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The Protected Trust Deeds (Scotland) Regulations 2013

The Background

The Protected Trust Deeds (Scotland) Regulations 2013 (“the Regulations”) come into force on 28 th November 2013. As IP’s will be aware, the Regulations are a result of the AIB’s drive to try and address what is perceived (by the Scottish Government at least) as a high cost/poor return insolvency option. Figures quoted on the AiB website suggest that “more than a third” of Protected Trust Deed’s (“PTD’s”) result in no dividend to creditors.

Current Problems

As suggested above, the Scottish Government are concerned about two particular aspects of PTD’s: cost and return to creditors. The concern is exacerbated by the fact that the very nature of the PTD results in creditors who may not have consented to the Trust Deed becoming bound by it. The Regulations have been designed to address these issues by ensuring that only those with “serious” debts are eligible to sign a Trust Deed and providing transparency as to how much of the debtor’s contributions will be paid to their creditors.

The Regulations

The Regulations will provide that a debtor must have a minimum debt level of £5,000 before the debtor will be eligible to enter a Trust Deed. This is clearly how we are to define the “serious” debts referred to by the Scottish Government. If the debts can be repaid within four years then the Trust Deed cannot become protected, thereby rendering it very unattractive to debtors. There will be a mandatory minimum period of four years for contributions to be made by the debtor. A shorter period for contributions will only be allowed if the creditors are paid off in full in less than four years. The debtor’s social security benefits will not make up any part of their contribution payments.

Arguably, the more significant changes as far as IP’s are concerned relate to the way in which the fees for administering PTD’s are now to be charged. Fees based on hourly rates and fees for work carried out prior to the are to be a thing of the past. Similarly, fees for work carried out prior to the Trust Deed being signed are to be excluded. Trustees will have to charge a fixed fee upfront and then an additional fee based on the percentage of funds ingathered. Creditors will be notified of the proposed fee prior to their consent to the Trust Deed being sought. Any change to the fixed fee will require creditor approval. Unfortunately, section 23(1) of the Regulations is not clear as to how the trustee works out their fixed fee and neither is it clear as to the percentage that the trustee can charge.

Advice

It remains to be seen whether these Regulations will address the Scottish Government’s issues with the current PTD system. In theory, the changes are designed to limit the fees being taken out of the debtor’s estate and improve returns to creditors. The notion that some cases are more challenging than others appears to have been given some recognition by the concession that an additional fee can be charged. However, how IP’s will decide on their fixed fee and their additional percentage fee is not clear. What does appear to be a likely consequence of the four year contribution period is that sequestration, where the debtor receives an automatic discharge after only one year, may suddenly become more appealing. We shall see!

BBM Solicitors specialise in advising IP's in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal () or Alasdair Baijal ().

This briefing note is current as at 1 October 2013 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).

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