Trustees’ Fees and Dividends in Protected Trust Deeds
KPMG LLP
4 May 2010
Trustees’ Fees and Dividends in Protected Trust Deeds
Paper for the Protected Trust Deed Working Group
May 2010
KPMG LLP
4 May 2010
This report contains 8 Pages
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ABCDContents
1 Introduction 2
2 Observations on Administration costs 3
3 Future discussion re trustees’ fees 5
4 Dividends 6
5 Access to debt relief 6
6 Conclusions 7
1 Introduction
The meeting of the Protected Trust Deed Working Group (“PTDWG”) on 12 May 2010 is due to consider the issue of Trustees’ fees and dividends to creditors in protected trust deeds.
In PTDWG meetings and papers presented to date concern has been expressed about the level of administration cost in protected trust deeds.
Analysis provided by the Accountant in Bankruptcy (“AIB”) (Table 1) based on Form 3’s submitted at the outset of cases suggests that average administration costs are £5,003 with an average projected dividend of 16.28p in the £1.
The AIB analysis of the 5,840 Form 4’s submitted to date on trust deeds protected since 1 April 2008 indicates that by the end of year 1 there has been a 2.78% rise in average costs to £5,142 and a 7.8% reduction in the projected average dividend.
As has already been well documented by others, further analysis of the data shows that by excluding one IP firm that appears to have performed poorly, total projected costs dropped by 1% and projected dividends dropped by c.3%.
We have to be careful about drawing conclusions from the data presented in the AIB’s Table 1 as it is based on data from a narrow time period and figures are estimated.
The Form 4 is simply a projection at the end of year one by the trustee on what the final costs / realisations of the trust deed will be. A more meaningful comparison will be to compare the Form 3 and the Form 7 which will show the actual distributions at the end of the trust deed. Unfortunately, this will only be possible after April 2011 (the third year anniversary of the date of submissions of the first Form 3’s).
The analysis is also dependent upon how the Form 4 is completed, for example, my own firm will, if the debtor misses three or more contributions, take a prudent view and show future projected realisations as nil which will reduce the projected dividend. We will not at this stage amend the estimated administration costs. These costs will still be incurred, however, our ability to draw a fee will be diminished by the reduction in realisations. By the time the Form 7’s are completed some of these debtors will have resumed payment and if not fees will be reduced.
Therefore the comparison between Form 7 and Form 3 will be somewhat different to that shown in the data in Table 1. There will also be variations in how the Form 4 has been completed between individual IP Firms and we would caution against over reliance on these figures until actual figures are submitted.
2 Observations on Administration costs
It is important to consider what projected Administration Costs on a protected trust deed include. Using the average estimated costs from the AIB data of £5,003 per case, I would comment that:-
· These include outlays, for example, advertising in the Edinburgh Gazette, the IP’s bond, registering the inhibition and supervision by the AIB. Including VAT these are conservatively estimated at £420. These costs must be incurred.
· Cases involving heritage will also attract the cost of incurring a professional valuation.
· Excluding estimated outlays the remaining administration costs equate to £4,722.
· Since most debtors are not VAT registered, VAT is irrecoverable and after adjusting for this, the average payment in respect of Trustees’ Fees is c£4,000.
It should be noted that this average of £4,000 covers a minimum of 3 years administration and will also include trust deeds with an extended term since there are a number of practitioners administering cases for up to 5 years.
This average will also include cases where there is a requirement to deal with heritage or other assets, which feedback from creditors suggests is around 25% of cases.
This average fee also includes any payment made to a third party for work done in preparing a statement of affairs. Whilst a trustee is permitted to make payment to a third party to carry out this work, SIP 3 (A) makes it very clear that this payment can only be justified if it saves time (and cost) that the trustee or his staff would otherwise have to incur. The issue of what level of payment is justifiable should be considered by the sub group of the PTDWG considering the trust deed protocol. However, agreement on this may not affect the total level of administration cost on a trust deed since trustees should already be reducing their own fee to reflect any payments made to a third party.
At present fees are typically based on work done, i.e. hours spent multiplied by an hourly charge out rate. In a typical trust deed work done included in the Trustee’s fee of £4,000 above will include:
· Initial assessment of debtors circumstances and consideration of whether a trust deed represents the best solution;
· Verification of the information provided by the debtor regarding their financial circumstances, reviewing payslips, key expenditure, property searches, verifying creditor balances and where property is involved obtaining valuation and redemption figures;
· Preparation of a statement of affairs;
· Correspondence with creditors, AIB and advertising to obtain protected status;
· Collection of agreed income contribution, regular reviews of circumstances and agreement of variations to contributions;
· Pursuing debtor where payments are missed;
· Annual reporting to creditors and AIB;
· Asset realisation (if appropriate);
· Agreement of creditor claims and distribution of funds;
· Statutory paperwork to close case, and discharge trustee and debtor;
The above is not an exhaustive list of tasks, it is simply intended to illustrate the extent of the work that is done.
It should also be noted that particularly where initial advice, verification and asset realisation are concerned these duties will be carried out by well qualified, trained professionals. Insolvency Practitioners are regulated and have to adhere to high standards in terms of training, qualifications and insurance and this is reflected in these costs.
It is also worth noting that it has been suggested in other papers presented to the PTDWG that a Fast Track Trust Deed could be administered over up to five years for £500-£700.
The foregoing comments illustrate that outlays are currently c£420 for a trust deed. Potentially some of these could be reduced by the removal of the need to advertise in the Gazette or the waiver of the AIB Supervision Fee.
However, all of the other duties outlined above (with the exception of these related to heritage) would still have to be carried out. It is impossible to envisage how this could be achieved for £500-£700 without any decline in the return provided to creditors or the advice provided to debtors.
3 Future discussion re trustees’ fees
Creditors are currently entitled to object to a trust deed and if their objection is sufficient then it will fail to become protected. Since late 2006, the increasing engagement of creditors has done much to standardise fees across the industry.
Various creditor representatives have already noted in their papers that they believe that IP’s should be properly remunerated for work done.
However, there appear to be two issues:-
· the need to relate fees more closely to asset realisations;
· there is still a gap between levels of fees in Trust Deed’s in Scotland and IVA’s in England.
Whilst there is a basic level of work which needs to be done on every case to verify information received and comply with a Trustees’ statutory duties and requirements, there is an argument that an element of the Trustees’ fee should be a percentage of realisations. This directly incentivises the IP to improve the return to creditors.
The caveats to this are that it has to be done in a way which the IP’s regulatory bodies are comfortable with and without detriment to the debtor.
Discussion about the extent to which Trustees could and should share risk/reward with Creditors is a topic that was considered in detail by the ICAS group. This should be considered by the sub group of the PTDWG considering a Trust Deed protocol.
However, if should be noted that as with the English IVA protocol, care will need to be taken to ensure that parties participating in the discussions do not attempt to enter into any price fixing discussions.
4 Dividends
As noted above, the AIB data suggests that the average projected dividend on a protected trust deed was 16.28p. After the adjustments previously discussed this is projected to have reduced by 3% by the end of year 1.
It should be noted that there are several reasons why dividends will decline, particularly in the current economic climate:-
· the debtor could lose their job or have their working hours reduced, reducing or eliminating their ability to pay a contribution;
· the debtor may not pay the agreed contribution.
Both of these circumstances will require the trustee to carry out additional work to verify the change or pursue payment. Factors which may increase a dividend payment, for example improved asset realisations are less likely to be apparent at the end of year 1. Taking this into consideration, it does not seem unreasonable that dividends have reduced on average by 3% by the end of year 1.
Creditors have an interest in not just the level of dividend but also the timing. Creditors will no doubt share their data and concerns about the level of funds held by IP’s which could be distributed earlier.
This is an area where creditor confidence in the process could be considerably improved by an industry consensus around the timing of first and subsequent dividend payments. This is a further area for debate by the sub group of the PTDWG considering a trust deed protocol.
5 Access to debt relief
With the introduction of the Certificate for Sequestration it is difficult to identify any category of debtor who will not be able to access some form of debt relief.
Specifically in relation to the Fast Track Trust Deed it is difficult to see how the process can be simplified any further. There is a view that trustees’ fees/administration costs are a barrier to entry to trust deeds for some debtors on lower incomes. Notwithstanding the long running dispute over what a fast track trust deed could cost (addressed above) a better option would be that in those cases where low dividends are an issue for creditors they could be dealt with by way of the trust deed protocol.
Discussions have already taken place whereby creditors may agree that if the trust deed is extended to 5 years and the trustee has agreed to reduce his fee to an agreed level then the minimum 10p hurdle rate would be dropped. Alternatively, creditors may consider their position in relation to the hurdle rate in return for improvements in the process, for example, earlier and more frequent dividends.
Agreement of a trust deed protocol could resolve this perceived issue without the need to add an alternative process for which there appears to be limited demand.
6 Conclusions
· Trustees’ actual performance against initial projection, on protected trust deeds will only be established when Form 7’s are submitted from April 2011 onwards. In the meantime, caution should be exercised when drawing conclusions based on Form 4’s provided to date.
· Administration costs include, statutory outlays and VAT, the average projected payment to Trustees (including heritage and cases administered over 5 years) has been c£4,000.
· It is difficult to see how a fast track protected trust deed can be delivered for £500-700 without any decline in return to creditors or quality of advice to debtors. A trust deed protocol could resolve the issues of access to the trust deed process without the need to create a fast track protected trust deed.
· The sub group of the PTDWG considering a trust deed protocol should consider:-
- The timing of first and subsequent dividends to creditors;
- The extent to which Trustees’ fee can be linked to asset realisations;
- What is a reasonable level of payment by a Trustee to a third party for assistance in preparing the statement of affairs;
- The 10p hurdle rate which may be preventing access to debt relief for a small proportion of debtors.
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