Consultation response by Govan Law Centre on the draft Debt Arrangement Scheme (DAS) regulations

Transcription

1 Consultation response by Govan Law Centre on the draft Debt Arrangement Scheme (DAS) regulations Introduction who we are Govan Law Centre (GLC) is a Glasgow based independent, charitable community controlled law centre operating in Scotland, charity no. SCO We have been in operation for over 8 years. Our annual report can be viewed at examples of our money advice work can be found at GLC aims to tackle unmet legal need within the Greater Govan area of Glasgow and other areas of legal need in Scotland, as sanctioned by our community Board of Trustees, the Govan Law Centre Trust. We do this by undertaking expert advice, court and tribunal representation with certain fields of social welfare law. We provide free and low cost legal education through a variety of media, including training and conferences. Govan Law Centre's primary client group are those residing within the Greater Govan area of Glasgow who experience poverty or social disadvantage. Poverty and social disadvantage can affect anyone. Manageable debts can soon become unmanageable following relationship breakdown, health problems, the loss of employment or personal life crisis. GLC is never judgmental. Our role, at all times wherever possible, is to use the law to resolve, limit or alleviate a client's problems - whether that means preventing eviction, maximising benefits, maximising income through compensation, reparation or employment law rights, limiting the impact of debt, securing major housing repairs, or challenging adverse decisions of public bodies. We welcome the Debt Arrangement Scheme, although we would have preferred an independent debt tribunal system to take all non-contentious debt out of the sheriff court. The following response to the Scheme s draft regulations is based upon our practical experience as gained through legal casework. Regulation 2: Views on the inclusion of secured debts The justification for including secured debts within the Debt Arrangement Scheme (Scheme or DAS ) is contained within paragraph 9 of the Scottish Executive s covering note (CN) which accompanies the draft regulations. It provides as follows: There has been a recent trend in debts which are unrelated to heritable property being consolidated and converted into secured loans over premises owned by the debtor. If some debts were to stand outside the Scheme and have to be treated separately it may jeopardise the success of programmes under the Scheme. It is clearly a priority to keep people in accommodation where at all possible. 1

2 Govan Law Centre s casework supports the general observation that there has been a recent trend towards debtors securing consolidation loans over heritable property. This is a UK wide trend although we understand that the position in England and Wales is more problematic from the ability of creditors to secure unsecured loans by way of charging orders. Loan companies (many of which are arms length companies of major High Street banks) compete to lend consolidation loans to individuals with equity in their property. Such lenders (and their legal agents) can be aggressive on minor default in practice because they know they have a low risk route to recover the principal sum, charges and legal expenses: that is by realising equity within heritable property. That said, we are unconvinced that a repayment programme would be jeopardised if a secured debt remained outside the Scheme. Our casework experience is that the Mortgage Rights (Scotland) Act 2001 (MRA) provides a powerful remedy for debtors to resist repossession actions and set up reasonable repayment plans (see further: We would caution against the speculative suggestion in the CN to amend the MRA; particularly so, given the Act has only been in force since 3 December With respect, we believe that the CN fails to appreciate the scope and interaction of the Debt Arrangement Scheme with Scottish repossession and eviction law generally, in theory and practice. This problem is explored below but suffice to say at this stage the Scheme will not, and cannot, prevent lenders and landlords from pursuing repossession proceedings. The Scottish Executive s CN makes no case for why principal mortgages (as opposed to second secured loans) should be included within the Scheme. Yet the draft regulations would include all secured loans. We remain uncertain as to the need to include mortgages or standard securities. The only reason offered (with respect to secured consolidation loans and not mortgages) is that a Scheme could be undermined if a debtor was being threatened with repossession. This observation fails to appreciate the availability of the MRA to debtors threatened with secured debt repossession. It is also worth noting that in the less common scenario of creditors with decrees granted before the commencement of the MRA (typically for second secured loans under 25,000) debtors can resist repossession by way of a section 129 order under the Consumer Credit Act 1974 (see further: The inclusion of secured debts within the Scheme appears to be unnecessary in light of the MRA, and moreover, is unlikely to be effective in practice for the following reasons. The policy objective (stated in the CN) of stopping lenders calling-up secured loans is beyond the scope and power of the DAS. Section 4 of the Debt Arrangement and Attachment (Scotland) Act 2002 provides as follows: 4 Effect of debt payment programmes (1) Where a debt payment programme has been approved or varied, the debts specified in the application for the approval or, as the case may be, the variation shall be paid in accordance with the programme. 2

3 (2) It is not competent- (a) to serve a charge for payment in respect of; or (b) to commence or execute any diligence to enforce payment of, any debt owed by a debtor who has debts which are being paid under an approved debt payment programme. [our emphasis]. An approved Scheme cannot prevent a lender from calling up a loan, or for that matter, cannot prevent a creditor from raising possession proceedings in terms of standard condition 9(1)(b). In calling up a loan or seeking vacant possession of security subjects the creditor is not executing any diligence to enforce payment of a debt. Instead, the creditor is pursuing a statutory remedy to gain vacant possession of a property in terms of the standard security: a property which it will acquire title and ownership of where a calling-up notice is served and the debtor fails to repay the entire mortgage within 2 months of the calling-up notice. If mortgage and second secured loan debt are to brought within a DAS then this will have implications for the success of the scheme in terms of draft regulation 20. Regulation 20(3) enables the consent of a debtor to be dispensed with as follows: 20 (3) The DAS administrator may dispense with the consent of a creditor where (a) the amount due by a debtor to a creditor is 50% or less of the total debt included in a programme; and (b) the amount due to all creditors who refuse to consent does not exceed 60% of the total debt included in a programme. Where a creditor calls up a secured loan the entire debt becomes due. Such debts would be eligible to enter a DAS in terms of draft regulation 2(1) ( any sum due by a debtor to a creditor and (a) constituted by a decree of document of debt ). Thus secured debts could easily represent more than 60% of the total debt included in a programme. That being so, it is conceivable that the DAS administrator would have to secure the consent of secured debt creditors in most cases. Why would any secured creditor want to consent when a more effective and efficient legal remedy is available? Namely, an action for repossession under section 24 of the Conveyancing and Feudal Reform (Scotland) Act If a DAS administrator wanted to challenge the lender s refusal to consent (or objection) he or she would have to raise summary application proceedings to the sheriff in terms of draft regulation 25. We cannot see how a creditor could lose. Draft regulation 25 provides that a sheriff must approve a DAS where it is fair and reasonable. We cannot see how it could be unreasonable or unfair for a creditor to pursue its lawful remedies under a standard security, particularly as the Debt Arrangement and Attachment (Scotland) Act 2002 does not amend the Conveyancing and Feudal Reform (Scotland) Act Presumably a creditor would have the right to enter proceedings under draft regulation 25 (and clearly amendment to the sheriff court rules will be required as a result of regulation 25). Summary application proceedings are not inexpensive and it would be unfortunate indeed if public funds were expended on a matter which is neither necessary or workable. 3

4 Regulation 3: Fees We believe the position on fees is imprecise and uncertain. Draft regulation 3(2) provides that fees may be waived where a debtor has a very low surplus income. What does very low mean? Fees with respect to civil court procedure in Scotland are dealt with precisely. Where a litigant is in receipt of civil legal aid, or in receipt of income support or income based jobseeker s allowance, he or she is exempt from court dues. The position under a DAS could be made clearer by setting out a financial taper or passport qualifications to fee exemption. That said, Govan Law Centre believes it is unhelpful to charge any fees to debtors: paying professional fees is that last thing most debtors need. Debtors do not have to pay court fees for time to pay applications and the Scheme is ultimately a sophisticated time to pay device for multiple debts. Regulation 5: Money advisors change & notification Clearly a debtor may wish to change his or her money advisor, and the ability to do so is essential in any professional advice giving setting. We would caution against a requirement being placed on the debtor to intimate to the administrator that a money advisor has ceased to act. For example, where a money advisor cannot get instructions from a debtor and can no longer act, the money advisor should be in a position to notify the administrator of this fact. Likewise, where a debtor loses confidence in an advisor (for whatever reason) it would be more efficient for that advisor to notify the administrator of that fact. Regulation 7 & 8: Money advisors We agree that sheriff officers should not be money advisors, and other persons who have an obvious conflict of interest. We also support the principle of genuine choice which is paramount to debtor confidence and trust in an advisor. Regulation 12: Charges by a payment distributor We support the position that creditors should meet payment distributor charges under the caveat that such charges should be realistic and reflect actual costs. Regulation 14: Information on the Register We accept there must be a public register or record for the Scheme to operate in the context of consumer credit lending generally. That said, Govan Law Centre would invite the Scottish Executive to consider making the scheme more consistent with a key principle of the Mortgage Rights (Scotland) Act Section 2(3) of the 2001 Act provides as follows: (3) If, while an order under this section is in force, the obligations under the standard security in respect of which the debtor is in default are fulfilled, the standard security has effect as if 4

5 the default had not occurred. In other words while a debtor is repaying their mortgage and arrears under a section 2 order, the effect is as if the debtor had never missed any payments. In practice we are now finding, after 12 or 18 months or so of repayments, that creditors will capitalise residual arrears, and agree to dismiss the court action. Thus in the context of secure debts our clients are able to obtain debt rehabilitation. We would argue that standing the terms of s.2(3) of the MRA a creditor reference agency should not record any mortgage default which has been rectified under a section 2 order. If people convicted of criminal offences (subject to certain limitations) can obtain rehabilitation, why not debtors? Thus a debtor who successfully completes a DAS should have defaults treated as if they had not occurred. Regulation 20: Consent of every creditor We believe draft regulation 20 is poorly worded. The regulation says that every creditor of a debtor must consent but draft regulation 21 allows for objections; and by implication regulation 20(3) gives certain creditors a general right of objection. This section of the draft regulations could be improved. The general thrust of draft regulation 20 is that unless a creditor has over 60% of the proposed debt in a Scheme, they may find that their consent is automatically dispensed with in term of regulation 20(3). This has implications for the vires of the scheme standing section 29(2)(d) of the Scotland Act 1998 and the Human Rights Act The difficulty can be summarised as follows. A creditor with a decree for payment may find that an administrator is blocking his or her right to enforce that court order. While the rationale underpinning the Scheme is consistent with ECHR principles (see for example, James v. UK (1986) 8 EHRR 123) the interference with property and civil rights requires adherence to article 6(1). The administrative agency charged with running the Scheme is not an independent and impartial tribunal established by law. Of course, draft regulation 49(2) entitles a creditor whose consent has been dispensed with to appeal to the sheriff by way of summary application. The right of appeal to the court from an administrative body can sometimes satisfy article 6: see for example Begum v. Tower Hamlets London Borough Council 2003 Hous LR 20. But HRA case law, such as Begum, may not be helpful to the Scheme. In Begum, the House of Lords was looking at an administrative scheme (local authority decision-making on homelessness applications) which had a right of appeal to the county court. The Debt Arrangement Scheme presents an opposite picture: creditors who have been through an expensive court procedure (which gives them decree for payment) are subsequently confronted by an administrative body which is not article 6 compliant. If a creditor wants to challenge an administrator s decision he or she must then expend further money by raising an Initial Writ against the DAS decision. 5

6 It is not entirely clear on what principles or criteria a sheriff would have to determine creditor appeals. Draft regulation 25 sets out a fair and reasonable test for sheriffs to follow where a creditor objects or refuses to consent (and that consent cannot be dispensed with), but there is no linkage between draft regulations 49 and 25. If a creditor appeals against his or her consent being dispensed with what test is the court applying as to whether that administrative decision was right or wrong? This is all very peculiar and in the case of a modest debt it could be uneconomical to raise a summary application. We suspect this arrangement will be susceptible to HRA challenges by creditors. Regulation 25: Determination by the sheriff The use of standard forms is to be welcomed, although this would also require some thought on how applications will be dealt with in terms of court procedure. For example, parties may wish to respond to each others averments, so unless there is a provision for written pleadings (i.e. which would not occur with standard forms) what would take place at a hearing? It may be necessary for evidence to be led (in light of what is claimed) and for legal argument to take place. We suspect, in practice, that if secured debt was removed from the scheme the number of court determinations would be small. Regulation 27: Discretionary conditions Govan Law Centre is opposed to the prospect of debtors being forced to sell items of domestic moveable property as part of a DAS. While draft regulation 27 provides that only non-essential assets under schedule 2 of the Debt Arrangement and Attachment (Scotland) Act 2002 will be realisable, it is important to remember that the definition of non-essential assets is largely subjective. For example, a debtor who has an extra chair, bed or table could find such goods deemed as non-essential in term of schedule 2 to the 2002 Act. The position should be made clearer: for example only non-essential assets over a prescribed value would provide greater protection. Regulation 32: Completion of diligence We are surprised that draft regulation 32(1)(a) excludes an earnings arrestment from being recalled upon approval of a scheme standing the assurances the then Deputy Minister of Justice gave the Social Justice Committee during Stage 2 of the Debt Arrangement and Attachment (Scotland) Bill on 2 October 2002: 13:00 Tommy Sheridan: As we are discussing section 4, I take the opportunity to press him on what he means by "to commence or execute any diligence" because I am not clear whether execution of diligence refers to continuing diligence, such as an arrestment or a bank freeze. If the minister is spelling out for us that all diligence against someone who enters the scheme will freeze, I would like him to say that for the record. Dr Simpson: I will address the two points that committee members have made... Secondly, on Tommy Sheridan's point, it is our understanding that the word "execute" will apply to continuing diligence. We are clear on that point also, and I have placed that on the record. 6

7 Col. 3113, Social Justice Committee, Meeting No. 16, The Minister s position was that section 4 of the 2002 Act would extend to continuing diligence, so that both bank and earning arrestment would be recalled upon approval of a DAS. This was a clear position which we would hope will be incorporated in the Scheme s regulations. General interaction with the heritable court As with secured debt, we believe that landlords can and will pursue an action of recovery of heritable possession notwithstanding that an amount of rent arrears was being repaid within a DAS. A landlord raising a variable summons would be unable to insist upon a payment crave for arrears subject to a DAS, however such arrears could be founded upon to establish the eviction crave. A similar position exists at present where a tenant applies for sequestration. Ultimately the presence of a DAS will be relevant to whether it is reasonable to evict: although it cannot be assumed that where rent arrears are admitted to a DAS this will automatically mean it is unreasonable to evict (each case must turn on its own facts). We anticipate that a key problem in this context will flow from the fact a DAS looks at a snapshot in time with respect to arrears and continuing payments. However, debtors are people, and people exist in real time. For example, 900 of rent arrears are repaid within a DAS. The debtor subsequently misses continuing liability payments while a landlord could seek revocation of the DAS under the draft regulations, it could also proceed to move for decree of eviction (e.g. which could happen quickly where an eviction action had been sisted). Much more thought should be given to the practical interaction between the DAS and eviction law generally and landlord and tenant law in practice. Mike Dailly Principal Solicitor On behalf of the Govan Law Centre Glasgow, 18 September Govan Law Centre 47 Burleigh Street Glasgow G51 3LB mail@govanlc.com 7