Changes to protected trust deeds from July 2024
The Scottish Parliament has passed The Protected Trust Deeds (Miscellaneous Amendments) (Scotland) Regulations 2024 (the Regulations). The Regulations will bring in changes to the protected trust deed (PTD) process in Scotland from 1 July 2024.
Eligibility criteria
Trust deeds seeking protection on or after 1 July 2024 (even if granted before that date) will be required to meet more eligibility criteria. This is to ensure that only those with a connection to Scotland can access the PTD regime, with the aim of restricting debt relief tourism.
Where a trust deed is to be granted by a living individual, that person must have been habitually resident, or had an established place of business, in Scotland at any time in the year preceding the granting of the trust deed.
Where the trust deed is granted by a partnership, a limited partnership (within the meaning of the Limited Partnerships Act 1907), a trust, a corporate body or an unincorporated body, it must have had an established place of business in Scotland at any time in the year preceding the granting of the trust deed. Alternatively, it must meet a two-fold test of having been formed or constituted under Scots law and have carried on business within Scotland at any time.
Removal of protected status
New sections are added to the Bankruptcy (Scotland) Act 2016 (the 2016 Act), providing a process where the Accountant in Bankruptcy (AiB) can remove the protected status of a trust deed where there has been material error or irregularity in the process that led to a trust deed gaining protected status.
This requires the trustee to notify the AiB if they become aware that any of the conditions set out set out in sections 164, 165, 166(2) (where it applied) or 167 to 170 were not met at the point of registration due to a material error or irregularity. The obligation, however, is limited to where they become aware of this within 3 months of the trust deed being granted. The legislation does not set out what is material error or irregularity or how this threshold is to be applied. It also doesn’t provide a timescale within which the AiB should be notified.
Where the AiB is notified, they must decide ‘as soon as reasonably practicable’ whether the trust deed should have the protected status removed or not. It is unclear what criteria the AiB will apply in making this decision. For instance, will the AiB review whether a threshold of material error or irregularity has been met, consider whether it is in the interests of the debtor or the creditors for protected status to be withdrawn, what the implications and alternative outcomes for various stakeholders will be, etc.
Similarly, it’s not clear at this stage how trustees should notify the AiB. The Regulations do not introduce a form for notification, although it may be expected that the AiB will issue a non-statutory form or template notice to help the process.
When the AiB decides that protected status should be removed, they must notify the trustee and the debtor ‘as soon as reasonably practical’ of their decision. In turn, the trustee must ‘as soon as reasonably practical’ notify all creditors (other than secured creditors who have agreed not to submit a claim for any debt which is secured).
The Regulations don’t require the AiB to notify the trustee of a decision not to remove the protected status.
Where the AiB issues a notice to the trustee and the debtor of the decision to remove protected status, that protected status is removed 14 days after the decision notice is issued (subject to any review application being made – see below). But the trust deed details are removed from the register of insolvencies prior to that, ‘as soon as reasonably practical’ after the notice has been issued.
The AiBs decision to remove protected status can be reviewed under a new section 171B of the 2016 Act. Applications to review must be sent within 14 days of the notification of the AiBs decision to the trustee and debtor. This timescale to apply for review is short and means that it is critical that trustees issue the notification to creditors without any delay.
In addition to the process for the application for review, the section also sets out the process for notification of the review outcome.
The determination of a review may be appealed to the Sheriff Court.
A new section 171C of the 2016 Act sets out the consequences of the removal of protection. Importantly, this sets out that any acts of the trustee between the date of the trust deed being granted and the effective date of protected status being removed are not invalidated.
It also specifically provides that the withdrawal of protected status doesn’t prevent the trust deed being resubmitted for protection – effectively allowing for a curing of defect, particularly where the withdrawal of protected status has been because of a material (but unintentional) error.
Subject to the terms of the trust deed, the removal of protected status doesn’t terminate the trust. Trustees would therefore remain in office and should continue to administer the trust as an unprotected trust deed and consider what further steps to take.
Dividends
The time periods in section 176 of the 2016 Act have been amended with the first dividend period reduced from 24 months to 12 months, and later dividend periods reduced from 6 months to 3 months.
This change only applies to trust deeds granted on or after 1 July 2024.
Refusal of discharge
A new section, section 184A, is inserted into the 2016 Act, so that where the trustee in a PTD considers that the debtor should not be discharged from the trust deed because they have not cooperated or failed to pay their contributions, the trustee must seek AiBs agreement to refuse to discharge the debtor. A new form, Form 5A, is added to the Protected Trust Deeds (Forms) (Scotland) Regulations 2016 for this purpose.
The application to the AiB must be made as soon as reasonably practical after the period when the contributions are payable has ended, or if the period has not ended when the trustee concludes that the non-cooperation or failure to pay contributions is likely to continue until the end of the required payment period.
Where the AiB agrees with the trustee’s decision not to discharge the debtor, they must notify the trustee as soon as reasonably practicable. The trustee must issue a notice to the debtor within 7 days of receipt of the AiBs determination. A copy of the notice issued to the debtor must be sent to the AiB within 21 days of the notice being issued.
Early discharge
New sections, sections 184B and 184C, are added to the 2016 Act introducing a process for early discharge where extenuating circumstances affecting the debtor mean that the debtor is no longer able to meet their obligations under the trust deed and there is no reasonable prospect of the debtor being able to resume meeting their obligations.
What constitutes extenuating circumstances is not defined, and this could pose difficulties for trustees evaluating whether a threshold has been met.
If the trustee considers that in such circumstances the debtor should be discharged from the trust deed before the end of the period where contributions would be payable, they must seek the agreement of the creditors to the proposed discharge.
Unless the trustee, within 21 days of the notice being issued, receives written notification from a majority in number, or no fewer than one third in value, of the creditors that they object to the proposal, the trustee must then apply for the debtor’s discharge. The trustee must be satisfied that any notice of inhibition has been recalled or expired before the application for debtor discharge is submitted. On receipt, the AiB will register the discharge in the register of insolvencies and notify the date of discharge to the trustee without delay. The trustee must within 7 days of receipt of that notice notify the debtor and all creditors of the discharge.
If a majority in number or no fewer than one third in value of the creditors object in writing within 21 days of the notices being issued, the trustee must ask AiB to review the proposal. The request to review must be made within 14 days of the end of the 21-day period.
Where the AiB reviews a proposal, it must decide whether it is satisfied that, taking account of all the circumstances, it is fair and reasonable for the debtor to be discharged. There is no timescale for the AiBs review determination to be issued, but once received by the trustee, if the AiB agree that the debtor should receive their discharge, the trustee must issue the notice to the debtor and all creditors within 7 days. The process to apply for the debtor’s discharge then follows the same process as where there was no or insufficient creditor objection.
If the AiB agrees that the debtor shouldn’t be discharged, they must issue a direction to the trustee.
AiBs directions and determinations under the new sections 184A, 184B and 184C are appealable to the sheriff.
The refusal of discharge and early discharge provisions shall apply to pre-existing and new PTDs on 1 July 2024.
AiB as trustee of last resort
New sections 186A and 186B are inserted into the 2016 Act.
Section 186A allows the AiB to take over as the trustee in a protected trust deed where the existing trustee is unable to continue to act and where no replacement trustee can be found after all reasonable efforts to appoint a replacement trustee have been unsuccessful. Section 186B provides that where AiB becomes the trustee under new section 186A, Part 14 of the 2016 Act will apply to AiB as it applies to any other trustee, subject to the modifications specified.
The rationale behind these new provisions is to provide contingency against market failure.
Before being appointed as replacement trustee the AiB must consider any representations from an interested person, consider the public interest and consider the AiBs capacity and resources.
The annual supervision fee for PTDs will not be payable by the AiB as a PTD trustee.
These provisions shall apply to pre-existing and new PTDs on 1 July 2024.
PTD supervision fee
The annual supervision fee payable to the AiB in respect of PTDs will increase from £100 to £120 and will apply in respect of pre-existing as well as new trust deeds on 1 July 2024.
Further comment
As highlighted above, the Regulations leave unanswered questions on practical implementation. For instance, the timescale within which the AiB should be notified in connection with removal of protected status, how they are to be notified, what threshold or circumstances should be applied in connection with material error or irregularity, what thresholds apply to extenuating circumstances for early debtor discharge, etc. ICAS will be engaging with the AiB to seek clarity on these issues as soon as possible but at least before the Regulations commence on 1 July 2024.
Action to be taken
While certain matters are still to be clarified, insolvency practitioners should undertake certain actions now in preparation for the changes. These include:
- Update pre-appointment checklists to ensure the new eligibility criteria is met.
- Update post-appointment checklists to ensure a review is carried out at 3 months to consider whether the AiB is to be notified of protection status conditions not being met due to material error or irregularity, and ensure processes are put in place to notify the AiB.
- Ensure processes are put in place to deal with notice of removal of protected status being received.
- Consider the implications and routes available to debtors where protected status is withdrawn.
- Update checklists for refusal of debtor discharge processes.
- Update checklists for early discharge processes.
- Update diary prompts for all the above.
- Consider whether the terms of your trust deed require to be amended to deal with the impact of protected status being withdrawn (the ICAS style trust deed is being reviewed and changes shall be communicated in due course).
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