Certificated Sequestration & S10 Protected Trust Deeds

Certificated Sequestration & S10 Protected Trust Deeds Home Owner and Debtor Protection (Scotland) Act 2010

Part Two • Part two of the 2010 Act contains a number of changes to personal insolvency: • It amends the routes into sequestration • It create a new S10 type of protected trust deed, where the principal home is not included • It extends the length of time a sheriff can postpone an application to sell the family home in sequestrations and protected trust deeds; and • It abolishes the requirement to advertise sequestrations in the Edinburgh Gazette

Sequestration • S9 of the 2010 Act amends The Bankruptcy (Scotland) Act 1985, abolishing the concurrence of a qualified creditor route into sequestration. • It introduces a new certificate for sequestration route

Certificate for Sequestration • The new certificated route into sequestration is a route that is available: • when a certificate is granted by an authorised person; and • It certifies that the debtor is unable to pay debts as they become due

Certificate for Sequestration • Cannot pay debts as they become due: Example: Client’s contractual payments to all unsecured debts are £350 per month. Money adviser does a financial statement using information provided by the debtor: it shows debtors only has £250 per month disposable income. Debtor, therefore, cannot afford to pay debts as they become due. This does not mean, however, they should, be sequestrated!

Certificate of Sequestration • Practical insolvency: cannot pay debts as they become due • Absolute insolvency: liabilities outweigh assets. • Many people are absolutely insolvent, but not practically insolvent and are able to manage their debts without any problem. • Advisers should ensure when signing certificates for sequestration that debtor is both unable to pay debts as they become due and absolutely insolvent.

Certificate for Sequestration • Certificates can only be granted on the application of a debtor, they cannot be granted on the application of a creditor. • An authorised person must grant a certificate if and only if, the debtor can demonstrate they cannot pay their debts as they become due. • It is important to remember just because a debtor cannot pay their debts as they become due, does not mean they are insolvent!

Authorised Persons • An authorised person will be: • Insolvency Practitioners and their staff • Money advisers working for an agency which has been accredited at type II of the National Standards for Information and Advice Providers • Approved Money Adviser for the DAS • CABx money advisers • Local authority money advisers • Authorised persons cannot be associates of the debtor as defined in S74 of the 1985 Act

Granting of Certificate • Prior to granting a certificate of sequestration, the debtor must first • Be provided with a copy of a Debtor Advice and Information package • Be advised of options in relation to DAS, voluntary repayment plans and trust deeds; and • Be advised of the possible consequences of sequestration

Consequences of Sequestration • The consequences of sequestration include the possibility of: • the debtor being refused credit, or being offered credit at a higher rate, whether before or after the date of the debtor being discharged; • the debtor not being able to remain in his/her current place of residence • the debtor being required to relinquish property which the debtor owns

Consequences of Sequestration • It can also mean: • the debtor requiring to make contributions from income for the benefit of creditors; • damage to the debtor’s business interests and employment prospects; • the debtor still being liable for some debts; • the debtor’s financial transactions over the last five years being investigated; and • other restrictions or requirements imposed on the debtor as a result of the debtor’s own circumstances and actions.

Form of Certificate • The Bankruptcy (Certificate of Sequestration) (Scotland) Regulations 2010 (Draft) • Form contained in schedule • Must be printed on Agency headed notepaper or invalid • Cannot be signed by authorised person more than 30 days before debtor applies for bankruptcy • Both authorised person and debtor must sign • Authorised person must certify that, based on information provided by the debtor, they cannot pay their debts as they become due.

Form of Certificate • Approved persons must also certificate that the client has been advised of • Consequences of sequestration; and • They have been provided with a copy of the advice and information package; and • That they have been advised of other options, such as DAS, voluntary repayment plans and trust deeds.

Form of Certificate • It is not possible to charge for a certificate of sequestration • Certificate must be signed by authorised person within 30 days of the debtor applying for sequestration, or application will be rejected and client will lose £100 application fee!

Problem • What happens if debtors contractual payments are £350 per month and money adviser draws up financial statement showing they can only afford £250. • Certificate of sequestration may be signed, but trustee in bankruptcy draws up financial statement and decides client can afford £400 per month. • Client could be asked to pay more than they were required as their debts fell due for payment. • Should client have been sequestrated?

Common Financial Statement • Accountant in Bankruptcy to adopt Common Financial Statement • Protected Trust Deed Working Group Report recommending use of common financial statement as industry standard

Common Financial Statement • Remember the CFS’s purpose is to assist in providing an accurate account of a debtor’s income and expenditure. • Expenditure figures are not targets to be reached in every case! The CFS can be accessed at: http://www.cfs.moneyadvicetrust.org/

Section10: Trust Deeds • Creates a new type of trust deed where the debtors principal home will not be included • Providing a secured creditor holds a security over it; and • The secured creditor agrees before the trust deed is granted not to make a claim for any of the debt in respect of which the security is held • Trust Deed will become protected in normal way.

Section10: Trust Deeds • Where there is no security, no section 10 trust deed will be possible • The secured creditor will have to prior to the trust deed being granted complete Form A1 • Form A1 requires the secured creditor to consent to not participate in the trust deed in relation to the secured debt, providing it receives protected status

Section10: Trust Deeds • If the secured debt is excluded from the Trust Deed • The terms of repayment are not affected • The Trustee will not vote in the trust deed, nor receive a dividend • The debtor will not be discharged from their secured debts • The secured creditor will not be entitled to • Make a claim in respect of the secured debt • Do diligence against assets covered by the trust deed • Or petition for the debtor’s sequestration • Unless the debtor does not comply with their obligations owed to the secured creditor in relation to the secured debt.

Problem • If debtor has a standard security on their property which contains “an all sums due” clause, S5(4A) of the 1985 Act requires the lender to agree not to claim in relation to any debt in respect of which the security is held. • This could include: • Overdrafts • Loans • Credit Cards Where the provider is the secured creditor. • Debtor will still have to pay these debts and will not receive a discharge.

Problem • Section 10 allows home to be excluded in trust deed only • If debtor refuses to co-operate with trustee they could be sequestrated and no protection will exist in sequestration. • If debtor does not meet obligations in relation to any debts a standard security relates to, secured creditor can sequestrate. • This could include payments to credit cards, loans etc where there is further borrowing owed to secured creditor and there is an “all sums due” clause.

Sheriff Powers in Relation to the Family Home • Currently sheriff’s on application by a trustee to sell a family home, can: • refuse to grant the application; or • postpone granting the application for up to 12 months • Section 11 of the 2010 Act amends this power to allow the sheriff to postpone granting the appication for up to 3 years. • Before applying to the Sheriff, the trustee must give notice of the proceedings to the local authority in whose area the debtor’s home is situated.

Edinburgh Gazette • It is not necessary for a trustee to send a notice advertising the awarding of sequestration to the Edinburgh Gazette • Still will be required for trust deeds (at present it appears so anyway!)

Thank you Alan McIntosh Tel: 0141 572 0130 a.mcintosh@moneyadvicescotland.org.uk

Certificated Sequestration & S10 Protected Trust Deeds