What is a protected trust deed and how does it differ from an individual voluntary arrangement (IVA) in England and Wales? Eoghann Green and Lucy McCann of Brodies LLP explain how protected trust deeds work in Scotland.

What is a trust deed?

A trust deed for creditors is a voluntary deed through which a Scottish debtor conveys certain assets to a trustee, to be administered for the benefit of their creditors. Historically, it has been viewed as an alternative to sequestration (bankruptcy) in Scotland.

What is a protected trust deed?

A trust deed only binds those creditors who agree to it. However, a debtor can apply for a trust deed to become "protected", otherwise known as a ‘protected trust deed’ (PTD). This is binding on all the debtor's unsecured creditors and prevents them from taking enforcement action against the debtor. A trust deed becomes protected once all the statutory requirements in the Bankruptcy (Scotland) Act 2016 have been met.

The first step is to send notice to the Accountant in Bankruptcy (AiB) for publication in the Register of Insolvencies. The Trustee must then write to all creditors, giving them five weeks to object to the trust deed becoming protected. Provided the majority (by number) or not more than a third (by value) object within the five-week period, protected status is usually granted by the AiB. A PTD generally lasts for 48 months and is a matter of public record.

What are the differences between a protected trust deed (PTD) and an individual voluntary arrangement (IVA)?

In England and Wales, the equivalent to a PTD is known as an individual voluntary arrangement (IVA). Much like a PTD, an IVA is an agreement between a debtor and their creditors, which aims to repay all or part of their debts and is administered by an insolvency practitioner.

Entering into an IVA or a PTD does not impact on an individual's ability to remain or become a company director and both processes are a matter of public record. There are however, certain differences that distinguish an IVA from a PTD:

• an IVA requires 75% of creditors (by value) to agree to the proposal, compared to only 66% under a PTD
• an IVA typically lasts 60 months, as opposed to 48 months for a PTD
• an IVA requires an individual to transfer all assets into the IVA, whereas a debtor under a PTD can pick and choose what assets are included (although excluding valuable assets from a trust deed will encourage creditors to object to the trust deed becoming protected)

What are the benefits of a protected trust deed (PTD)?

In terms of advantages, a PTD is an easier process for individual debtors to access than an IVA in England and Wales and is therefore a popular chosen method for debtors in Scotland seeking protection from creditors. Debtors can benefit from the PTD process as:

• it enables them to avoid sequestration
• it protects important assets like their family home
• it avoids interest and penalty charges on existing debt
• on average, a debtor is required to make a lower median monthly contribution of £140 compared to sequestration (£190) or the Debt Arrangement Scheme (DAS) (£220)
• unlike sequestration, a debtor has the certainty of knowing when the process will come to an end

This level of certainty in terms of payments and duration is also seen as an advantage by many creditors, which is reflected in the number of PTDs being registered. Between January 2018 and April 2019 there were 10,057 PTDs registered in Scotland, compared to 3,500 sequestrations (excluding minimal asset process bankruptcies). Of interest, in the same period the average cost of administering a PTD compared to a private trustee in sequestration was significantly lower at £4,200 compared to £5,800.

What are the risks of a protected trust deed (PTD)?

The PTD process is not, however, without risks for both debtors and creditors. Between January and April 2019, over 16% of PTDs failed. These incidents of failure are due, in part, to the relative inflexibility of PTDs in that they cannot be adapted to deal with a change in the debtor's circumstances. The DAS, on the other hand, is more flexible by allowing changes to contributions to be made at any stage during the process. 

A PTDs remains a popular alternative to sequestration in Scotland. However, with the advent of the DAS, which offers identical protections and greater flexibility over longer periods of time, the reign of the PTD as Scotland's premier alternative to sequestration may be coming to an end.

About the authors

Eoghann Green and Lucy McCann are Associate and Partner, respectively, at the Restructuring & Advisory Team at Brodies LLP.

See also

Scottish insolvency vs England and Wales - What you need to know

The company liquidation process in Scotland

Gratuitous alienations, good faith and adequate consideration under the Insolvency Act 1986

Can a winding up petition be stopped in Scotland?

Find out more

Protected trust deeds (AiB)

Bankruptcy (Scotland) Act 2016 (Legislation)

Register of Insolvencies (AiB)

Debt Arrangement Scheme (AiB)

Image: Getty Images

Publication date: 10 February 2020