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Contribution Order Practices and Remedies in Protected Trust Deeds

Posted by Alan McIntosh at 17:04: 19/04/10

New thread: Contribution Order Practices and Remedies in Protected Trust Deeds

I would like to make one suggestion, which the Working Group may wish to consider and suggest the system of income payment agreements and orders be extended to protected trust deeds.

At present where a debtor is refusing to cooperate with their trustee in a protected trust deed, the trustee's only option is either to refuse to discharge the debtor and seek a discharge themselves, leaving the debtor undischarged (this may result in the trustee not recovering their costs in setting up the case, administering it and applying for their own discharge). Alternatively they must sequestrate the debtor and then abandon the case to the AIB or be appointed trustee and apply for an income payment order (the petition for sequestration may cost several hundred pounds for the trustee). This is an expensive process and the costs could be avoided by allowing a trustee in a protected trust deed to apply for an income payment order under S32 of the 1985 Act.

In the last few years it appears some insolvency practitioners have found what they believe is a solution to this problem (where they cannot apply for an income payment order and do not want to incur the costs and risks related to sequestrating a debtor). They are now asking debtors to sign contribution orders, which have no statutory basis, when they sign trust deeds. These orders will normally state the debtor will pay 36 monthly payments of a specified amount. The orders will also contain signed authority from the debtor allowing the order to be registered for preservation and execution in the Books of Council and Session. This allows the trustee to extract these deeds when the debtor defaults. Such an extracted deed effectively acts like a decree. So the debtor has to fulfil the obligation contained in the contribution order of paying say 36 instalments of £200, if that is what was agreed. It also contains a warrant allowing summary diligence to be executed to enforce payment of the debt.

The problem with this solution is first it effectively creates a debt where no such debt exists. A payment under a trust deed is an assignation of income, not a charge for payment of a fixed sum by instalments. A trust deed does not contain any obligation to pay 36 payments of a specified amount, but to cooperate with your trustee, which may require you to make a contribution, if your means allow you. A debtor, therefore, may initially agree to pay £200 per month but this amount may be revised up or down, depending on the debtor's circumstances during the duration of the protected trust deed.

Yet, such contribution orders are being registered, despite the fact only liquid debts can be registered for preservation and execution in the Books of Council and Session. There have been cases where the actual contribution order, once extracted, has been served on a debtor's employers by messenger at arms, clearly giving the impression that the payments specified in the order must be deducted by the employer and made over to the trustee. This is despite S3 of the Writs Execution (Scotland) Act 1877 only allowing for such deeds to be enforced using specified types of diligence under the Debtors (Scotland) Act 1987, such as an earning arrestment. This could create a situation where an employer believes he has to make deductions of £200 per month, where an earnings arrestment may only have allowed for £120 per month. If there is no legal basis for such deductions, the employer may be liable themselves for making an illegal deduction from wages.

It could also create a completely undesirable situation, where an earning arrestment is used and only £56 per month can be deducted. Where the order was for 36 payments of £200, it is not clear whether the earning arrestment stops after 36 payments of £56, or does it continue until the full £7,200 originally agreed in the contribution order is paid. If it is the latter the trust deed could take ten years to complete, despite the fact the debtor was not refusing to cooperate with their trustee: the trustee may have been unrealistic in expecting £200 per month and the debtor may not have been able to pay the agreed amount.

In their defence those who have begun adopting such practices have said they would only use such enforcement procedures where the debtor is a "won't pay" and not a "can't pay". The problem is if it is left to the trustee to determine when someone is a "wont pay" and not a "can't pay"; the only apparent remedy the debtor would have is under Regulation 24 (1) of the Protected Trust Deed (Scotland) Regulations 2008, which allows an application to be made to the Sheriff for directions with regards the administration of the protected trust deed.

Clearly, there are problems for trustees in protected trust deeds with "wont pay" debtors, but the use of the Books of Council and Session and summary diligence is not a desirable solution and arguably is legally incorrect. The correct procedure is to sequestrate the wayward debtor and to apply for an income payment order, which allows the sheriff to apply penalties should the debtor still continue to refuse to pay. This, however, is costly and time consuming and a preferred solution to make the protected trust deed process more efficient would be to extend income payment orders to protected trust deeds. Where a debtor refuses to pay an income payment agreement, without the agreement of their trustee, the trustee can apply to the sheriff for an income payment order. Although such a procedure would incur costs for the protected trust deed, it would allow judicial supervision over whether the debtor is a "wont pay" or "can't pay". It would also remove the need to first sequestrate the debtor and, therefore, save unnecessary costs that may ultimately reduce the dividends that are available for creditors.

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