WORKING GROUP ON DEBTOR ACCESS TO DEBT
RELIEF
BACKGROUND AND REMIT
Chair
Donna Mckenzie-Skene, Aberdeen University
Members
Susan McPhee, Citizens Advice Scotland
Secretarial and policy support
Civil Justice Division, Scottish Executive
Background
General
1. Debt relief discharges a debtor from the obligation
to repay debt. Statutory forms of debt relief in Scotland
are set out in the Bankruptcy (Scotland) Act 1985. They are
sequestration of a debtor's estate (bankruptcy), and a
protected trust deed for creditors (PTD) that provides for
such relief.
2. Debt management is time to pay. In respect of
multiple debts, the only statutory form of debt management
in Scotland is the Debt Arrangement Scheme under the Debt
Arrangement and Attachment (Scotland) Act 2002. Statutory
debt management prevents a creditor from using diligence
(civil court recovery) or bankruptcy against a debtor.
Consultation
3. The Scottish Executive published a draft Diligence
and Bankruptcy Bill and consultation document on 2nd July
2004. Responses are required by 30th September 2004.
4. The Executive proposes to make it slightly easier for
a debtor to apply for bankruptcy, and to reform the PTD
regime.
5. The proposals for bankruptcy reform in the draft Bill
are based on those in the consultation paper 'Personal
Bankruptcy Reform in Scotland: A modern approach'. That
consultation closed on 20 February 2004.
6. Question 9 of the paper was -
"Do you think that there are certain people for whom the
range of current and planned debt management tools [which
in this context includes debt relief] does not provide an
effective solution to their problems?
6. 54 persons or organisations responded to question 9.
The majority view (29/54) was that the proposals consulted
on when taken together did not provide an effective
solution to all debt problems.
7. There is thought to be a pool of unmet need for debt
relief. This pool is comprised of people who can't pay
their debts, have no reasonable prospect of doing so over
time, and are unable to go bankrupt or sign a trust
deed.
8. Ministers have therefore concluded that that there is
a need for further work in respect of 2 areas. They are
(1) debtor access to debt relief
(2) the right balance between debtor choice and creditor
interests.
Apparent insolvency
9. Scots law requires either that a creditor consents
(which is unusual), or that apparent insolvency is
established, before a debtor can petition for their own
bankruptcy.
10. Apparent insolvency is constituted by the actions of
creditors, and if they take no action (perhaps on
commercial grounds) then the debtor cannot petition
themselves.
11. Not all legal systems have a similar requirement. In
England and Wales, for example, a debtor may seek
bankruptcy by making a statutory declaration and payment of
a court fee. The fee itself acts as a barrier to access,
and the Departments of Trade and Industry and
Constitutional Affairs are also examining issues related to
debtor access.
12. Section 7 of the Bankruptcy (Scotland) Act 1985
provides that apparent insolvency is constituted by-
(1) sequestration in Scotland or bankruptcy elsewhere in
the UK;
(2) written notice of inability to pay debts in the
course of a business;
(3) signing a trust deed for creditors (whether a PTD or
not);
(4) service of a charge for payment, and no payment
being made;
(5) attachment under a summary warrant, and no payment
being made;
(6) a decree of adjudication for payment or in
security;
(7) sale of effects under a sequestration for rent;
(8) a receiving order being made in England and Wales;
and
(9) a statutory demand being served for a liquid debt of
not less than £750 and no response is given.
(10) 'main' insolvency proceedings are raised against a
debtor in another European Union state.
A debtor cannot seek bankruptcy on all grounds (1) to
(10). The underlying principle is that it must be an action
of a creditor, so grounds (2) and (3) apply only to
creditor applications.
13. In view of the existing concerns, the Executive has
or intends to-
(1) introduce two new grounds for apparent
insolvency-
(i) revocation of a debt payment programme made under
part 1 of the Debt Arrangement and Attachment (Scotland)
Act 2002;
(ii) service of a new notice following the grant of a
summary warrant; and
(2) amend the existing grounds of apparent insolvency,
as a result of the abolition of-
(i) adjudication for debt; and
(ii) sequestration for rent.
14. These reforms will still leave intact the need to
constitute apparent insolvency. It follows there will still
be of at least some persons who will be unable to establish
apparent insolvency, and thereby access debt relief through
sequestration.
Debt management and relief
15. A person who is not apparently insolvent may be able
to access debt relief by signing a trust deed, which is
then converted into a PTD by using the 1985 Act
procedure.
16. Indeed, signing a trust deed would itself constitute
apparent insolvency. At present, a debtor can choose
whether to go bankrupt or sign a trust deed. If a debtor
has signed a trust deed, they can still choose to go
bankrupt.
17. A trust deed conveys the assets of a debtor to a
trustee for the creditors, who realises the assets and pays
a dividend to qualifying creditors. The debtor is
discharged from all remaining obligation to those
creditors.
18. A trust deed is a private arrangement amongst a
debtor and creditors. It almost always provides for some
debt to be written off. If the trust deed becomes a PTD,
the debtor is protected from diligence or creditor induced
bankruptcy. The debt relief only has real effect when the
debtor is discharged from the PTD, and not all deeds make
suitable provision for discharge.
19. A debtor with little or no income or assets is
unlikely to be able to enter into a trust deed, and thereby
access that form of debt relief.
20. The 'classic' trust deed is would be used by a
debtor with little or no income, but with assets. The
assets are realised, expenses met, a dividend paid to
creditors, and a discharge granted.
120. A debtor with some income but little or no assets
may be able to access debt relief through a trust deed,
which may provide for an income contribution from the
debtor. Any contribution is normally paid over 3 years.
21. However, the Executive is concerned that
'contribution only' trust deeds are poor value for
creditors. Some deeds benefit only the trustee, usually an
insolvency practitioner, who takes most or all of the
contribution as a fee.
322. The Executive is to use secondary legislation to
reform PTDs. The intention is that a trust deed will only
become a PTD if there is a reasonable dividend paid to the
creditors. That is likely to mean that debt relief through
a contribution only PTD will become harder to access.
423. If a debtor can pay a contribution, then debt
management through a debt payment programme under DAS (even
if paid over a longer period than 3 years) may strike a
better balance between debtor and creditor interests.
524. Restriction on debtor choice has been introduced
under DAS. A person in a PTD may not apply for a debt
payment programme under DAS programme, and when a programme
is approved a debtor may not sign a trust deed.
625. A debtor in a debt payment programme under DAS may
still seek their own bankruptcy. They would need to
establish apparent insolvency, and that may be difficult
unless the programme is formally revoked i.e. stopping
payments is not enough by itself.
726. There are no other restrictions on debtor choice in
respect of statutory debt relief or debt management
measures.
Remit
To consider-
Apparent insolvency
(1) If a debtor should be required to establish apparent
insolvency.
(2) If so, whether the criteria for establishing
apparent insolvency should be extended or simplified.
(3) If not, what should be required of debtor, and in
what way should it be establishedway.
(4) If a debtor need not prove apparent insolvency,
should creditors still have to do so.
(5) If apparent insolvency is abolished will this
adversely affect (for example) contract law, partnership
law or corporate insolvency.
Choice of debt relief or management
measures
(1) If debtor choice in respect of relief or management
measures should be further restricted, and if so how.
(2) If the existing range of measures should be
simplified (for example because of any overlap in the
effect of a DAS programme and a PTD).
Report
To report, with any recommendation for change, to SE
Justice Department by 31st October 2004
The working process is to be open rather than close, and
minutes and materials will be posted on the Executive
website.
The Group will have an opportunity to consider at its
first meeting how it wants to operate, and frequency of
meetings.