Debt Advice Handbook Scotland - 1st editionChapter 6: Statutory debt solutions in Scotland7. Protected trust deeds Operation of a trust deed
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Operation of a trust deed
Trust deeds are administered by the trustee through ASTRA, the AiB’s electronic case management system.
Registration of the trust deed
Once the trust deed has been signed, the trustee must send a notice (Form 11legislation.gov.uk/sdsi/2016/9780111033173/schedule) to the AiB who enters it in the Register of Insolvencies.2s169 B(S)A 2016 This begins the process.
 
1     legislation.gov.uk/sdsi/2016/9780111033173/schedule »
2     s169 B(S)A 2016 »
Gaining protected status
No later than one week after registration in the Register of Insolvencies, the trustee must send all known creditors:1s170 B(S)A 2016
    •a copy of the signed trust deed; and
    •a copy of the statement of claim (Form 2); and
    •a copy of the notice (Form 1); and
    •a statement of the client’s affairs, prepared by the trustee, containing:
      ◦a list of the client’s assets and liabilities;
      ◦a statement of the client’s income and expenditure as at the date on which the trust deed was granted (Form 2A);
      ◦a statement as to the extent to which those assets and that income will not vest in the trustee;
      ◦a statement as to whether the creditors are likely to be paid a dividend and the amount of the dividend that is expected to be paid (Form 4);
      ◦a statement that on request the trustee must provide a copy of any valuation of the client’s assests made by a third party, any statement showing the amount due by the client under a security and any document showing the client’s income;
      ◦a copy of any agreement referred to in section 175(1) of the Act (heritable property);
      ◦a statement explaining the conditions which require to be fulfilled before the trust deed will become a protected trust deed and the consequences of it so becoming;
      ◦a statement, in such form as may be prescribed for the purposes of this paragraph, of the trustee’s anticipated realisations from the trust deed;
      ◦details of any protected trust deed within the six months preceding the notice, whereby they were discharged or refused discharge.
If a client has had a PTD within six months of the new notice, the trustee must also give creditors these details.
Trustee proposals for protection can be found in Form 3.
Where the client makes a contribution from income, there must be a statement and evidence that the contribution is in accordance with the CFT.2s170 B(S)A 2016
 
1     s170 B(S)A 2016 »
2     s170 B(S)A 2016 »
Creditor responses
Creditors reply to the trustee, agreeing or disagreeing that the trust deed should be protected. They must do so within five weeks from the date of registration of the trust deed. (Usually, four weeks after being informed.)
If more than half of the creditors, or a third in total value, do not agree to the trust deed becoming protected, it does not become a PTD.1s171(1)(c) B(S)A 2016 Creditors who do not respond are deemed to have accepted.
Examples
There are seven creditors and four object to the trust deed gaining protected status, it does not become protected because more than half of the creditors object.
The total debt is £12,000. One creditor who is owed over £4,000 objects to the trust deed gaining protected status. It does not become protected because that creditor is owed a third of the value.
During the five weeks, creditors may also apply to the court for the sequestration of the client’s estate (as signing the trust deed constitutes apparent insolvency), and the trust deed then cannot be used.
On application by a creditor, the sheriff grants the sequestration only if they are satisfied that to do so is in the creditors’ best interests. In this case, the trustee may apply to the court for the client’s bankruptcy and administer the case as a bankruptcy, where the FAB bankruptcy rules apply. These terms should be included in the trust deed itself. This is at the sheriff’s discretion so there is no guarantee that the trust deed will gain protected status and be successful, and the client may end up bankrupt. This can affect the possible exclusion of the family home and clients must be made aware of this.
Insolvency practitioners can give advice on whether they think the trust deed will gain protected status as they will likely know which creditors will agree, and which will oppose it becoming protected.
Speak to the potential trustee about this before making a recommendation.
 
1     s171(1)(c) B(S)A 2016 »
Sequestration petition by a qualified creditor to the sheriff court
A qualified creditor who is not a notified creditor or who has notified the trustee of objection to the trust deed within the relevant period may:1s172 B(S)A 2016
    •not later than five weeks after the date of registration under section 169 of the Act of the notice mentioned in that section; or
    •at any time if the creditor avers that the provision for distribution of the estate is, or is likely to be, unduly prejudicial to a creditor or class of creditors, present a petition to the sheriff for sequestration of the client’s estate.
The sheriff must be satisfied that it is in the best interests of the creditors before it is granted.2s177(1) B(S)A 2016
If the petition is successful, the client is declared bankrupt, and the petitioning creditor may appoint another insolvency practitioner or the AiB to administer the bankruptcy.
 
1     s172 B(S)A 2016 »
2     s177(1) B(S)A 2016 »
Registration for protection
The trustee sends the AiB all the responses from creditors along with a statement by the trustee that those creditors, if any, who have objected in writing to the trust deed during the relevant period do not constitute a majority in number, or a third or more in value, of the creditors.
The AiB must register the trust deed in the Register of Insolvencies as a protected trust deed if, among other things:
    •it has received all the documents required;
    •the conditions set out in sections 164 to 170 of the Act have been met;
    •it is satisfied, in accordance with the CFT, that the amount of the contribution determined.
Where the client, makes a contribution from income:1s171 B(S)A 2016
    •a statement that the amount of the contribution is in accordance with the CFT as assessed by the trustee, and
    •any evidence or explanation required in applying the CFT.
The AiB notifies the trustee that the trust deed has, or has not, gained protected status.
The trustee must, within seven days of being notified, notify the client and every creditor known to the trustee that the trust deed is registered as a protected trust deed, or has been refused protected status.
 
1     s171 B(S)A 2016 »
Date of protection
When the AiB registers the trust deed in the Register of Insolvencies as a PTD, this is known as the ‘date of protection’. From this date, creditors cannot pursue the client or attempt to use any diligence against them.1s163 B(S)A 2016
 
1     s163 B(S)A 2016 »
Effect of protected status
Where a trust deed has protected status, all creditors are bound by the terms of the PTD. Section 172 of the Act covers the general effect of protected status over diligence.
The client cannot make an application for sequestration while the PTD subsists.
During a PTD a secured creditor cannot:1s172(3) B(S)A 2016
    •make a claim under the protected trust deed for any of the debt in respect of which the security is held. This means that the secured creditor, if they have agreed to be excluded from the trust deed, is also bound by the terms of the trust deed; or
    •take diligence against the assets conveyed to the trustee under the protected trust deed; or
    •petition for the sequestration of the client during the subsistence of the protected trust deed.
On the date of protection, any current earnings arrestment, maintenance arrestment or conjoined arrestment order cease to have effect.2s173 B(S)A 2016
A deduction from earnings order is not competent after the date of protection to secure the payment of any amount due by the client under a maintenance calculation in respect of which a claim could be made under the trust deed.
The execution of an earnings arrestment or the making of a conjoined arrestment order is not competent, after the date of protection, to enforce a debt in respect of which the creditor is entitled to make a claim under the trust deed.
Therefore, protection from diligence from creditors is achieved by the trust deed gaining protected status.
 
1     s172(3) B(S)A 2016 »
2     s173 B(S)A 2016 »
Unprotected trust deeds
In a trust deed which has not become protected, there is no statutory procedure to close the trust deed. It is normal practice for a receipt for the final dividend to incorporate a discharge of the trustee and a discharge of the client. Creditors who have not acceded to the trust deed have no requirement to grant a discharge to the client.
Basically, an unprotected trust deed brings no guarantee of an end to the debt for the client and creditors may still pursue them for the money owed.
A better alternative is for the trustee to sequestrate the client and bring the trust deed to an end with the agreement of the creditors. This clause should be inserted into and be part of the trust deed itself.
Duration of the trust deed
The normal duration of a protected trust deed is 48 months, although it can be extended if the client has any problems paying the contributions or if there are assets to be realised. Think of it as being 48 payments to be made over any period.
It cannot be less than 48 months unless the total debt (including statutory interest) plus trustee fees and outlays can be paid in full.
Whereas in bankruptcy the client can register a zero contribution and this counts as a payment in the 48-month period, when a client misses a payment in a trust deed, the trustee may add on another month (or more) to allow the client to catch up. This is a disadvantage of a trust deed over a bankruptcy.
Contribution
The client must sign an agreement, contained within the trust deed, to make regular contributions, or realise assets, or both, during the period of the trust deed.1s168 B(S)A 2016
The trust deed must state that during the payment period, the client is to pay any contributions from income for the benefit of creditors (including, where the client is an individual, any contribution required by the common financial tool) at regular intervals.
The payment period is:
    •48 months starting on the date the trust deed is granted; or
    •a period shorter than 48 months, as determined by the trustee; or
    •longer than 48 months as:
      ◦determined by the trustee where there has been a period during which the client has not paid those contributions; or
      ◦agreed between the client and the trustee.
The trustee can only determine a shorter payment period if they believe that payment during that period would allow distribution of the client’s estate to meet in full the total amount, as at the date on which the client grants the trust deed, of the client’s debts (including interest).2s168(2) B(S)A 2016
In calculating contributions, the whole of the client’s surplus income over the amount allowed for expenditure in the statement of the client’s income and expenditure supplied must be applied.
Therefore, the only way a PTD can end early is if the client can afford to pay the full debt plus interest and the trustee fees and outlays.
It can however be extended beyond the 48-month period and PTDs of up to seven or eight years, while uncommon, may be encountered.
This means that the client is not discharged until the full terms of the trust deed are completed, meaning 48 payments over whatever timescale it takes.
Note that contributions from a client cannot be taken from benefits only, but if there is a mixture of benefits and income, they can. However, the contribution amount cannot be any more than the earned income.
 
1     s168 B(S)A 2016 »
2     s168(2) B(S)A 2016 »
Non-payment
When non-payment occurs, a trustee can extend the period of the PTD and/or demand payment from the client’s employer.1s174 B(S)A 2016
When a client signs a trust deed, they sign a statement that, in the event of non-payment, their employer can be contacted, and the trustee can demand payment from the employer.
This can happen when the client misses two consecutive payments to the protected trust deed.
The employer must make the deduction and pass the money on to the trustee or they will become liable for the payments. They can also charge a fee for this comparable to that where an earnings arrestment is in place.
 
1     s174 B(S)A 2016 »
Deductions from the client’s earnings
Where a client is required to pay to the trustee, a contribution from income for the benefit of creditors and where the client fails to pay on two consecutive occasions, the trustee can insist that a deduction is made direct from the client’s wages.1s174 B(S)A 2016
Employee’s payment instruction
Following a request by the trustee, the client must give their employer an instruction (using Form 4A) to make:2s174(2) B(S)A 2016
    •deductions of specified amounts from their earnings; and
    •payments to the trustee of the deducted amounts.
Trustee’s payment instruction
The trustee may directly give the client’s employer an instruction (in Form 4B) if the client fails to comply.3s174(3) B(S)A 2016 The employer must comply with any instruction given.
If agreed between the client and the trustee, the client may also give the client’s employer a variation to an instruction (Form 4C).
Employer’s duty
The instruction having been delivered, the employer must:
    •deduct the specified sum on every pay day; and
    •pay the sum deducted to the trustee as soon as it is reasonable to do so.
Where an employer fails without good cause to make a payment due under an instruction, the employer is:
    •liable to pay on demand by a trustee the amount that should have been paid; and
    •not entitled to recover from a client the amount paid to the client in breach of the instruction.
An employer may, on making a payment due under an instruction:
    •charge a fee; and
    •deduct that fee from the balance due to the client.
This may cause the client serious problems either due to a reduction in earnings, increased costs, or the CFT not being completed correctly, and a sustainable budget not being properly worked out for the client. It may also cause friction at work for some people.
If the client is suffering financial hardship, and it is not of a short-term nature, they should contact the trustee and revisit the CFT and agreed contributions, and perhaps look at sequestration as an alternative.
This involves the trustee resigning and the client may end up with all their debt back, despite having made several payments to the trust deed already. See here on non-performing trust deeds.
 
1     s174 B(S)A 2016 »
2     s174(2) B(S)A 2016 »
3     s174(3) B(S)A 2016 »
Third-party payments
If a client cannot make a contribution from their income for a trust deed, it is possible that a third party can contribute for them – eg, a friend or family member. The third party should not be subject to an insolvency or debt arrangement themself.
The trustee makes a payment agreement with the third party. This agreement may not be enforceable and, in the event of non-payment, the third party cannot be forced to pay. The trustee must inform the creditors if this is the case.1s2.10.6 Notes for Guidance for Trustees under Protected Trust Deeds The trustee should also advise the third party to take independent legal advice.
Where the agreement is unenforceable, it may lead to the creditors refusing protected status.
If the third party stops paying, and any third-party agreement is unenforceable, the PTD fails, and the client will be made bankrupt or be stuck in limbo in the PTD (see here).
This could be useful where a trust deed would be a clear solution for the client but they cannot afford it. Take advice before considering this option.
 
1     s2.10.6 Notes for Guidance for Trustees under Protected Trust Deeds »
Exclusion of the family home
In a trust deed, it is possible to exclude the family home and any equity in it. This is done with the agreement of the secured creditors. This is not possible under bankruptcy procedures and can be an advantage of a trust deed.
To be successful, the secured creditors must agree not to claim in the trust deed, and then the unsecured creditors have to agree to allow the trust deed to gain protected status.
If the unsecured creditors refuse to agree to the trust deed gaining protected status because of the exclusion of the family home (and any equity), the trustee can vary the trust deed to include it or look at sequestration as another option.
Before the client grants the trust deed:1s166(2) B(S)A 2016
    •the trustee must provide the client and the secured creditor with a valuation, made by a chartered surveyor or other suitably qualified person, of the dwellinghouse (or part) which is to be excluded from the estate;
    •the client must obtain the secured creditor’s agreement not to claim under the trust deed for any of the debt in respect of which the security is held, and any agreement so obtained must be set out in Form 1A.
This excludes the secured debt from the trust deed and the trustee can ignore any equity in the home.
More detailed guidance can be found in section 2.8 of the trustees’ notes for guidance.2https://aib.gov.uk/publications/notes-for-guidance-protected-trust-deeds-bankruptcy-scotland-act-2016
 
1     s166(2) B(S)A 2016 »
2     https://aib.gov.uk/publications/notes-for-guidance-protected-trust-deeds-bankruptcy-scotland-act-2016 »
Dealing with the family home where it is not excluded from the trust deed
Section 175 of the Act (agreement in respect of client’s heritable property) applies where the client may have some equity that could be realised by the trustee but not enough for the trustee to sell the home. For example, if there is equity of £2,000 in the property at the time of signing the trust deed, the trustee would be looking to realise the £2,000 without having to sell the property and make the client homeless.
If the trustee does not realise the full amount of available equity in the family home. The trustee must give an equity statement to creditors and AiB.
The trustee has the following options:
    •payment by the client (see here);
    •paymeny by a third party (see here).
Explore these options when considering making a referral for a trust deed. For more information in see section 2.9.trustees’ notes for guidance.1https://aib.gov.uk/publications/notes-for-guidance-protected-trust-deeds-bankruptcy-scotland-act-2016
Payment by the client
Where there is some equity in the property, the trustee may continue the trust deed for a longer period to allow the client to make up the amount of the equity.
This can involve the client making extra payments after the normal 48 months to make up the difference. In the example above, the client could offer the trustee £200 a month for 10 months or £100 per month for 20 months, extending the trust deed period to 58 or 68 months respectively. This increases the length of the trust deed but ensures the client does not lose their home.
Payment by a third party
The trustee can agree with a third party (eg, a close friend or family member) to make up the equity in the home so that the creditors do not lose out. The third party can make the contributions alongside the client’s normal contributions over the 48-month period.
Using the example above, they could pay £2,000 over 48 months (£41.67 a month). This avoids the trustee having to sell the property.
 
1     https://aib.gov.uk/publications/notes-for-guidance-protected-trust-deeds-bankruptcy-scotland-act-2016 »
Agreement where there is little or no equity
Where the trustee has obtained a valuation of the property and there is very little or no equity, they can agree to relinquish their interest for a nominal fee, currently around £550. This is done through an agreement in Form 1B.
The fee can be paid by the client at the end of the trust deed, or a third party can contribute during the term (see here).
These options can be discussed with a trustee before the client signs the trust deed, one of the main advantages of a trust deed over bankruptcy (although this can also happen if you appoint your own trustee in bankruptcy).
Failure to comply with the written agreement can lead to the trustee cancelling the agreement and proceeding with the sale of the property.
If the client contends the sale of the property, the trustee must apply to the sheriff to sell the property
If your client has equity in their property, take advice first from an insolvency practitioner, it might not exclude them from an insolvency option.