Comments for thread: minutes 31 March 2010 paragraph 16-25
By Alan McIntosh
There is a danger in arguing that as IVAs in England operate for five years
that protected trust deeds should run for the same duration. Clearly the
purpose of such a change would be to allow more time for the debtor’s estate
to be swollen for the benefit of the creditors, but developing Scot’s law simply
by referencing it to what exists in English law is not necessarily the best way
to develop our legal system. Clearly creditors may be attracted to increased
dividends and as we can see from the ICAS paper, the insolvency industry
may be lured by the prospect of increased fees, but it is important to
remember the options available for debtors in both legal systems, not just in
relation to personal insolvency, but all remedies, are completely different and
various factors will determine the impact of any change.
IVAs were a statutory creation of the Insolvency Act 1986; trust deeds in
contrast, in their common law form, date back hundreds of years (albeit the
statutory form of protected trust deeds were a creation of the Bankruptcy
(Scotland) Act 1985 and 1993). The trust deed is a flexible remedy for debtors
to use to deal with their debts and for that reason has played a specific role in
Scotland’s personal insolvency laws, as it still does. There is nothing, as
things stand, which prevents a debtor proposing a four or five year trust deed.
Such proposals may be suitable in such cases where a debtor wishes to
increase the dividends and, therefore, the likelihood of the deed becoming
protected; or if they wish to use the fourth or fifth year to buy out the equity in
their home. By stipulating that protected trust deeds will lasts for five years will
restrict the scope for this flexibility and for proposals to be tailored to meet the
needs of the debtors.
Whether five year protected trust deeds will result in less being proposed, as
suggested by Nick Robinson and queried by Mike Norris waits to be seen.
Mike Norris is sceptical. It is currently a fact that the ratio of debtors in
England and Wales opting for formal bankruptcy as opposed to IVAs is 2:1:
and a similar ratio exists in Scotland in relation to sequestration and protected
trust deeds. However, it is true that in Scotland many debtors are prevented
from opting for sequestration due to the apparent insolvency rules and even
the AIB believe with the certificated route into bankruptcy due to be introduced
there will be a drop in the numbers of protected trust deeds in favour of
sequestrations. It is also true in Scotland income levels tend to be lower as
are the levels of homeownership (England 70.7%; Wales 73.7%; N Ireland
77%; Scotland 65.5%)1. Also the latest figures on the average household debt
show that debt to be £18,623 per household nationally, whereas the CAS
Drowning in Debts 2009 report shows the average Scottish Bureau client’s
debt was £20,193. Arguably, therefore, the average level of debt in Scotland
may be higher. Even discounting, therefore, the possibility that Scots feel less
inclined to repay their debts, which is a groundless suggestion, there are
1
Foster, Kennedy, The Changing Face of Home Ownership in Scotland, CML Housing Finance, April
2006
numerous other factors that may incline a Scottish debtor to opt for formal
sequestration over a five year protected trust deed. It also has to be factored
in that the Scottish economy is more dependent on the public sector than
other parts of the UK and with the seemingly high levels of cuts that will be
required in the public sector in coming years, there is an increased possibility
of more debtors struggling financially.
In addition to this another factor that will need to be considered is how S10 of
the Home Owner and Debtor Protection (Scotland) Act 2010 will operate in
practice. Currently although protected trust deeds only last three years, many
are extended to allow equity to be bought out. If protected trust deeds are
extended to five years and this flexibility is not available, unless provisions for
excluding equity are comparable with those available in IVAs, the number of
debtors willing to use protected trust deeds may reduce.
There are other issues we need to consider also when we contemplate
extending the duration of protected trust deeds. Discussions in relation to
personal insolvency are often dominated by the issue of striking the correct
balance between debtors and creditors, but there is an equally important
discussion to be had in relation to striking the correct balance between
creditors. Bankruptcy laws have an important function in deterring over
indebtedness and encouraging responsible lending. We currently have a
situation where irresponsible lenders, sometimes with APR rates in their
hundreds if not thousands are allowed to make inflated claims based on those
rates. This is detrimental to the interests of responsible and involuntary
creditors, such as credit unions and local authorities. A local authority if they
use the summary warrant route for constituting their debts cannot apply more
than a 10% surcharge (8% per annum if they use the action for payment of
money route), but can easily see their proportion of the total debt in a case
decrease against more predatory lenders with more aggressive levels of APR.
The same is true for credit unions, who on average charge no more than 10%
APR, but can see their claim dwarfed by a pay day loan company who lends
no more than them but applies extortionate levels of interest. There is,
therefore, an argument that it would be more socially useful to deter such
levels of interest by not treating all creditors equally. If lenders were not able
to inflate their lending with such oppressive levels of interest, total debts
would be lower and greater dividends would be available for all lenders (and
arguably fewer debtors would become insolvent).
The reality is extending protected trust deeds to five years is a sticking plaster
and doesn’t resolve the problem. As Nick Robinson points out, trustees, who
are often blamed for low levels of dividends come at the end of bad lending
decisions and are not the cause of them. Other major factors, in addition to
trustee fees which result in poor dividends are levels of debt and disposable
income. As CAS in its Drowning in Debt 2009 report shows the average level
of debt bureaux clients have increased by 50% in the last five years. If we see
a similar increase in the next five years, or the problem is compounded by
wage freezes and increased living costs (inflation, rising interest rates etc) we
may find ourselves within a very short period of time looking again at reduced
dividend levels. What then? A seven year protected trust deed?
We also have to consider that some of the creditors in protected trust deeds
calling for five years are in a quite unusual position in that they are debt
purchasers. Such firms are some of the largest creditors in protected trust
deeds and sequestrations in Scotland. Increasing the duration of protected
trust deeds for these firms is not, therefore, about reducing their losses and
providing them with an increased level of restitution, but further increasing the
profits they are already making. If widely known this would only dilute many of
the moral arguments that are often used to justify some of the harsher
sanctions and stigmas associated with personal insolvency.
The arguments for extending protected trust deeds in Scotland are poorly
argued. They seem to be driven simply by the interests of creditors, many of
whom are in the business of profiting from personal insolvency and who seek
only to further increase their profits, whilst other creditors continue to treated
unfairly under the current distribution scheme. A fairer distribution scheme
and more responsible lending could result in increased dividend payments
and less personal insolvencies. We are interfering in a historic Scottish
remedy which has and still does play a specific purpose and removing the
scope for it to be used flexibly by the expertise of properly trained and
qualified insolvency practitioners. There are indications such changes will
result in increased sequestrations which is socially undesirable. There may be
some arguments for decreasing trustee fees, but it has to be borne in mind
that much of the fees in protected trust deeds are incurred at the outset and
are in relation to trustees carrying out verification checks. Although it may be
possible to reduce these, less stringent verification checks may result in
increased temptation for the system to be abused. There is nothing to say,
however, even if fees are reduced and protected trust deeds are extended,
we won’t be facing the same problem of reducing dividends within a very short
period of time.
If we are looking to increase the efficiency of the protected trust deed remedy
we must concentrate on those changes, levels of debt, trustee fees and
fairness in methods of distribution that will provide the greatest longevity in
creating a fairer system.