Under a Protected Trust Deed (PTD), a debtor in Scotland can - as an alternative to formal bankruptcy - put his estate in the hands of a trustee for a fixed period so it can be administered for the benefit of his creditors.
In return, the debtor is protected from enforcement action by his creditors, and is absolved of his debts at the end of the process.
In recent years there have been concerns about how PTDs operate in Scotland, and reform of PTDs has been widely discussed in the context of overall bankruptcy reform.
On 9 October 2013, Parliament approved the new Protected Trust Deeds (Scotland) Regulations 2013, which come into force on 28 November 2013.
They make significant changes to how trust deeds become protected and how PTDs are to be administered in future.
Attaining protected status
The regulations provide that a trust deed will become protected from the date it is registered in the Register of Insolvencies (ROI) by the Accountant in Bankruptcy (AiB).
Previously, a deed became protected five weeks after notification of creditors that protected status was sought.
Under the Regulations, certain conditions require to be fulfilled to gain protected status:
- Both the debtor and the trustee must be eligible to enter the deed. Eligible debtors can include trusts and "corporate bodies". In order to be eligible, the debtor must owe more than £5,000 at the time the deed is signed.
- A statement will require to be signed by both trustee and debtor confirming that the trustee provided the debtor with prescribed advice and the debtor agrees that acquirenda will vest in the trustee.
- Where a contribution from the debtor's income is taken, it must be payable for the 'payment period' of 48 months (increased from the current 36 months) unless that period is varied. No sum derived from social security benefit may be included. If a debtor can repay his debts in full within 48 months from income contributions protected status will be denied, as for policy reasons the Government considers DAS to be more appropriate in those circumstances.
- Following an initial Notice in the ROI, the trustee must send certain information to creditors, who will then have five weeks to object to protected status. As before, objection will only be effective if a majority in number or not less than one third in value, of creditors object. A secured creditor of an excluded dwellinghouse cannot vote for these purposes.
- Following the expiry of the notice period to creditors, the trustee must send certain information to the AiB in order for the deed to be registered as protected. If certain conditions are complied with, the AiB has no discretion over registration of the deed.
- A dwellinghouse may be excluded from a PTD, subject to certain conditions, primarily: (a) the trustee must provide the debtor and secured creditor with a valuation; (b) the secured creditor must agree not to claim in the PTD for any part of the debt owed to it; (c) The AiB must be informed; and (d) unsecured creditors must be given information on (i) the effect of an exclusion on any dividend, (ii) the value of the excluded dwellinghouse and (iii) on the debt owed to the secured creditor.
Effect of Protected Status
Broadly speaking, the effect of protected status is the same as before.
No creditor can undertake diligence to recover their debt during the currency of a PTD. A secured creditor who has agreed to the dwellinghouse being excluded may not undertake any diligence against assets vested in the trustee, nor petition for sequestration.
An earnings arrestment will cease to have effect from the date of protection. That is a change from the current position.
The regulations seek to standardise the manner in which a trustee values property owned by the debtor by fixing the equity amount as at the date of the deed. Previously, trustees had wide discretion as to how and when they chose to value property.
The AiB has the power to give directions to the trustee as to how the PTD should be administered. She has a power of censure, and can report a trustee to the sheriff for failures.
Trustees must send statements of account to the debtor, all creditors and the AiB at 12-monthly intervals. On receipt of such a report, application may be made to the AiB to carry out an examination of the administration of the trust.
Trustee's remuneration has always been a controversial aspect of PTDs. Under the regulations, remuneration must consist of a fixed-fee and an additional fee based on a percentage of assets realised, together with outlays. Hourly rates can no longer be charged.
Unforeseen circumstances requiring additional fees will require approval from the creditors in the first instance (whom failing the AiB).
Fees may include remuneration for seeking a secured creditor's consent prior to a trust deed becoming protected. The AiB may, at any time, audit the trustee's accounts and fix the outlays of the trustee in the administration of the trust.
Certain conditions must be met for a debtor to be discharged of debts and obligations under the PTD. They must have complied with all obligations under the deed and co-operated with the administration of the trust.
Refusal to sell a dwellinghouse or family home is not treated as failure to meet a debtor's obligations.
The Discharge is recorded in the ROI and effective from that date. Refusal of a discharge may be appealed to the sheriff. Student loans cannot be discharged under a protected trust deed.
The regulations were intended to address concerns over the level of fees charged by trustees, the size of the dividends, and the level of advice debtors received before entering PTDs. On the face of it they go some way to doing so.
It will only be apparent after 28 November the extent to which the reform has succeeded.