Scottish Government

Costs and benefits

Business sectors affected

60. Any debtor who can be sequestrated can sign a trust deed, and seek protection. The PTD regulations will therefore apply to natural persons (including sole traders), ordinary partnerships, limited partnerships, trusts, corporate and unincorporated bodies (for example, clubs and associations). They will not apply to either limited companies or limited liability partnerships. In practice nearly all trust deeds are signed by individual natural persons for non-business debts, and the PTD regulations will have a minimal impact on the business, charitable or voluntary sectors.

61. Creditors can be from any of the business, charitable or voluntary sectors. In most cases, of course, debts are due to businesses. At present many creditors are paid little or nothing by debtors in protected trust deeds. The PTD regulations will impact on those sectors by increasing the amount paid to creditors whose debts are administered under a trust.

62. The Executive expects that the major effect of the PTD regulations is that they will reduce the number of protected trust deeds. As few voluntary deeds are signed for any purpose other than seeking protection, it is also expected that there will be a reduction in the number of voluntary trust deeds.

63 Protected trust deeds are prepared and administered by insolvency practitioners, who are in business for themselves. There are roughly 110 insolvency practitioner businesses in Scotland, and around a fifth of these are thought to have significant caseloads of protected trust deeds ⁵.

64. A reduction in the number of trust deeds will affect the fees income of those businesses to a greater or lesser extent. This will impact on self-employed insolvency practitioners (partners or principles), employed insolvency practitioners, and support staff.

Benefits

Option 1: Do nothing

65. The benefit of this option is that it will have no impact on business or other sectors, or insolvency practitioners.

Option 2: Code of practice/professional guidelines

66. This option is likely to have some impact on trust deed practice, particularly where there is the possibility of later regulation should the administration of trust deeds not improve. It is therefore reasonable to assume at least a modest increase in average payments to creditors in trust deeds when compared to sequestration.

Option 3: PTD regulations

67. The main benefit of making the PTD regulations is that this will reduce the number of cases where the public interest in fair use of debt relief raised by low levels of oversight of trust deeds when compared to sequestration is not balanced by a higher payment to creditors than would be the case in sequestration.

68. A secondary, but still important, benefit is that the public interest in fair use of debt relief will be enhanced by moving the level of oversight of trust deeds closer to that applying in sequestration. Overall, the public interest will be better protected by an enhanced regulatory structure for personal insolvency in Scotland.

69. A balance needs to be stuck between the benefit to creditors, the public interest in oversight, and the regulatory impact of the PTD regulations. The consultation document therefore seeks views on three possible dividend thresholds (options 3A to 3C) for protection, as set out above. Table 1 shows the expected fall in the number of protected trust deeds for each such threshold ⁶.

Table 1: Estimated reduction in numbers of protected trust deeds

70. Those debtors who would have signed a trust deed under current law, but will not be eligible to do so in future, will need to decide whether or not to use other debt tools. The Executive has assumed that of those debtors:

• Forty per cent will be sequestrated, either by themselves or an a creditor application;
• Thirty per cent will enter a DAS debt payment programme; and
• Thirty per cent will take no action ⁷.

The Executive welcomes comments on the reliability of those assumptions.

71. The Executive has considered how option three will impact on the actual numbers of protected trust deeds, DAS debt payment programmes, and sequestrations. Table 2 shows the actual and projected numbers of protected trust deeds and sequestrations in 2004/05 and 2005/06 year. Table 2 does not show the numbers of DAS debt payment programmes as take up is currently too low to provide a useful baseline for comparison.

Table 2: Numbers of PTD and sequestrations in 2005 and 2006

72. Table 3 shows the projected annual numbers of each of the three debt tools after the PTD regulations come into effect, based on the projected take up for 2006 under current law as shown in table 2. The number of protected trust deeds is shown reduced by the percentage figures for each dividend threshold as set out in table 1 to the 2006 projection. The 'missing' cases are then distributed between sequestration and DAS using the percentage figures set out in paragraph 71. The actual take up of each debt tool will of course depend on the circumstances existing when the PTD regulations come into force.

Table 3: Projected take up of debt tools after PTD regulations

Option 4: Abolish protection of trust deeds

73. The main benefit of this option is a simplification of the regulatory regime. Debt relief would only be available through sequestration. A simplified regime is easier to understand, and easier (and cheaper) for business and other sectors to administer.

Costs

Option 1: Do nothing

74. The costs of this option would fall onto creditors. Debts which could have been repaid in whole or in part will continue to be cancelled in trust deeds. It is, however, difficult to quantify this cost as the decisions debtors would have made on which other debt tool (if any) they would have used had a trust not been available will depend on the different circumstances of each debtor.

75. As discussed above debtors who would not otherwise have signed a trust deed may enter into a DAS payment programme, in which case a larger part of the debts would be paid. Such debtors may however self-sequestrate or be sequestrated by their creditors, in which case a smaller part of the debts may be paid.

Option 2: Code of practice/professional guidelines

76. There would be little or no cost to business arising from this option. The main impact would fall onto insolvency practitioners. There may, for example, be some costs associated with being trained on applying any new guidance or code. However, insolvency practitioners as professionals have an obligation to undertake regular training and therefore already factor in training costs as a regular business expense. For example, there is no reason to expect that there would be an overall increase in training costs.

Option 3: PTD regulations

77. The main impact of making the PTD regulations will be felt by insolvency practitioners in reduced fee income from the trusts they administer. This will affect all 110 insolvency practitioner businesses, although it will impact more on the approximately 22 businesses (one fifth, as above) that administer a high number of trust deeds.

78. The Executive has estimated the money cost to all insolvency practitioner businesses for each of the possible dividend thresholds (options 3A to 3C), based on fees and outlays as reported by trustees to the Accountant in Bankruptcy. The main impact will of course be on fees, which are not separately identified.

79. Table 4 shows the estimated reductions in income (fees and outlays) in 2007/08, based on figures reported by trustees to the Accountant in Bankruptcy for 2005/06. The Executive welcomes comments on the estimated figures.

Table 4: Reduction in payments to insolvency practitioners

80. The impact is such that it seems likely that some insolvency practitioner businesses will need to diversify into other work if they wish to trade at the same level as at present. The Executive considers that the wider reform programme offers scope for such diversification. In particular, the Executive considers that there is scope for extending the DAS into markets not served by the statutory or voluntary sector money advisers who are the only current DAS providers.

81. The Executive also notes that the insolvency practitioner profession has adapted well to other substantial changes in the regulation of personal insolvency. For example, in 1993 there were 11970 sequestrations and two protected trust deeds. The law was then changed by the Bankruptcy (Scotland) Act 1993 to reduce the barriers to protection of trust deeds. The impact of the 1993 Act was such that by 2005 there were 3521 sequestrations and 5363 protected trust deeds. Regulatory change has always had an impact on the choices that debtors make, and the business opportunities created (or removed) for insolvency practitioners.

Option 4: Abolish protection of trust deeds

82. Clearly, this option would have an even more severe impact on insolvency practitioners than option 3.

83. Costs to creditors through debt not recovered are hard to estimate, even approximately, although the Executive considers that a simplified system will reduce recovery by being less flexible. Offering debtors more choice by retaining and reforming trust deeds means they are more likely to manage their debt problem in a way that best fits their particular circumstances. Flexibility is therefore more likely to allow for an overall greater average rate of debt repayment to creditors.

Summary of costs and benefits

84. Creditors will be the main beneficiaries of the PTD regulations as deeds will only be protected where a minimum dividend threshold is met, and there will be closer oversight of the administration of protected trusts. The main cost is expected to follow from the impact on insolvency practitioner businesses due the expected fall in the number of protected trusts.