Over the past few months, I have accumulated a pile of papers annotated as if they belonged in a 1970s stellar observatory, although most of my Wow!s have arisen from a feeling of horrific incredulity.

I apologise in advance if I have got any details wrong; this post is nothing more than an English-person’s reaction to the Scottish Government’s proposed changes to the personal insolvency landscape across the border. I’m sure that Scottish IPs are well-acquainted with the changes, but some Englanders might like to scan this; it might make you feel more grateful for the current state of affairs down here!

Here are the key new pieces of legislation affecting the Scottish personal insolvency regimes:

• The Debt Arrangement Scheme (Scotland) Amendment Regulations 2013, which came into force on 2 July 2013.
• The Protected Trust Deed (Scotland) Regulations 2013, which are due to come into force on 28 November 2013. The draft Regulations can be found at: http://www.legislation.gov.uk/sdsi/2013/9780111021361/contents.
• The Bankruptcy and Debt Advice (Scotland) Bill, which is working its way through Scottish Parliament, Stage 1 oral evidence sessions having concluded on 6 November 2013.

In this post, I deal with the first two items. In a later post, I hope to cover the Bill.

Debt Arrangement Scheme (“DAS”)

The Chief Executive of the Accountant in Bankruptcy (“AiB”), Rosemary Winter-Scott, is quoted to have said: “DAS is the only Scottish Government-backed scheme that offers a way for people who are in debt to regain control of their finances again” (http://www.scottishfinancialnews.com/index.asp?cat=NEWS&Type=&newsID=7331#7331).

That article also publicises the amount of money that has been paid via DAS: £13m in six months. Whilst that is pretty impressive, I am not entirely convinced that this is evidence enough that DAS is the success that the Scottish Government (“SG”) and AiB would have us believe. How many debtors have exited DAS debt-free? May we have some figures on that, AiB, please? If DAS is simply a statutory debt management plan (“DMP”) with no end date, is it really the solution for all the thousands of debtors that are being encouraged down that route?

The AiB’s 2012 DAS review stated that the average duration of all Debt Payment Plans (“DPPs”) is 7 years 2 months (http://www.aib.gov.uk/sites/default/files/publications/DAS%20Review%202012%20-%20published%203%20December%202012.pdf), although I noted that this is the original scheduled duration and the review shows a few DPPs scheduled to last over 20 years, even the odd one or two over 30 years! Given that this statutory process does not have the flexibility of a non-statutory DMP that might be used as a temporary stop gap, I do wonder how this can be considered the “fair and reasonable” solution.

In my mind, the DAS Regulations 2013 at least have provided a light at the end of the tunnel for some debtors. Before the Regulations, the debts had to be paid in full (less up to 10% in fees). The Regulations introduced an element of composition (actually, “re-introduced”, as it had been an original provision back in 2004): where a debtor has been making payments for 12 years (excluding any payment breaks) and has repaid at least 70% of the total debt outstanding when the DPP was approved, the debtor would be eligible to make an offer of composition to creditors. Of course, creditors don’t have to accept – and the offer takes effect only with the acceptance or silence of every creditor – but if a debtor has been paying for 12 years, one would hope that they’d show some mercy..?

Much has been said also of the Regulations’ bringing-forward of the point when interest and charges on debts is frozen: to the date at which the DPP is applied for by the debtor, “potentially saving people in debt up to six weeks interest” (http://www.aib.gov.uk/news/releases/2013/07/new-regulations-place-debt-arrangement-scheme-das). Some commentators had hoped that the Regulations could have been amended so that it occurred earlier than that, but I was interested to read what might have been the real motivation behind the change: the DAS newsletter 3 points out that the change should avoid the “high volume of applications for variations to correct the level of debt included in a DPP where interest and charges have accumulated over the application process” (http://www.dasscotland.gov.uk/news/debt-arrangement-scheme-newsletter-edition-3), so maybe it hasn’t been all about debtors…

Still, I shouldn’t be surly. However, it’s not all good news for debtors: the DAS newsletter 4 reported that some banks have reacted to this change by restricting or suspending debtors’ access to bank accounts on receipt of a DPP proposal (http://www.dasscotland.gov.uk/debt-arrangement-scheme-newsletter-edition-4). Now who’s being surly..?!

Alan McIntosh brought attention to the numbers of DPPs that have been revoked (http://www.firmmagazine.com/scotlands-bankrupt-debt-strategy/) and the numbers just keep going up: the number of approved applications to revoke in Q1 2013/14 was up 31.5% on the previous quarter and up 93.8% on the quarter of the previous year. I guess it’s not surprising that the figures are increasing, given the current squeeze on consumers and that the numbers agreeing DPPs are generally also on the rise. I just think it’s a bit rich that the Enterprise Minister, Fergus Ewing, continually hails DAS as a success in view of the fact that more and more people are accessing it, but there seems to be no attention given to the people that are (or are not) leaving it.

Protected Trust Deeds (“PTDs”)

Proposed changes to the PTD process have been rumbling on for a number of years with the SG’s express motivation being to “drive up the performance of PTDs”. Although it has sought to do this by tackling “the trend of rising costs associated with delivering PTDs alongside disappointing dividend returns” (http://www.aib.gov.uk/protected-trust-deed-update), it seems intent on achieving this by dealing with what it seems to see as rip-off costs, but it does nothing tangible to help address the real costs. What I mean is: the SG seems to think that, by relegating pre-TD costs to the status of unsecured claims, outlawing fees on a time costs basis, and layering yet more requirements on the Trustee, the “trend of rising costs” will be reversed. Aren’t we all facing a trend of rising costs in every aspect of our lives? The AiB experiences rising costs – of course, the statutory costs on PTDs continue to increase – but somehow IPs are supposed to have a magic cure for this problem..?

Having said that, I’m not completely blind to the effects of the market in debtors, the anecdotal stories of which suggest a crazy world of surely unviable sums being sought. I do wonder if the situation isn’t so grim in England because creditors have exerted more pressure on fees in IVAs. However, personally I don’t see a statutory bar on pre-TD costs as a panacea. After all, that only controls the monies in the insolvency estate.

Fergus Ewing does not see PTDs “as a sustainable debt relief solution for either creditors or debtors if more than half of all the receipts are spent on costs”. Unfortunately, the Chinese whispers have led to this message becoming even more extreme in front of the Scottish Parliament’s Economy, Energy and Tourism Committee: “A key issue with PTDs in recent years has been that, in some cases, they offer insufficient returns to creditors because most of the value in the debtor’s estate is used to pay the trustee’s fees” (http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/68799.aspx). Please, will someone start talking some sense?! Firstly, the AiB’s statistics focus on total costs, not just Trustees’ fees. And we’re not talking mainly about DAS candidates here, are we? How many bankruptcies return more than half the pot to creditors? Does the lack of such a dividend make them unfair?

I also find some of the fantastically biased AiB releases staggering. They repeatedly quote ABCUL, which refers to Trustees having “so often pocketed” the vast bulk of realisations and welcomes the “new measures to clamp down on abuses of protected trust deeds” (http://www.aib.gov.uk/news/releases/2013/09/changes-protected-trust-deeds). They absurdly misrepresent statistics, such as quoting Fergus Ewing in the same release: “the costs of protected trust deeds… are increasing by more than 25 per cent. The latest figures show this is happening in up to 84 per cent of cases”, when the figures show that this is happening in only 25% of cases! (The 84% comes from one firm’s figures alone. You could say it is “up to 100% of cases”, if you’d picked the right cases!) Thank goodness that IPs are strong professionals that will not let this kind of criticism demoralise them into stopping doing a decent job. Sometimes cases that appear straightforward on day one just get complex or assets appear – such as PPI refunds – that weren’t originally envisaged and the effort just needs to be expended, by IPs, agents and solicitors… to improve returns! Or would Mr Ewing prefer Trustees to walk away from tricky or new assets for fear that their costs might increase?

Right, I must start getting objective about this. Otherwise, I’ll never get to the end of this article!

Some of the PTD Regulation changes detailed in the AiB releases are:

• A trust deed will be ineligible to be protected if the debtor’s total debts can be repaid in full within a 48 month period (i.e. from the full amount of the debtor’s surplus income, as calculated by means of the Common Financial Statement).
• “Pre-trust deed fees, such as fact-finding fees,” will be excluded “so that these can no longer be charged separately and will be treated the same as other debts”. The AiB release refers to “fees”, but I think this should be “outlays”, shouldn’t it; I don’t think that even the AiB is expecting an IP to prepare a Trust Deed free of charge, is she?!
• Trustees’ fees will be charged on the basis of a single fixed upfront fee and a percentage of funds ingathered. The fixed fee may be increased either with a majority in value of creditors (that is, an absolute majority, not a majority of those voting) or by the AiB.

But other changes have not been given top-billing by the AiB:

• The acquirenda period for Trust Deeds will be 4 years. Considering that, at least for a couple of years until the Bill becomes Act, bankrupts will only have to pay for 3 years (, are discharged after 1 year and are only exposed to a 1 year acquirenda period), some are predicting that PTD candidates will choose Sequestration. Personally, I doubt this, as it did not happen in England when 5-year IVAs became commonplace, but then IVAs are seen as some debtors’ best efforts to do the right thing by their creditors; I’m not sure that PTDs have the same image.
• Debtors’ contributions will be determined using the Money Advice Trust’s Common Financial Statement.
• Irrespective of creditors’ wishes regarding the Trust Deed achieving protected status, the AiB will have the power to refuse to register the Trust Deed, if she is not satisfied that the debtor’s expenditures and contributions are at appropriate levels.
• The Regulations fix the equity of heritable property as at the date that the Trust Deed is granted, but they raise all kinds of questions about how equity realisation or contributions in lieu of equity are to work.
• The AiB will have power to give directions, whether on the request of the Trustee, debtor, or creditors, or on the AiB’s own initiative. The Scottish Parliament Committee report mentioned above notes ICAS’ concerns that “the AiB is not best placed to take decisions in place of and over-ruling highly experienced and qualified IPs”, but all that it records the Minister saying in response is that “the AiB was undergoing significant restructuring to ensure that certain staff who would be involved in such decisions and appeals would be ring-fenced from those taking the original decisions” – that doesn’t deal with the concerns!

The (brief) Regulatory Impact Assessment suggests that, whilst the AiB will incur costs of £1.3m over the first 5 years, which will be recovered through a statutory fee, the Regulations are not expected to impact on IPs’ costs, as the Regulations are not expected to restrict the level of IPs’ fees, just revisit the basis on which they are calculated. Does the SG truly believe that the Regulations will result in no additional expense on IPs?!

For more details on the issues with the Regulations, I’d recommend ICAS’ written evidence, accessible at: http://icas.org.uk/Current_Insolvency_Issues.aspx (thank you, ICAS, for making available such an enlightening summary).

Phew! Right – those are the imminent changes. The Bill proposes some more incredible changes and I know that ICAS and others are expending a lot of effort in an attempt to refine its contents. You have my sympathy!