Can a debtor bring a protected trust deed, granted after the 28th November 2013 to an early end, without making 48 monthly payments or paying the creditors all monies owed to them?

This is a question I have recently been asked as the assumption is that since the Protected Trust Deed (Scotland) Regulations 2013 commenced, this is not possible. I answer it below.

Composition in Protected Trust Deeds

One of the most useful tools that the Personal Insolvency Law Unit have had at its disposal in assisting our clients has been discharges on composition. In many cases, it has allowed us to finalise a debtor’s Protected Trust Deed and release them from their obligations, whilst protecting their home, which they would have lost otherwise.  

To understand what composition is, it’s worth re-reading the comments of Sheriff Reid in the case of Allison Donnelly v Royal Bank of Scotland at paragraph 58:

“….a discharge on composition is a procedure whereby the creditors agree to an absolute discharge of the debtor, usually in return for part-payment of their debts.  Composition may be judicial or extra-judicial, and it may be general (i.e. it applies to all creditors) or partial (i.e. it applies to some creditors) (McBryde, Bankruptcy (2nd ed.), 18-62).  There is only one form of judicial composition and it is general in nature (Bankruptcy (Scotland) Act 1985, section 56 & schedule 4).  In any event, the essence of a composition is that it operates as a complete discharge, freeing the debtor from all debts and obligations for which he was liable at the date of sequestration, terminating the trust or sequestration process, and reinvesting the debtor in his estate to the same extent as it had vested in the trustee (Goudy, supra, 408).

Post 2013 Protected Trust Deeds

In 2013 the Protected Trust Deed (Scotland) Regulations, stated unless the conditions in regulation 4 to 10 were met a trust deed could not gain Protected status (regulation 3(1)).

The conditions required to be met under regulation 8 were:

  • Any payment period proposed in the Trust Deed must be for a minimum period of 48 months (regulation 8 (2) (a)); and
  • This could only be for a shorter period, where the shorter period allowed all the debtors debts to be paid in full (interest included). (regulation 8 (3)).

Termination of Protected Trust Deeds

However, this doesn’t mean a debtor has to pay all 48 monthly contributions or all the debts in full to obtain a discharge and bring the Protected Trust Deed to an end.

Regulation 24 (2) (Discharge of Debtor) states to obtain a discharge a debtor must be considered to have co-operated with his trustee and met all his obligations under the trust deed.

To meet his obligations a debtor may have to make all 48 contributions (although arguably if he can show his circumstances didn’t allow him to, there is still an argument he didn’t refuse to co-operate or that he failed to meet his obligations under the Protected Trust Deed).

We need to look at the Trust Deed document itself, which will vary. Most Trust Deed documents will, however, lay out the basis in which trust deeds can be terminated. This may be because the debtor has refused to co-operate (and, therefore will be terminated by the Trustee – grounds to refuse a discharge), but equally usually includes a clause that allows a discharge on composition.

So in short, Trust Deeds, even those granted after the 28th November 2013 can be brought to an early close. It is the Trust Deed document itself which outlines how Trust Deeds can be terminated. 

A debtor who seeks a discharge on composition is not failing to co-operate or failing in his obligations, but merely bringing the arrangement to an end in line with the provisions included in the deed, if it allows composition.

The conditions outlined in Regulation 8, only need to be satisfied for the Deed to become Protected.

Discharge on composition is an inherently sensible and equitable remedy that debtors can use, with the agreement of their creditors, when the circumstances of a case make it advisable.