

The decision by the Accountant in Bankruptcy to recommend the adoption of the SFS as the new CFT has proven controversial, as it is believed in some circumstances it may result in debtors paying more than they were required to pay under the CFS, or being required to pay a contribution where they were not required to under the CFS.

This is important, as one of the requirements for a Minimum Asset Bankruptcy, where the application fee is £90, is that the debtor cannot afford to make a contribution towards their bankruptcy. Where they can make a contribution, they must not only pay that contribution for 4 years, but also must use the Full Administration Bankruptcy procedure which has an application fee of £200.

Both tools are also controversial because of the way they are designed and formulated. Both break down a debtor’s expenditure into categories, such as essential expenditure and household expenditure. These categories, except the essential expenditure category, then have trigger figure assigned to them, based on the household composition of the debtor, which act as a rebuttable presumption that any expenditure over that amount is unreasonable.

The trigger figures for both Schemes are arrived at by looking at the average expenditure of the lowest 20% group contained in the Living Costs and Food Survey produced by the Office of National Statistics.

The argument why this is an inappropriate methodology to use to calculate trigger figures is that such a group are already living in poverty, with many dependent on means tested benefits to survive. Also the survey only shows what people are able to spend, rather than what they require to spend to afford a reasonable standard of living. The flaws in the methodology were recently exposed when the update trigger figures for the Common Financial Statement actually had some of the trigger figures being reduced at a time when it was clear living costs are increasing.

The regulations, however, have been withdrawn, as due to a timing error, they would not have been passed until after the summer recess and would have commenced on the 29th October 2018, leaving insufficient time for money advice agencies to adapt case management software systems and for training to be provided.

The Scottish Government have indicated they will resubmit the regulations after the summer recess with a view to commence them in April 2019.

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