Tag Archives: Protected Trust Deed (Scotland) Regulations 2013

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.

 

 

 

1,000s could go bankrupt as a result of law reform

1,000s could go bankrupt as a result of law reform

First published in Scottish Legal News

Alan McIntosh explains how the Scottish Government’s response to its Bankruptcy Law Reform Consultation will lead to thousands more debtors unnecessarily becoming bankrupt.

When the Scottish Government announced late in 2011 that it intended to consult on bankruptcy law reform, it came as a surprise to most who worked in the industry. The Bankruptcy and Diligence Etc (Scotland) Act 2007 had only been passed a few years earlier and part two of the Home Owner and Debtor Protection (Scotland) Act 2010 had only commenced in November 2010.

There had also been an announcement in August 2011 that the Scottish Law Commission had been asked by the Scottish Government to consult on consolidating Scottish Bankruptcy law, suggesting the intention at that time was to allow this much reformed area of law to bed in for the foreseeable future.

Then there was the announcement by the Scottish Government that it intended to consult on further reform to create a system suitable for the 21st century.

In its response to that consultation yesterday, however, it became clear although there a number of admirable reforms being proposed, at the heart of the reform agenda are changes that will not benefit debtors or creditors, but instead result in thousands of debtors each year being forced into sequestration in an attempt to address the funding crisis that the Accountant in Bankruptcy’s office is facing due to the Scottish Government’s policy of full cost recovery.

Public funding of the Accountant in Bankruptcy’s office is now at a 20-year low, with 40 per cent of cuts this year following on from 37 per cent of cuts last year. To address its current funding crisis, other than making cuts themselves, the AIB, has to find other sources of revenue. This is only possible in two ways: one is by increasing the fees it charges; and the other is by increasing its market share of the personal insolvency work it undertakes.

In relation to increasing its fees the AIB has already done this in relation to debtor application fees, where it raised the fee in June 2012 by 100 per cent from £100 to £200. This resulted in a 50 per cent decrease in the last quarter in the number of debtor’s applications being made. Fee increases, therefore, carry problems: the more they increase the more that is added to the cost of the remedy and the less people will use that remedy, resulting in falling fees and increasing costs per unit of work you undertake. It’s a vicious circle.

Increasing market share, however, provides more potential, although to do that you must compete with the private sector, except in relation to Low Income, Low Assets bankruptcies, where only the Accountant in Bankruptcy’s office is allowed to be appointed. In relation to other types of sequestrations, the AIBs office is the default trustee, meaning where a debtor chooses or cannot appoint a Licensed Insolvency Practitioner, the AIB acts. Previously the AIB had attempted to increase its market share of bankruptcies when part 2 of the Home Owner and Debtor Protection (Scotland) Bill was announced by proposing only they could act as trustee when the new route of certificate of sequestration was used. However, that proposal was controversial and a breach of competition rules and had to be dropped.

Since then, there has been increasing debtor and money adviser dissatisfaction with how the AIB treats debtors when they are the trustee and this has resulted increasingly in debtors appointing their own licensed insolvency practitioner. The main source of this dissatisfaction has surrounded the level of contribution the AIB agents are seeking from debtors once they are in place, whereas private insolvency practitioners can normally advise on this before being appointed.

In response to this, the Scottish Government have now proposed they will create a common financial tool which will harmonise the amount debtors will pay regardless of the remedy they use. This will allow debtors to know beforehand how much they will pay prior to signing up to any remedy and to that extent is a commendable proposal, although as the AIB will be deciding on the details of any financial tool, much of what is contained in the detail will be crucial.

Of more concern, however, is the proposal that a new statutory minimum dividend of between 35-50p in the pound be introduced for protected trust deeds. Protected Trust Deeds are voluntary, less formal type of personal insolvency in Scotland and over 9,000 people entered into them last year. They generally provide better returns for creditors than sequestrations and, although the majority only last 3 years, significant numbers do run for four to five years to allow debtors to buy out equity in their properties and pay additional amounts to satisfy creditor criteria for the deeds to be protected.

Legally, all Protected Trust Deeds in Scotland, therefore, are agreed to by creditors as they do get an opportunity to object. The effect of protection being legally all creditors are deemed to have acquiesced in the agreement.

Currently, the average dividend payable in a protected trust deed is approximately 16 pence in the pound. If the level of dividend is statutorily fixed at 35-50 pence in the pound, as opposed to it being agreed freely between the parties involved, the simple reality will be thousands of debtors each year will not be able to afford to such remedies and instead will have to enter more severe and damaging sequestrations. The alternative to this will be to enter into a Debt Payment Programme under the Debt Arrangement Scheme, which could see many debtors being trapped in repayments plans lasting up to 12 years.

This is only one feature of the current proposals being made by the Scottish Government and not all should be condemned, but it must be asked, as the AIB cannot act as trustee in Protected Trust Deeds, whether it is being proposed such criteria should apply to Protected Trust Deeds in the knowledge that it will kill off that remedy or restrict its use. The resultant effect being more will have to use sequestration and with the common financial tool, it must be in the AIB’s calculations that this will increase their market share of sequestrations and, therefore, their income from such work.

If this is the case and part of the strategy of the AIB becoming fully self-funding, the proposals must be condemned. A bankruptcy system that we all know will increase damage to the interests of debtors and creditors cannot be a system that is fit for the 21st century, nor can it be in the interest of the country as a whole to force more people into such a drastic remedy. If it’s not, then the question must be asked, why introduce statutory criteria into what is already currently a very popular remedy?