Protected trust deed update

Background

The performance of protected trust deeds (PTDs) in recent years has been an issue of some concern to the Scottish Government. As PTDs are granted for the benefit of a debtor’s creditors, a fair return to them must be achieved.   The trend of rising costs associated with delivering PTDs alongside disappointing dividend returns to creditors are issues we believe must be addressed. 

As part of its consultation on the creation of a ‘Financial Health Service’ and reforms to the law on bankruptcy, PTDs and the Debt Arrangement Scheme (DAS), a number of improvements to PTDs were proposed. These changes, which included a minimum dividend to be achieved before protection could be granted, were designed to drive up the performance PTDs. 

Through extensive consultation and negotiation with a wide range of stakeholder groups, the proposal for a minimum dividend was dropped. This was in recognition of the impact a minimum dividend had when applied to individual voluntary arrangements (IVAs) in England and Wales, in particular, higher failure rates and more variations. Instead, a package of reforms has been developed which aims to achieve improved outcomes for PTDs over the coming years. Changes will be introduced later in 2013, although it will be a number of years before their full impact is known. 

Alongside these changes, DAS is being strengthened further. Debtors who are struggling with their debts, but are able to repay them in full over a longer period of time, are encouraged to do so and where appropriate DAS should be the preferred option. The principle that debtors who can pay their debts should pay their debts is an important principle of the Financial Health Service.

Current process and performance

As part of the protected trust deed process, trustees are required to send the Accountant in Bankruptcy (AiB) yearly progress reports. The key information recorded on these reports is an estimate of the dividend that will be paid at the conclusion of a trust deed along with the current and estimated administration costs. Investigations into the administration of trust deeds may be triggered where the identified variance is 25 per cent or more. At the conclusion of the trust deed, the trustee provides information to AiB with the actual dividend paid and their administration costs.  

The information in the statistical summary at Annex A, details (by company) the estimated average dividend which will be paid to ordinary creditors on the conclusion of each trust deed. The summary also provides details of the percentage variance between the original estimated dividend at the outset of the trust deed against the latest estimate provided in the yearly progress reports, submitted to AiB between 1 April 2011 and 31 March 2012. 

The statistical summary also highlights the percentage of cases, per firm, where the yearly progress reports now indicate that no dividend will be paid to ordinary creditors at the conclusion of the trust deed. Details of predicted administration cost increases have similarly been drawn from the collation of yearly progress reports, identifying the number of cases where costs have risen by at least 25 per cent. 

Future changes 

To improve transparency on the performance of individual companies, we will provide further information on the outcomes of protected trust deeds in the AiB annual report. This will be achieved by providing a breakdown of information drawn from the Form 7 returns at the conclusion of trust deeds in terms of dividends payable and costs incurred.  

Later this summer, new regulations governing protected trust deeds will be introduced to the Scottish Parliament. These changes will take effect from autumn 2013. In summary these changes are: 

• A minimum debt level of £5000.

• New requirement for the trustee to demonstrate that a trust deed is an appropriate solution. If AiB is not satisfied with the case presented, there will be a new power to prevent it gaining ‘protected’ status. As now, the trustee could apply to the sheriff for a Direction if they disagree with AiB’s assessment.

• Removal of the requirement to advertise the trust deed in the Edinburgh Gazette, instead publishing the notice on the Register of Insolvencies.

• Pre trust deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts.

• Trustees will no longer be able to charge their fees at an hourly rate. Instead, they will be required to charge a single, fixed, upfront fee augmented by further remuneration based on a percentage of funds ingathered through the administration of the case.

• These fee proposals will require to be notified to creditors on Form 3 at the outset of the trust deed, including details of how the fixed fee will be taken across the period of the trust deed.

• Should there be exceptional circumstances requiring further expenditure in the case, there will be a process for seeking approval from creditors. Where creditors do not engage, AiB will decide on whether the increased fee is appropriate.

• The annual Form 4 will be issued to creditors as well as AiB. Trustees will be required to provide information to creditors if the expected dividend has reduced by 20 per cent or more. They will be required to provide details of the options available and to make a recommendation on the way forward.

• Equity will be frozen in a dwelling-house at the date the trust deed is granted.

On introduction of the new regulations a PTD Review Board will be established. This will be drawn from stakeholder representative groups. The purpose of the Board is to:  

• Provide information and guidance to the Accountant in Bankruptcy on the administration of protected trust deeds (PTDs)

• Help to identify problems/ issues or general areas of concern arising from the administration of PTDs at an early stage

• Act as a discussion forum for stakeholders, to ensure that there is an effective conduit for the receipt and dissemination of information concerning PTDs across stakeholder groups and interested parties.

Statistical Summary

The statistics, in Annex A, measure the performance of PTDs in 2011-12 at company level. The figures are based on all Form 4s returned during that period, for trust deeds protected between 1 April 2008 and 31 March 2011, regardless of whether the PTD has now concluded. 

Due to lower numbers of PTDs affecting the figures and not always providing an accurate measurement of average performance at company level, these statistics are based on a minimum qualifying number of 100 PTDs. This means the overall averages are based on the organisations that met this level in 2011-12 and are not equal to the actual total figures for all PTDs in 2011-12. 

Each Form 4 received in 2011-12 includes information on the estimated dividend and the estimated administration costs, relevant at the time the form was submitted.  This information along with the original information submitted on Form 3 when the Trust Deed was protected, means an annual snapshot of performance can be measured for each PTD and aggregating this information allows the performance to be measured for each company.

The statistical summary contains the following variables: 

• Number of PTDs – this is the number of PTDs where a Form 4 was received in 2011-12. 

• Average Estimated Dividend Form 3 – this is the average dividend figure obtained from all the initial estimates of the dividend that were given at the start of the process when the Trust Deed was protected. 

• Average Estimated Dividend Form 4 – this is the average dividend figure obtained from all the new estimates of the dividend that were provided in the Form 4s received in 2011-12. 

• Average Estimated Dividend Variance – this is calculated using the two average dividend figures mentioned above to measure the average variance between the original estimated dividend from Form 3 and the latest estimated dividend in 2011-12 from Form 4. 

• % Cases with Estimated Zero Dividend – this is the number of PTDs where the estimated dividend in Form 4 is zero as a percentage of the total number of PTDs (variable 1 above). 

• % Cases with Admin Costs Increase by 25%+ - each Form 4 contains a new estimate of the administration costs and these are compared with the original estimate of administration costs to measure any change in these. This is the number of PTDs where the administration costs are estimated to increase by 25 per cent or more, as a percentage of the total number of PTDs (variable 1 above).

Annex A 

PTD Form 4 Performance - Summary by Company - 2011-12 

Trust Deeds Protected 1 April 2008 - 31 March 2011 

Note: the above statistics are based on a minimum qualifying number of 100 PTDs.  Form 4 returns are estimates provided by trustees and recorded by AiB.