I appreciate that I am a bit behind the times here – the Scottish Government’s response was published on 1 November 2012: http://www.aib.gov.uk/publications/scottish-government%E2%80%99s-response-consultation-bankruptcy-law-reform. I won’t summarise it here, as it is a fairly brief document, which is well worth reading. However, I could not resist commenting on some of the plans.
Fundamental Changes to Trust Deeds
It seems to me that, at present, one strength of the Trust Deed is its flexibility: with the assistance of an IP, a debtor can consider what he/she can afford and what he/she is prepared to put forward to creditors, effectively in exchange for avoiding bankruptcy. I appreciate that, to some extent, Trust Deeds – and creditors’/creditor agents’ reviewing of them – have become standardised so that in effect we now have a “consumer” Trust Deed, which anticipates a pretty standard level of contribution over a standard three-year period, delivering a fairly standard dividend to creditors. However, I think it should be remembered that this is not what the legislation (currently) provides and the beauty of it is that debtors can formulate a Trust Deed to fit their particular circumstances. Not all debtors fit the “standard consumer” model.
However, the SG is now looking to “standardise the period over which an individual makes the assessed contribution in bankruptcy and protected trust deeds, to be equivalent to a minimum of 48 monthly payments”. The response also states: “There is a strong case for setting a minimum dividend at which Trust Deeds are eligible to become protected. We recognise that there are differing views among interested parties and believe that there is a legitimate debate to be had on the level of any minimum dividend. Our view is that the level would be most appropriately set between/around 30-50p in the £. We will engage constructively with interested groups over the coming weeks to agree on an appropriate level.”
Why take a flexible tool and impose such restrictions on its use? And how do these conclusions stack up with the consultation responses?
One of the conclusions described in the report on the consultation responses was: “There should not be a fixed term for completion of a protected trust deed” (page 5) – 71 respondees were opposed to a fixed term and only 29 were in favour. Perhaps the argument is that, in setting a minimum of 48 monthly payments, the SG is not setting a fixed term!
What exactly is the “strong case” for setting a minimum dividend? The report on consultation responses observed that “in recent years some creditors have taken a greater interest in PTDs and have actively rejected the protection of trust deeds which propose a dividend of less than 10p in the £” (page 31) – so that means that the Trust Deed framework is working, doesn’t it? In introducing a minimum dividend at which Trust Deeds become eligible for protection, isn’t the SG taking the power away from creditors to decide what they are prepared to accept? And how does evidence of creditors rejecting Trust Deeds anticipating 10p in the £ lead to a conclusion that the minimum dividend should be 30-50p?
The report on consultation responses quotes two responses from credit unions in support of 50p in the £ and I have already described how I personally feel about these in my earlier blog post (https://insolvencyoracle.com/2012/09/13/the-aibscottish-governments-report-on-responses-to-the-bankruptcy-law-reform-consultation/).
In my mind, it is simply not logical to put a minimum dividend on a Trust Deed. The dividend level is simply a measure of net assets/income over total liabilities; it is not a measure of what a debtor can afford to pay and neither is it a reflection of how appropriate the proposal is. Take two people: one can raise net assets/income of £12,000 and has liabilities totalling £40,000; the other can raise net assets/income of £13,000 and has liabilities totalling £45,000. Where is the logic in allowing the first person to acquire a Protected Trust Deed, as the dividend will be 30p in the £, but denying the second, as the dividend would be 29p in the £?
What is wrong with a Trust Deed that offers a return of 29p in the £, if the likely outcome of bankruptcy is no improvement? I remember an IP telling me that she had arranged an Individual Voluntary Arrangement for a 1990s Lloyd’s Names individual, which proposed a return of only a fraction of 1p in the £, but it still represented the best deal for creditors and it involved some reasonable assets/income. Surely that is the key of voluntary processes, such as IVAs and Trust Deeds – they can offer a better deal for both debtor and creditors, when compared with the alternative of bankruptcy. They should not be restricted by the need to meet a minimum dividend, which fails to recognise the individual circumstances of the debtor.
So will the introduction of a minimum dividend lead to many more people choosing bankruptcy? I wonder. It seems to me that many people will do almost anything to avoid bankruptcy, even when from a purely financial perspective it is obviously the best option for them. If they are prohibited from seeking a PTD, I wonder whether they would rather take the option of a long-term DAS or informal debt management plan or simply struggle on in no man’s land. In introducing a minimum dividend for PTDs, it seems to me that the misery for thousands will be extended for many years.
Protected Trust Deed “Guidance”
The SG appears to be seeking to introduce a further fundamental change to the PTD process, but via “Guidance”: “New Protected Trust Deed Guidance will also be introduced, to encourage best practice to be adopted in all cases. The Guidance will include a revised structure for trustee fees consisting of an up-front fee for setting up the trust deed and a percentage fee based on the amount of funds ingathered from the debtor’s estate.”
I believe that it is correct to avoid prescribing the basis on which Trustees should be paid via legislation, but I do wonder how the SG/AiB expects its Guidance will persuade IPs to re-structure fees to be on this fixed sum and percentage basis. What pressure will it bring to bear on IPs who do not follow this approach that it calls “best practice”? Will the AiB, as is stated in the paragraph preceding this, “take a more proactive role, where necessary compelling trustees to act by using their powers of direction”? But the Guidance is just guidance, isn’t it?
Creditor applications for Bankruptcy
The SG response states that the Bankruptcy Bill will look to develop “the bankruptcy process to facilitate the ability for non-contentious creditor applications to come to AiB rather than a petition to the court for an individual’s bankruptcy”. This plan appears most odd to me, particularly in view of the report on the consultation responses.
In the report’s summary, one of the conclusions of the consultation responses was: “creditors should continue to petition the court for an individual’s bankruptcy” (page 6), which appears unequivocal to me. The response statistics also bear out this conclusion – there were more responses opposed to the proposal that creditor applications be submitted to the AiB than there were responses in favour and this remained the case even when the proposal was restricted to “non-contentious” creditor applications. So what is the argument for proceeding with this plan?
Fortunately, Westminster has decided not to take forward the idea that creditor petitions for bankruptcy and company windings-up in England might avoid the courts. It took that decision having consulted on the proposal and having received the clear message back that the majority were opposed. It is strange that Holyrood has decided to take the opposite view on having received a similar reaction to a similar consultation question.
Of course, I have only commented on the plans that appear to me to be most significantly flawed – there are many more planned changes, including some that make perfect sense and are welcome. However, some leave me asking the question: why? What ills are these changes seeking to remedy? Are they going to be an improvement over what we already have, which seems to me to work reasonably well on the whole? And what kind of world will we live in when it all becomes a reality?