Protected Trust Deed

Review

2010

Table of Contents

1. Executive Summary

2. Introduction

2.1 Protected Trust Deeds

2.2 PTD Regulations and AiB’s supervisory powers

2.3 Information provided by trustees in PTDs

3. Methodology

4. Findings

4.1 Number of Protected Trust Deeds

4.2 Gender

4.3 Age/Employment status

4.4 Geographic distribution of PTDs

4.5 Debt owed to ordinary creditors

4.6 Income levels

4.7 Contributions and duration of PTDs

4.8 Assets

4.9Heritage

4.10 Proposed dividends

4.11 Proposed trustee fees and outlays

4.12 Creditors by value of debt

4.14Summary of findings

5. Conclusions

6. Recommendations

List of Tables:

Table 1 Protected Trust Deeds by financial year

Table 2 PTDs by Sheriffdom (shown as a percentage of total forperiod)

Table 3 PTDs by Sheriff Court

Table 4 Income level of debtors

Table 5 Monthly contribution in 2008/09 review versus 2009/10

Table 6 Value of assets in PTDs (cases with assets)

Table 7 Breakdown of assets valued up to £10,000

Table 8 Distribution of Expected Dividend

Table 9 Amount of Proposed Dividend

Table 10 Trustee’s Fees and Outlays

Table 11 Top Ten Creditors by Percentage of all Debt Owed to all...... Creditors

List of Charts:

Chart 1 Gender split in PTDs......

APPENDIX A

The Protected Trust Deed process

APPENDIX B

Protected Trust Deeds (PTDs) which concludedin the Financial year 2008/2009

Methodology

PTDs registered and concluded

Term of Trust Deeds

Assets and contributions realised

Preferred creditors

Ordinary creditors

No dividend to ordinary creditors

Dividend paid to ordinary creditors

Consignations

Trustee fees and expenses

Reversions

Conclusion

Appendix B Tables of Information

Table 1 Comparison of PTDs registered and discharged in thefinancial years between 2004 and 2009

Appendix B Charts of Information

Chart1 PTDs Registered and Discharged between 2004 and 2009

Chart2 Length of PTDs

Chart3 Value of money paid to ordinary creditors in PTDs by number of PTDs

Chart4 Dividend paid to ordinary creditors

Chart5 Comparison of dividends paid over the last 5 financial years...... where a dividend was paid

Chart6 Comparison between trustees fees where a dividend was paid..... and where none was paid

Chart7 Comparison of administrative expenses where a dividend was..... paid compared to where none was paid

APPENDIX C

Comparisons between Form 3 and Form 4 in PTDs

Introduction

PTD Review

Methodology

Variation

Dividend payments

Dividends

Trustee fees and administration costs

Realisations

Creditor claims

Conclusion

Appendix C Charts of Information

Chart 1 Variation where dividend was reduced to £0

Chart 2 Variation in Dividends to Ordinary Creditors

Chart 3 Trustee Fees and Administration Costs

Chart 4 Realisations of assets

Chart 5 Creditor claims

Acknowledgements

1. Executive Summary

The Bankruptcy and Diligence etc. (Scotland) Act 2007 introduced modification of provisions relating to Protected Trust Deeds (PTDs) and extended the supervisory functions of the Accountant in Bankruptcy (AiB) to include trustees under PTDs.

The extended supervisory function, which came into force on 1 April 2008, has allowed the AiB to monitor the progress of PTDs. The collection of additional information has allowed the collation and analysis of statistical data, which will assist in informing decisions on the future requirements for PTDs.

A commitment was made that the AiB would carry out an overall review of PTDs following the changes. Consequently, a review was conducted and a report published in June 2009.This report examined a representative sample of 1,262 of the 3,825 PTDs registered between 1 April 2008 and 30 September 2008. The report can can be accessed on AiB’swebsite at C to this paper details the progress of 823 of the 1,262 cases reviewed.

In order to ascertain if the new PTD provisions have had an effect on the trends of PTDs, a further review has been carried out. The reviewexamined a sample of 1,000 of the 4,827 PTDs registered between 1 April 2009 and 30 September 2009.

The review of the sample of 1,000 PTDs found the following:

  • the changes introduced appear to have had no effect on the number of PTDs registered;
  • more male than female debtors entered PTDs during the review period;
  • the average total debt included in individual PTDs amounts to £32,800;
  • the average estimated dividend proposed to creditors in individual PTDs is 15.5pence in the pound;
  • the average anticipated trustee fees and outlays amount to £5,200; and
  • the total debt estimated to be written off is£27.6 million.

The review concludes that the changes introduced in April 2008 has had no effect on the trends of PTDs. PTDs continue to be a recognised form of debt relief for debtors who are in a position to make partial repayment to their creditors.

2. Introduction

2.1 Protected Trust Deeds

Trust deeds are voluntary agreements between debtors and creditors. Theyconvey the debtor’s right to their assets to a trustee and provide, through realisation of assets or contributions from the debtor’s income, for the repayment of part of what is owed over the course of the trust deed. Based on the information provided by trustees, a trust deed generally runs for a period of 3 years.

A trust deed can become ‘protected’ if a sufficient number of creditors either agree to the trust deed, or do nothing and are therefore deemed to agree to its terms.. Once protected, the trust deed is binding on all creditors, who can thentake no further action to pursue the debt owed, providing the debtor complies with the terms of the trust deed. Upon completion of the trust deed, the remaining unpaid debt is written off although secured lenders can still rely on their security.

2.2 PTD Regulations and AiB’ssupervisory powers

Prior to 1 April 2008, the AiB had no statutory supervisory powers in relation to PTDs. The AiB was required to record certain information in the Register of Insolvencies and carried out audits only when asked to do so.

The Bankruptcy and Diligence etc. (Scotland) Act 2007 introduced powers for the AiB to supervise trustees in PTDs and to carry out additional audits. The Act also provided regulation making powers to improve the administration of PTDs and formalise the discharge of debtors.

The Protected Trust Deed (Scotland) Regulations 2008 (“the 2008 Regulations”) were brought into force on 1April 2008 however, these did not introduce any radical changes to the conditions for the protection of trust deeds.

2.3 Information provided by trustees in PTDs

Prior to 1 April 2008,details of debts included in PTDs, expected realisations, proposed dividends to creditors and fees charged by trustees were not provided until the end of the trust deed administration.

The 2008 Regulations changed this to require trustees to provide this information, and any otherinformation not previously supplied,from the outset of the trust deed. Trusteesare now required to provide a ‘Statement of the Debtor’s Affairs’ and to complete Form 3, a ‘Statement of Anticipated Realisations from a Protected Trust Deed’ at the beginning of the trust deed. Form 3 details the anticipated contributions from the debtor, expected realisations from assets, the estimated cost of administering the PTD and the proposed dividend to ordinary creditors.

In accordance with the Bankruptcy and Diligence etc. (Scotland) Act 2007, a trustee must submitto the AiB, at intervals of not more than 12 months beginning with the date the trust deed is granted, a Form 4, which details the estimated dividend payments to creditors. If this amount has varied from the amount projected at the commencement of the PTD (as shown on Form 3) the trustee must give the reason for the change. The trustee must also, at this time, submit a statement of his accounts in administering the trust deed.

Collection of this additional information has allowed AiB to monitor the progress of PTDs and to offer an instruction where necessary.

3. Methodology

A representative sample of 1,000 out of the 4,827 PTDs registered between 1 April 2009 and 30 September 2009 were examined to:

  • Produce a profile of the debts, debtors and creditors within the PTDs.

The sample represents approximately one fifth of the PTDs registered in the first 6 months of the financial year, commencing 1 April 2009.

In accordance with section 10 of the 2008Regulations, the trustee must submit a Form 3 declaration, which is a statement of anticipated realisations. The figures provided in the Form 3 are expected values at the commencement of the PTD, and may vary due to change in circumstances such as new creditors coming forward, the debtor’s personal situation changing or increased trustee feesin line withincreased workload.

All data which has been gathered in this review has been extracted from the original Form 3 declaration of the 1,000 PTDs in the sample.

Some currency values shown in this report have been rounded to the nearest whole number.

4. Findings

The data available on PTDs registered in the first six months of the financial year 2008/09 have been collated to reflect a number of findings including:number of PTDs registered, debts, assets, realisations, creditors and dividends;details of which are explained more fully in the following text.

4.1 Number of Protected Trust Deeds

The number of PTDs registered during the review period was 4,827 compared to 3,825 registered in the corresponding period in the previous year. This represents an increase of approximately 26 per cent.

Table 1 compares the number of PTDs by financial year from 2004/05 to 2009/2010.

Table 1 – Protected Trust Deeds by financial year

Year / 2004/05 / 2005/06 / 2006/07 / 2007/08 / 2008/09 / 2009/10
First Half Year Total / 2,825 / 3,655 / 4,310 / 3,874 / 3,825 / *4,827
Second Half Year Total / 3,316 / 3,544 / 3,988 / 3,635 / 3,808
No. of PTDs / 6,141 / 7,199 / 8,298 / 7,509 / 7,633

*Figures for the financial year 1 April 2009 to 31 March 2010 have now been reported to the third quarter; details of which can be viewed on the Accountant in Bankruptcy’s website at .

4.2 Gender

A gender-specific descriptor is not provided within PTDs. However it has been possible to ascertain that male debtors accounted for approximately 53 per cent of the sample,with female debtors representing approximately 47 per cent. The sample has shown,as in the corresponding period in the previous year, more males than females continue to enter a PTD. Chart 1below illustrates the proportion of males to females entering PTDs

Chart 1. Gender split in PTDs

4.3 Age/Employment status

It was not possible to profile the age range or employment status of the debtors, as trustees are not required to provide this information to AiB, although some trustees do record this information.

4.4 Geographic distribution of PTDs

Geographical distribution of PTDs was not reported on until the 2009 review.although AiB includes information on bankruptcies by sheriffdomin her Annual Report. To provide consistency and allow comparison, this review hasalso collated PTD information by sheriffdom.

FromTable 2 below it can be seen that the highest number of PTDs fall within the sheriffdom of South Strathclyde, Dumfries & Galloway. This is a change from the 2009 review, where the highest number of PTDs fell within the sheriffdom of Tayside, Central & Fife. A further breakdown of the PTDs by sheriffdom can be seen at Table 3 below.

Table2 - PTDs by Sheriffdom (shown as a percentage of total for period)

Table 3. PTDs by Sheriff Court

4.5 Debt owed to ordinary creditors

The analysis of the sample has shown that the average debt owed in an individual PTD was £32,800, with the average debt owed by males being £37,000 and by females, £28,100.

The median for all cases was £25,500. The median was £27,300 for males and £23,400 for females. (The median value is the middle value in a range of numeric data and gives a slightly better representation of where the general spread of debt has occurred. In this review, the male median is almost £10,000 lower than the

Average debt owed, suggesting that some very high individual debts may have skewed the average upwards.)

The highest debt in the sample owed by an individual debtor was just under £700,000 and the lowest debt £6,900: considerably higher figures than those from the corresponding period last year of £456,361 and £3,542.

4.6 Income levels

The average monthly net income of debtors in the sample was £1,425. The average income for males was slightly over £1,500 and for females was just below £1,340.

When compared to the previous year’s review, proportionally more people with an average net salary of between £1,201 and £2,800 have entered a PTD. This increasesuggests that a section of the population who were once in a position to service their debts, nowrequire debt relief.

There has been a reduction in the number of debtors receiving net incomes of below £1,200,and earners in excess of £2,800 also show a decrease.

The Annual Survey of Hours and Earnings (ASHE) - 2009 Results from the Office for National Statistics indicates an average gross income for Scottish adults to be £24,546, which would imply an average monthly net income in the region of £1,550. Of the 1000 debtorsreviewed, 640 had an income of less than this Scottish average and 358 debtors had an income greater than the average monthly income. The remaining 2 debtors receive the average income of £1,550.

Table 4 - Income level of debtors

4.7 Contributions and duration of PTDs

The average duration of repayment in the sample was 36.6 months. Over 80 per cent of cases had a duration of exactly 36 months. The longest duration for a case was 72 months. Less than 2 per cent of cases had a duration of 5 years or greater.

The average contribution expected was £8,300. The average monthly payment was £223. A contribution of £37,800 was the highest total sum ingathered over the duration of a trust deed in the sample.

51per centof the PTDs in the samplewere proposed by debtors with no realisable assets.These PTDs were based on a contribution from the debtor’s income only.This is a decrease of 9 per cent on the corresponding period in the previous year. In 2 per cent of the PTDs reviewed,no contribution was calculated as creditors were being paid solely through the sale of assets. The remaining 49 per centof PTDs in the sample were based on a mixed realisation of assets and a contribution from the debtor’s income.

Table 5below demonstrates the range of contributions expected from debtors. The contributions range from £20 to £1,050 per month. Approximately 27% of debtors are expected to contribute between £175.01 and £225 per month; this is proportionate with the previous year’s review.

Table 5. Monthly contribution in 2008/09 review versus 2009/10

4.8 Assets

In 49 per cent of cases, debtors included a realisable asset in their trust deed. From the information available it has been possible to ascertain the nature of assets included in PTDs. The majority of assets remains unchanged from the 2009 review, with the highest number of assets being heritable property and motor vehicles. Other assets declared were cash, ISAs, insurance policies, endowment policies, shares, premium bonds, equipment, stock, pensions, superannuation and holiday ownership.

The value of assets to the estate ranged from £50 to £145,000.Table 6

demonstrates the range of asset value. The study has revealed that the majority of assets were valued at less than £10,000. A further breakdown of the largest grouping of assets is shown in Table 7.

Table 6 - Value of assets in PTDs (cases with assets)

Table 7 - Breakdown of assets valued up to £10,000

4.9Heritage

From the 1,000 PTDs in the sample, 429 included heritable property as an asset. The estimated value of the properties ranged from £20,000 and £450,000.

Of the 429 properties, 228 had no or negative equity. In orderto discharge the trustees interest in the property,the debtors had to pay between £150 and £500. In the remaining 201 properties, the debtor’s share of the estimated equity ranged from between £4 to £145,000 with the average amount of equity being £11,240.

The percentage of PTDs in the sample which include a heritable asset has increased on the previous year’s review. The percentage of PTDs in the sample where the heritable asset has no or negative equityhas also increased. This would correlate with the economic downturn in the property market at that time.

In order to realise the debtor’s share of equity in the property, the trustee may consider an offer from a third party or give the debtor the opportunity to re-finance at the end of the trust deed. If the debtor is unable to re-finance, the trustee may continue collecting contributions from the debtor or may consider selling the property.

4.10 Proposed dividends

Table 9 shows proposed dividends to creditors, subject to assets being realised for their estimated value and contributions being paid by debtors.Approximately 31 per cent of PTDs project a dividend of 10 pence or less in the pound.This is a decrease of approximately 6 per cent on the corresponding period in the previous year.

Approximately 11 per cent project a dividend of 25 pence or more, which is a decrease of 7 per cent on the previous year. The remaining 58 per cent project a dividend between 11 and 24 pence in the pound, which is an increase of approximately 13 per cent on the previous year. The average proposed dividend was 15.5 pence -1.5p less than in the corresponding period in the previous year.

Table 8. Distribution of Expected Dividend

Table 9 - Amount of Proposed Dividend

The total projected dividend to all creditors based on the total debt included in the sample equates to £50.2 million, which will effectively produce a debt write-off of £263 million for the financial year.

4.11 Proposed trustee fees and outlays

Fifty-four trustees were responsible for administering the 1,000 PTDs included in the sample. The highest number of cases which one trustee was responsible for was 86; this accounts for 6.5 per centof the total debt. Of the 1,000 PTDs included in the sample, 54 insolvency practitioners (IPs) handled at least one PTD. There were 5 IPs who administered one case only. Trustees are required to provide details of the fees and outlaysanticipated for each PTD. The costs may change if the trust deed does not proceed as anticipated, and in some cases, the trustee may not recover his fee.