protectedtrust deeds: abetter deal 1

PROTECTED TRUST DEEDS: ABETTER DEAL
FORMAL RESPONSE OF THE ASSOCIATION OF BUSINESS RECOVERY
PROFESSIONALS (R3) AND R3'S SCOTTISH TECHNICAL COMMITTEE
1
Introduction
1.1
R3, the Association of Business Recovery Professionals, is the leading Professional
Association for Insolvency, Business Recovery and Turnaround Specialists in the UK. It
promotes best practice for professionals working with financially troubled individuals and
businesses. It has representation around the UK and provides a forum for debate on key
issues facing the profession. Most Insolvency Practitioners (IPs) operating in Scotland are
members.
1.2
R3 has received a large volume of representation from its members in relation to the
Protected trust deed (PTO) Consultation Document and the Committee has a duty to report
those concerns to the Scottish Executive. We therefore welcome this opportunity to do so.
1.3
R3 has been provided with a copy of the formal responses prepared and submitted by the
Institute of Chartered Accountants in Scotland (ICAS) and the Law Society of Scotland (the
Law Society), and on the whole agrees with the comments in those responses. R3's
response considers the specific questions asked in the consultation process; examines the
implications of the proposals and suggests alternative solutions where we do not agree with
the outlined proposals. We make these comments to ensure that the interests of our
members are represented, as well as those of the debtor and creditor communities and the
general public.
2
Commentson the ConsultationDocument
We are of the opinion that the contents, assumptions and conclusions contained in the
Consultation Document require specific comment as follows:
2.1
Para 2.2 - the Consultation Document refers to the debtor making an offer to the creditors,
but this is incorrect. The debtor signs a trust deed and at the time of signing, in effect
transfers his assets to a trustee. The trustee then puts an offer to the creditors based on
available information. The creditors either accept the terms of the offer and accede to the
trust deed becoming protected, or object. If the creditors objecting are sufficient in value or
number the trust deed does not become protected. The granting of a trust deed is a
unilateral act by the debtor and is effective in law even if no creditors accede to it. This
process differs significantly from that of an English Individual Voluntary Arrangement (IVA),
which will only take effect if the creditors agree.
2.2
Para 2.6 describes an IP as a "specialised accountant". A licensed IP may in fact be an
accountant, lawyer or IP. All IPs must pass the Joint Insolvency Exam and then
demonstrate annually they are fit and proper persons to obtain the appropriate licence.
They are subject to rigorous regulation under UK statute, best practice set down by the
various Recognised Professional Bodies (RPBs) via Statements of Insolvency Practice
(SIPs) and regular monitoring.
2.3
Para 2.16 states that "The changes in the 1993 Act have had an effect on the numbers of
bankruptcies that proceed as sequestrations or protected trust deeds respectively" but no
evidence is given for that assertion. Evidence given to the Enterprise and Culture
Committee in respect of the Bankrucptcy & Diligence (Scotland) Bill ("the Bill") in respect of
a recent direct equivalent, the Enterprise Act 2002, indicates that changes in legislation
were not fuelling the numbers in England and Wales but that the growth in consumer debt
is. We would suggest that changing the legislation in 1993 was not responsible for the
subsequent growth in personal insolvency appointments and that the insolvency profession
is simply meeting the demands of the market.
2.4
At Para 3.1 and throughout the consultation document, trust deeds are referred to as a
mechanismfor the debtorto obtaindebt relief. However,debt relief is not automatic- the
trust deed must specifically provide for it. It is important to recognise that the relief is not
automatic. Thus the provision regarding discharge of the debtor in the draft regulations,
which appears to make debt relief in a protected trust deed automatic, is in fact an
important change in the law. In practice debtors may view themselves as free of debt on
signing a trust deed but in reality they exchange their responsibility to creditors for a
responsibility to their trustee. We agree however that sequestration and protected trust
deeds both provide practical debt relief and a fair division of available property.
2.5
Paras 3.2 and 3.3 attempt to set out the key similarities and differences between
sequestration and protected trust deeds. The Scottish Executive has stated that in its view
there is too great an overlap between the procedures, thus meriting change in the latter.
Simply by presenting the lists in paras 3.2 and 3.3 in a different format, we can demonstrate
that this is not the case.
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Duration
Choice
Creditors
Use of credit
Carrying on a
business
Criminal Penalties
Information to
creditors
Compulsory audit
of accounts
Effective regulation
of conduct of
Trustee
Protected trust
deed
Any period
(although
commonly 3 years)
Voluntary.
Unilateral action
appointing Trustee
of choice
Can obiect
No statutory
restrictions
Yes
No
Little
None - can be
requested by the
Trustee, the
creditors or the
debtor
No
Sequestration
Comment
Currently 3 years
(to be reduced to
one)
Can choose or can
be forced by
creditor. Trustee
usually Accountant
in Bankruptcv
Cannot obiect
Subject to statutory
restrictions
No
See 2.6
No overlap
Yes
Not mentioned in
para 3.3
Yes by either
Commissioner or
Accountant in
Bankruptcy
Dividend
Higher
Subject to
guidance of
Accountant in
Bankruptcy
Lower
Public Office
Accounts available
for inspection
No bar
No
Barred
Yes
No overlap
No overlap
See 2.7
No overlap
See 2.8
Overlap
No overlap
See 2.9
No overlap
See 2.10
No overlap
See 2.11
No overlap
No overlap
No overlap
2.6
Sequestration has a fixed duration of three years, while currently a protected trust deed has
no fixed timescale. Historically it matches the three-year period of sequestration, but the
flexibility of a protected trust deed could allow for any period, e.g. one to five years. It is
also important to note that sequestration can be deferred for up to two years, and under the
proposed Bankruptcy Restriction Undertakings and Orders, that time limit could be up to 15
years.
2.7
Para 3.2 states that debtors subject to a protected trust deed can use credit and this is not
entirely accurate. A debtor is not subject to the restrictions of s67 of the Bankruptcy
(Scotland) Act 1985 (as amended) (BSA85) (see also 2.8) and may still use or obtain credit
without declaring their status subject to a protected trust deed. It may however be difficult to
find credit and it will be priced accordingly. Para 3.3 states that an undischarged bankrupt
is restricted from using credit, but s67 of BSA85 states simply they must disclose their
status to the creditor to whom they are applying. Again, credit may be found and at a price,
notwithstanding their status.
2.8
In a sequestration the Interim and Permanent Trustee has the power to close or to trade the
debtor's business. A trustee under a protected trust deed in effect has similar powers,
since the business would usually form part of the estate transferred to the trustee and the
undertaking would be considered a realisable asset (or source of liability and be closed)
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Debtorssubjecttoeitherprocedure
cantradebutindoingso,
and dealtwithaccordingly.
cannot use assets that have transferred to the trustee or vest in the Permanent Trustee.
The restrictions on obtaining credit described at 2.7 may also act as a barrier.
2.9
We disagree that creditors in a protected trust deed receive little information. The
documentation that they receive on notification (viz: Statement of Affairs, including a list of
the debtor's assets and liabilities and list of income and expenditure) is arguably more
detailed than the report and statement of affairs provided in a sequestration. Regular
reports are sent to creditors throughout the period of the deed and in conjunction with fee
requests (usually six monthly or annually). Compare this to the two accounts sent out in an
agency sequestration, one at six months and the final in anticipation of closure two and a
half years later.
2.10
To state in para 3.2 "there is no effective regulation of the conduct of the trustee, other than
the requirement that the trustee is a member of a professional body" is frankly insulting to
IPs and their RPBs. We presume that a phrase "of an equivalent nature to that exercised
by the Accountant in Bankruptcy in relation to sequestrations " or some such similar is
missing from this statement. We refer you firstly to our comments at 2.2. Further, SIP3A
Trust Deeds (SIP3A) was introduced by all RPBs in January 2004 and alllPs are required
to follow its guidance.
2.11
We make specific comment on the statistics relied on at para 3.8, but in general we agree
that on average a protected trust deed provides a better return to creditors than a
sequestration. A protected trust deed tends to be more dependent on the debtor's income
and the accession of creditors is in turn dependent on the dividend level. The emphasis in
sequestration is currently not on maximising dividends by seeking a contribution, although
the proposed changes in the Bill relating to Income Payment Agreements and Orders may
change that. This distinction in dividend return may be further eroded however if a
substantial regulatory burden is placed at cost on the protected trust deed procedure.
2.12
We would suggest that there is at least one further key significant difference between the
procedures that the consultation ignores and this is access to the procedures. A Trust
deed can be accessed immediately and without prequalifying apparent insolvency. A
debtor's access to sequestration is dependent on apparent insolvency and the action of a
creditor to constitute same. In effect a number of debtors are barred from sequestration for
that reason. A trust deed becomes their only alternative. The proposed changes to the
protected trust deed entry level by way of introduction of a minimum dividend level remove
that significant difference and rob the protected trust deed procedure of an element of its
flexibility.
2.13
From the above analysis therefore we conclude that there are in fact significant differences
between the procedures, not significant overlap. The only significant overlap is that the
debtor gains an element of debt relief in either procedure, but since both are debt relief
mechanisms this is to be expected. How the debtor obtains that debt relief is significantly
different. The Executive's consultation proposes changes to protected trust deeds on the
basis of too much overlap, but as demonstrated at table 2.5, this overlap does not exist.
The changes would in fact introduce significantly more overlap between the two than
currently exists.
2.14
We do not agree with the conclusions of the Executive at para 3.4. Firstly, alllPs are
obliged by the terms of SIP3A to meet a debtor in advance and discuss their financial
affairs in detail. Without so doing the IP is unable to provide best advice. We agree there
are few penalties for debtor non-compliance in a protected trust deed but the ultimate
sanction of sequestration does exist. That threat is usually sufficient to guarantee
compliance. We disagree that there are no penalties for trustee non-compliance and refer
you to our comments at points 2.2 and 2.10. The comment that "there is little or no
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regulation of the conduct of the trust" is, at best, misleading. We presume "by the
Accountant in Bankruptcy" is missing from the statement, since significant regulation of the
trustee is in force at all other times. We fail to see how any of these statements translate to
the conclusion that these are in some way an advantage for a trustee.
2.15
Para 3.5 states that "the Executive considers the main advantages of sequestration are that
the public interest is better served by a high level of public protection through restrictions
and penalties and through the more detailed regulation of the conduct of the sequestration."
We agree in theory that one of the advantages of sequestration from a public point of view
is increased protection from an undischarged bankrupt and debtor penalties, but in practice
these sanctions are rarely imposed by the courts. We again assume that "by the
Accountant in Bankruptcy" is missing from the latter part of that statement?
2.16
The argument expounded at para 3.7 is unclear. The co-existence of hard and soft
bankruptcy regimes is justified provided the benefit of a softer approach to the debtor is
balanced by a benefit (usually a greater return) to the creditors. The conclusion that the
"key difference between sequestration and Protected trust deeds is that a Trust deed is
only protected where creditors do not object" is not logical, nor supported by the
paragraph's prior statements. If we accept that the benefit of a softer approach, (as the
Executive does at para 3.54 et al) then the Executive's own proposals to toughen protected
trust deeds by introducing greater "public oversight" run counter to its own argument.
2.17
Para 3.8 and Table 8 give comparative statistics showing the average dividend in pence in
the pound of debt paid to creditors in sequestrations and protected trust deeds over the
years 2000-2005.
The above statistics are misleading in that these averages include only cases where a
dividend is paid, and take no account of cases where there is a Nil dividend.
Para 4.19 attempts to justify the lowest appropriate payment,threshold for protected trust
deeds as being 20p in the £, and the basis for this justification is the extraction of the figure
of 18.4p in the pound from the aforementioned Table 8.
Para 4.19 states that the payment threshold for protected trust deeds "should therefore be
not less than the average dividend paid in a sequestration". The same paragaraph then
states that "in the year to April 2005 the average was 18.4 pence in the pound." This
statement is misleading in that it ignores the very high percentage of sequestrations where
there is a Nil dividend. In reality the average dividend in ALL sequestrations during that
same period was between 6p and 7p in the pound. If any threshold is appropriate, and R3
does not consider this to be the case, the lower figure of 6p-7p is a more appropriate
comparison.
Regarding the percentage of sequestrations which pay a dividend, paragraph 3.37 states
that for the years 2000 - 2005 only 23% of sequestrations paid no dividend to creditors.
Annual reports from the Accountant in Bankruptcy highlight that in that period 81% of
sequestrations actually paid no dividend.
Other statistics within the consultation are based on historical outcomes of trust deeds, long
before the introduction of SIP3A on 1 January 2004, the principles of which have been
adopted by all RPBs. Unfortunately these incorrect and historical figures have beemrelied
upon by the Enterprise and Culture Committee during their Stage 1 deliberation of the Bill,
and by others giving oral evidence to the Committee.
A survey of protected trust deeds paying a dividend to creditors post introduction of SIP3A
was undertaken by ICAS and this revealed that there is an expectation of a dividend being
paid in every protectedtrust deedwhenit is signed.Will the ScottishExecutivenow
undertake an exercise to re-examine the material discrepancies described above and
5
preparestatisticson whicheveryoneagrees?We agreewiththe IPA'ssuggestionthat it
may be beneficial to instruct an independent person to review the statistics.
2.18 Paras 3.10 to 3.42 examine various points under the heading "Integrated System of Debt
Management and Debt Relief'. The Scottish Executive has placed much emphasis on the
need for a "joined up" package of bankruptcy reform and the four elements of this "joined up"
package are: -
i.
Sequestration changes as outlined in Part 1 (Sections 1 - 30) of the Bill
ii.
Trust deed reform, and to emphasise the importance of trust deeds, it should be noted
that in the nine months to 31 December 2005, there were 9,415 personal insolvency
proceedings of which sequestration awards were 4,105 (44%) and Protected trust deeds
were 5,310 (56%)
iii.
Debt Arrangement Scheme (DAS) and the possible proposals to alter the basis of this to
allow for debt relief
iv.
Apparent Insolvency, as sequestration can only be considered as an alternative to any
other procedure if the debtor can constitute apparent insolvency.
Although the Bill is intended to facilitate the proposed changes to protected trust deeds, we
agree with ICAS and IPA that it is our shared view that the Enterprise and Culture
Committee has not been provided with sufficient evidence on the proposed changes to
Trust deeds to allow detailed consideration of the final proposals prior to completion of the
Stage 1 Report to the Parliament. Written and oral evidence was therefore provided prior
to release of the protected trust deed consultation, albeit these proposed changes to trust
deeds will have a fundamental impact on the bankruptcy reform.
Notwithstanding that the "joined up" package encompasses the four elements as outlined
above, we are submitting this response without any indication of the Scottish Executive's
proposed changes for either the Debt Arrangement Scheme (DAS) or apparent insolvency.
2.19
Para 3.16 states that DAS does not currently offer debt relief. It is true that it does not
automatically give debt relief, but it can do so if individual creditors agree. As pointed out
earlier, a protected trust deed currently does not offer automatic debt relief either.
2.20
The Executive proposes that if DAS "is extended to enable some form of debt relief it will
remain different from the other available forms of debt relief." No explanation is given as to
how this will be achieved. (See 2.18 on this point generally.)
2.21
The statements made in para 3.24 raise various issues. Firstly, it is incorrect to state that
in a protected trust deed there is no formal calculation of surplus income. This information
is specifically presented to the creditors as required by Regulation 18(a)(ii) of the
Bankruptcy (Scotland) Amendment Regulations 1993. Secondly, the creditors' role is not
to formally reject the trust deed. The creditors can accede/object to the deed becoming
protected, but the trust deed will still stand if protection is rejected. If they wish, and their
debt satisfies the qualifying level of £1,500, the creditor may sequestrate. Thirdly, we
would counter that creditors "rarely express a view" because they are in the vast majority
of cases satisfied with the proposals. Finally, it is not clear what this and repeated
reference to "public oversight" means nor why it should be introduced into what is in effect
a commercial agreement between a debtor and his creditors, negotiated and implemented
by the trustee. The creditor and the trustee retain the right to sequestrate if appropriate if
either consider the debtor should not benefit frorn the softer approach of a protected trust
deed.
.
6
2.22
Para 3.26 states that there is no public oversight of the calculation of income payments
and we ask why there should be? Reference has already been made to Regulation
18(a)(ii) of the Bankruptcy (Scotland) Amendment Regulations 1993. Those creditors who
will be directly affected by an income-based dividend in a protected trust deed get the
information they need to form an opinion on whether to accept or reject the proposals. It is
unclear why the state, in the form of the Accountant in Bankruptcy, needs to interfere in
that contract. The consultation states that that omission "cannot be justified" but gives no
reason for the proposed interference. There is a danger that a blanket approach to setting
or approving debtor contributions by a government agency deprives the procedure of its
recognised flexibility, imposes an element of penalty against the debtor, ignores individual
circumstances and undermines the Executive's own stated objective per para 3.56 that
protected trust deeds are seen as "reward for taking earlier action to resolve major debt
problems". Any further public oversight will add to the costs of the procedure and in our
opinion further erode the dividend distinction between sequestration and protected trust
deeds.
Similarly a further burden of cost will be added to the public purse for the
administrative element of the Accountant in Bankruptcy's added functions.
2.23
In terms of para 3.38 we agree that debtors who cannot pay should not be precluded from
seeking debt relief, but the issue of access and apparent insolvency arises again. We
would suggest that the historic issue of low or nil dividend trust deeds arose because
access to sequestration was not available and that by widening the apparent insolvency
qualifications, this issue might be resolved once and for all.
2.24
Para 3.39 provides for the introduction of a minimum dividend in protected trust deeds to
sufficiently differentiate sequestration from protected trust deeds. We do not agree with
the imposition of a minimum dividend. We have indicated at points 2.5 to 2.13 that the
procedures are already sufficiently distinct.
2.25
Para 3.40 notes that of trust deeds sampled 50% of realisation went in costs to the Trustee
and postulates this finding itself as a "further argument for reform". Did the Executive
examine the particulars of the deeds, whether any creditors had objected to the fee level or
what level of dividend was eventually paid out in each deed? Unless the Executive can
demonstrate that the 50% was in each case excessive and to the detriment of the debtor
and the creditor, this is not a sound argument.
2.26
Firstly, per para 3.41 we agree that introducing a creditor threshold will make it harder for
debtors to get debt relief through a protected trust deed. This contradicts the Executive's
stated intention in the Bill to provide a humane system of debt relief. Secondly, the
Executive states that the "relative ease" of protected trust deeds has had an unacceptable
cost to creditors but no evidence is provided in support of that conclusion. Creditors have
since 1993 generally acceded to protected trust deeds and have not objected in
overwhelming numbers to make the system unworkable. In commercial terms, creditors
"budget for bankruptcy" and set their interest rates and charges across their debtor book to
plug the financial gaps created by debtor delay, default and failure. Creditors view
bankruptcy as a commercial risk of business and plan and price accordingly. The
Executive is implying that creditors are unable to manage their own affairs and that
centralised bureaucratic government is better placed to make that decision on their behalf.
We cannot agree with that proposal.
2.27
Para 3.42 suggests that debtors, if no longer able to access trust deeds as a result of the
new requirement for a minimum dividend, will still be able to access sequestration (if they
are "can't pays") or the DAS (if they are "could pays"). This pre-supposes that a "can't pay"
debtor will be able to fulfil the conditions for self-sequestration, which experience would
suggest will often not be the case (and was the precise subject of study of the Executive's
Working Party on Debt Relief). Thus, the implementation of the proposals may result in the
creation of a further group of debtors who, because they can no longer access a trust
deed, cannot access debt relief or even debt management. While denying such debtors
7
accessto a trustdeedmaybejustifiedin principle,it is againstthestatedintentionsof the
Bill, and it is suggested that steps need to be taken to ensure that they do in fact have
some appropriate alternative solution available.
2.28
Para 4.5 states that "debtors often comment they did not realise the consequences of
signing a trust deed" but this does not mean they were not fully explained nor literature
provided. A substantial amount of literature is available on Protected trust deeds, including
guidance from the Accountant in Bankruptcy. SIP 3A requires the debtor to be given
certain information and we agree with the Law Society that there is a danger in trying to
prescribe in legislation a list of things the debtor must be told.
2.29
We note the proposed prescribed list at para 4.6 and advise that the majority of IPs already
provides this. We are happy to see the list become a statutory requirement. We would
suggest however that a debtor obtains significant value from consulting an independent,
highly qualified IP for advice in advance of entering any insolvency procedure. An IP
provides a suggested solution based on their precise circumstances and simply providing
alternative information on sequestration or DAS is only of value if these are suitable and
appropriate alternatives.
2.30
In para 4.7 the Executive expresses misplaced concern over the mis-use of income only
protected trust deeds. Firstly, a trust deed will only become protected if the creditors
accede to its proposals, and if a debtor won't pay, then he faces the sanction of
sequestration and the enforcement of the Permanent Trustee's powers in terms of s32 of
BSA85. Secondly, if "could pay" debtors should be in a DPP under DAS, then that is
where we would expect to find them. There are in fact fewer than 200 DPPs in operation
since its introduction in November 2004, while protected trust deeds number 5,310 for the
nine months to December 2005. The majority of protected trust deeds will not and do not
qualify for DAS as it stands. Finally, a "can't pay" debtor should not be signing in a trust
deed in terms of the guidance set down in SIP3A.
2.31
The Executive proposes that in future a trust deed should not become protected unless the
Accountant in Bankruptcy is satisfied that in all the circumstances it is reasonable to do so.
We are pleased that the Executive recognises the extra burden this will place on the
Accountant in Bankruptcy's resources, but ask whether in light of our comments at 2.26
such intervention by the Accountant in Bankruptcy is required at all. The introduction of
this process to the procedure will increase the cost of the procedure and the public purse.
Potentially it will introduce a delay in obtaining protection. We would also question wither
the Accountant in Bankruptcy has the capacity, in terms of experience and resource, to
deal with this requirement..
2.32
We agree that a trust deed should not become protected unless creditors can expect to be
paid a dividend that justifies protection. We are pleased to note that we are not required to
give a guarantee to a particular dividend and concur that such a guarantee is out of our
hands. Why then impose a minimum dividend threshold, which is an attempt to guarantee
a return to creditors?
2.33
The points made at para 4.13 simply reflect what is current practice and the vast majority
of trustees already declare an anticipated dividend. Without such a declaration, creditors
would be unable to decide whether to accede or object.
2.34
Per para 4.14, the Trustee does not certify that the anticipated dividend is enough to justify
protection - that decision rests with the creditors. What evidence does the Executive have
that "in most existing cases where an expected dividend is declared, either no dividend is
paid, or the actual dividend is less than the expected one"? ICAS research post January
2004 indicates that from 5,200 Protected trust deeds, only 79 will fail to provide a dividend.
These 79 are due to an unexpected change in the debtor's circumstances.
8
2.35
We note the proposed application for protection (with which we disagree) should be
accompanied by certain evidence. While that evidence should be readily available, there
will be an administrative cost to the estate, borne ultimately by the creditors, for its
provision to the Accountant in Bankruptcy and a cost to the public purse for its
consideration.
2.36
To what extent is the Accountant in Bankruptcy reasonably expected to predict
redundancy, ill health or divorce of a debtor? Para 4.16 does not define "reasonable
grounds". Further, para 4.16 states that the Accountant in Bankruptcy will be able to take
into account the reliability or otherwise of previous certificates granted by a trustee as to
expected dividends in deciding whether to grant protection for a trust deed. This may be
problematic, as there may be legitimate reasons for past certificates transpiring to have
been inaccurate.
2.37
In response to para 4.17, we offer again our comments at point 2.26 and question why the
intervention of the Accountant in Bankruptcy is necessary.
2.38
The protected trust deed supervision that the consultation envisages duplicates work
currently undertaken by the trustee or the creditors. If the Executive insist that the
Accountant in Bankruptcy must have a supervisory role, would it not be more cost and
resource effective to introduce a high level supervisory role, e.g. dealing with the removal
of a trustee where there are grounds for concern over the trustee's conduct or ability and
reporting debtors not complying with the terms of the protected trust deed etc? We also
take exception, as a highly qualified and regulated profession, to the assumption that civil
servants are better placed to carry out our work. Further we note that the Accountant in
Bankruptcy is not required to be licensed in insolvency to carry out her duties, and cannot
therefore lose her licence, unlike an IP. What sanction will be imposed if the Accountant in
Bankruptcy gets it wrong? What mechanism will be introduced to ensure there is an
adequate, independent appeal process if she does?
2.39
As discussed at point 2.17 the statistics, on which this assumption is based, are flawed.
.2.40
We agree with the statement that protected trust deeds are significantly better for debtors
than sequestration. We repeat our comments on the veracity of the consultation statistics.
If however a minimum dividend is 1mposed, will the Executive undertake to link the
prescribed minimum dividend to the yearly average dividend in sequestration? The
Executive recognises, and evidence produced to the Enterprise and Culture Committee
indicates, that access to credit is endemic and individuals' debt burdens are increasing
exponentially with no equivalent increase in their asset base. This will do more to deplete
the dividend prospects of creditors than any increased scrutiny of protected trust deeds by
the Accountant in Bankruptcy.
2.40 The Law Society makes comprehensive comments on para 4.25 with which we agree. The
proposed fixed three-year timescale does not allow for a change in circumstances and it is
unrealistic to impose this as a criterion for protection. Further, why introduce a prescriptive
period for protected trust deeds of three years, as para 4.25 states, when at the current
time they offer flexibility and can be for any duration, and give creditors a better return.
IVAs are allowed to run for up to five years and it is therefore difficult to understand the
rationale for a determined three year trust deed.
2.41
Para 4.26 sets out the information the Executive expects creditors to get in future. While
we accept this in principle, we note simply that this will add to the cost.
2.42
ICAS's response includes a section on Fees and we concur with its comments, which are
relevant in considering para 4.29.
2.43
Paras4.35to 4.37proposetheintroduction
of a cooling-offperiod.Wedo notunderstand
why this is being proposed if previous consultation indicated no appetite for such a
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requirement.Nordowebelieveit is necessarynow. If theExecutiveinsistsdebtorsshould
have that right, we suggest that it lasts seven days and commences from the date of
signature of the document (mirroring consumer creditor agreements). The Law Society's
response deals comprehensively with the difficulties of a six-week cooling off period that
follows the process of failing to achieve protection from the Accountant in Bankruptcy.
2.44
The increase in oversight and audit as envisaged by part 5 of the Consultation Document
will necessarily involve increased costs to the public purse as a result of the increased role
of the Accountant in Bankruptcy. The Accountant in Bankruptcy is given wide discretion but
there would appear to be no provision made for any appeal to be made against a decision
of the Accountant in Bankruptcy. This seems to be an increasing issue as the Accountant
in Bankruptcy's role and functions expand. We are sufficiently concerned that a failure to
incorporate appropriate and independent avenues of appeal will breach European Human
Rights conventions and requirements.
2.45
Looking at paras 5.9 and 5.11, it is not clear why if a trustee fails in a duty or obligation,
then the debtor should lose the benefit of protection. This seems illogical.
2.46
Para 5.13 states that a trustee could pay the costs of an audit personally. In what
circumstances is that envisaged, and what right of appeal (and to whom) has the trustee?
2.47
We suggest that the proposed changes to the protected trust deed regime do not support
the rescue of sole trader and partnership based businesses, contrary to the spirit of the Bill.
The effective use of protected trust deed in business rescue will be lost as a result of the
changes.
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3
Consultation Questions - Our Responses
3.1
Q1: Do you agree that 30p in the pound is the right payment threshold?
We do not agree that there should be a payment threshold.
It is clear that a number of people who are currently eligible for debt relief would no longer
qualify for the protected trust deed procedure if a 30p in the pound dividend threshold is
introduced.
A recent survey by The Institute of Chartered Accountants of Scotland
(ICAS) of protected trust deeds entered into between 1stJanuary 2004 and 31 December
2005 shows that only 10% of protected trust deeds paid a dividend of 30p or more in the
pound. Protected trust deeds in their current form have the ability to pay a dividend of
between 0 - 100p in the pound.
The Individual Voluntary Arrangement (IVA) in England and Wales has no prescribed
minimum dividend; the view being that IVAs are generally accepted provided there is a
demonstrable better return to creditors than in bankruptcy. Information provided to the
creditors in an IVA details a comparison of expected realisations and costs in both
bankruptcy and IVA, therefore, the creditors can make an informed decision.
A similar procedure could be adopted in Scotland to detail the difference in expected
realisations between the case as a protected trust deed and a sequestration. The
Bankruptcy and Diligence etc (Scotland) Bill is intended to align sequestration in Scotland
with the bankruptcy procedure in England and Wales so why not align protected trust deeds
and IVAs? Why should a Scottish debtor be more restricted in debt solutions than his
English counterpart? Giving creditors the choice between sequestration and a protected
trust deed would also satisfy the Executive's public protection criteria.
3.2
Q2: If not, what do you think is the right payment threshold and why?
The right payment threshold in a protected trust deed is simply that of a greater dividend
than would be available in a sequestration, each case to be examined on its own merits as
indicated above.
There are currently less costs in a protected trust deed - e.g.: no court costs, less audit
fees and no cost to the public purse. A protected trust deed, therefore, will in theory always
provide a greater return to creditors than sequestration.
All creditors have the right to object to the trust deed proposal based on the information
given to them by the trustee. The acceptance or otherwise of a proposal is a commercial
decision for a creditor and we do not agree that legislation is required to protect them.
3.3
Q3: What do you consider to be a reasonable percentage cap on fees
and why?
We do not accept this premise, as certain time costs must be expended on all cases,
irrespective of asset realisation. The consultation document fails to disclose what this cap
should be or whether it relates to "anticipated" or "actual" estate realised, and to whether
the "estate" includes contributions from income.
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3.4
Q4: Do you agree that the percentage change in fees and outlays triggering
notification by the trustee should be 25%?
Yes (but bearing in mind that we do not agree with the premise of a cap)
3.5
Q5: If not, what do you think the appropriate percentage change should be and why?
See Q3
3.6
Q6: Do you agree that a reduction in the dividend to 75% of the original amount is
the appropriate trigger?
Yes
3.7
Q7: If not, what do you think is an appropriate level and why?
See Q6
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4
Technical Comments on Draft Reaulations
The Committee has had sight of the Law Society of Scotland's specific comments on the
draft regulations and we concur with its findings, which for ease of reference are
represented here.
4.1
Regulation 3. The approach taken here seems to preclude the creditor from receiving a
dividend under the trust deed, as the creditor will not be a creditor for this purpose at all. Is
this intentional? Surely it would be better to allow the debt to be included in the trust deed
but simply provide that any outstanding balance will not be discharged.
4.2
Regulation 4. This initially refers to the Accountant in Bankruptcy then subsequently refers
to "that office-holder" - why the difference in terminology? The same issue arises in other
places in the regulations.
4.3
Regulation 5. This allows the Accountant in Bankruptcy to be appointed as the trustee in a
trust deed. There is an obvious potential conflict of interest here if the Accountant in
Bankruptcy is the trustee and is effectively regulating herself. This seems to be an
increasing issue as the Accountant in Bankruptcy's role and functions expand. We are
sufficiently concerned that a failure to incorporate appropriate and independent avenues of
appeal will breach European Human Rights conventions and requirements.
4.4
Regulation 6(a). See previous comment - is it a good idea to attempt to prescribe this in the
regulations? What is the sanction if this is not complied with?
4.5
Regulation 6(b). This effectively restricts debtor choice by making it a legislative
requirement that a trust deed is the best option. It may be considered that this is justified,
but it may also give rise to disputes. What is the result/sanction if it is decided this was not
in fact the case?
4.6
Regulation 6(d)(i). See comments above on costs prior to the decision on protection of the
trust deed.
4.7
Regulation 7. See previous comments on maximum time limit for trust deed and
introduction of automatic discharge. Also, it is not clear exactly what the debtor will be
"discharged" from - this needs to be spelled out clearly, perhaps along the lines of the
corresponding provisions in sequestration.
4.8
Regulation 10. Query whether there should be a time limit for the trustee to apply for
protection to ensure no unnecessary delays?
4.9
Regulation 11. See previous comments on minimum dividend.
4.10
Regulation 12(2). The Accountant in Bankruptcy is directed to take into account three
things in particular in determining whether it is reasonable to grant protection. The first is
whether the debtor would be able to pay his debts in full without granting a trust deed does this include through the DAS? The second is whether it is likely the court would grant
a BRO if the debtor was sequestrated - see previous comments. The third is whether the
dividendwouldbe higherthan in sequestration- see previouscommentssuggestingthis
should in fact be the test rather than a minimum dividend.
4.11
Regulation 13. This provides for the effect of the decision to grant protection, but nowhere
is there any requirement to register that decision or indeed the trust deed itself once it is
protected. Currently, a protected trust deed is registered once it becomes protected - this is
presumably an oversight and should be rectified.
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4.12
Regulation 15. This deals with the cooli~goff period - see previous comments.
4.13
Regulation 18. This provides for notice where there is likely to be a reduced dividend.
Would it be useful to require the notice to specify the reasons for this - it might prevent
unnecessary referrals to the Accountant in Bankruptcy where there are perfectly valid
reasons for the reduction?
4.14
Regulation 19. This provides, inter alia, for revocation of the protected status of a trust deed
and allows the debtor to revoke the trust deed within six weeks if it loses its protected
status. Similar issues arise here as arose in relation to refusal of protection in so far as this
may leave everyone in limbo for a considerable period. It is also suggested that if a
protected trust deed is registered as suggested above, the revocation of protected status
would also need to be registered.
4.15
Regulation 20(a)(i). Is publication of this amount of the financial detail of the trust deed
appropriate?
4.16
Regulation 21. Would it be appropriate to define the effect of the trustee's discharge (as is
the case in sequestration)?
4.17
Regulation 23. This is a confusing provision. Does it allow the Accountant in Bankruptcy to
disapply the trustee's discharge in relation to a particular creditor in particular
circumstances. If so, is this appropriate?
4.18
Regulation 26. This allows the Accountant in Bankruptcy to require the trustee to pay the
audit fee personally, but there is no indication of the circumstances in which this might be
appropriate and the Accountant in Bankruptcy therefore appears to have a completely
unfettered discretion in the matter. Is this appropriate?
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5
Conclusion
We would be happy to provide any further clarification required on application and welcome
any further opportunity to debate the proposed changes to protected trust deeds. If you
wish to contact us, please do so as follows:
Rachel Grant
Chairman of R3's Scottish Technical Committee
Clo Semple Fraser
80 George Street
Edinburgh
EH2 3BU
rachel.grant@semplefraser.co.uk
Or
Eileen Maclean
National Council Member for R3 in Scotland
Business and Management Services
32 Morningside Grove
Edinburgh
EH105PZ
eileen.maclean@btinternet.com
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