Bank refused PPI setoff against discharged bankrupt
A bank found liable in a payment protection insurance (PPI) claim by a woman previously discharged from her debts in terms of a trust deed for creditors, has failed in its claim to be allowed to set off a debt for which it had received a final dividend from the trustee.
The Inner House of the Court of Session refused an appeal by the Royal Bank of Scotland against a decision by the Sheriff Appeal Court to grant decree to Alison Donnelly in her claim for payment of the balance of £10,815, which remained unpaid from an award of £11,927 by the Financial Ombudsman Service. The bank claimed that a total of £21,617 remained outstanding in respect of loan agreements to which the PPI taken out by Mrs Donnelly related.
Mrs Donnelly had entered into a trust deed for creditors in 2006 which became a protected trust deed under the legislation then in force. The bank submitted claims and in December 2013 the trustee made a final payment of 22p in the pound, following which, in terms of the trust deed, the trust deed terminated and Mrs Donnelly was discharged from all her debts. Her PPI complaint was raised in January 2014 and her claims were upheld in February and March that year.
The court "noted, though it does not affect the disposal of this appeal, that it is a matter of agreement that at no time either before or during Mrs Donnelly’s bankruptcy was Mrs Donnelly or the trustee aware that Mrs Donnelly had a claim against the bank for misselling PPI".
The Sheriff Appeal Court regarded the case as indistinguishable from Dooneen Ltd v Mond [2016] CSIH 59, since upheld by the UK Supreme Court: [2018] UKSC 54. On appeal the bank argued that although Dooneen decided that the trust must be regarded as having been brought to an end by payment of the final distribution, the question had been between the trustee and the debtor and it did not settle the rights of a creditor.
Insolvency set-off was an equitable adjustment to avoid manifest injustice, and the lower court erred in concluding that the termination of the trust had the effect of preventing the retro application of insolvency set-off (as at the date of the trust deed). Mrs Donnelly's discharge was not absolute and did not preclude the exercise of insolvency set-off which had already accrued but could not have been exercised; further, the lodging of a claim in the insolvency process should be treated as an assertion of all legal rights as a creditor of the trust, including any right to insolvency set-off.
Delivering the opinion of the court, Lord Glennie, who sat with Lord Justice Clerk Lady Dorrian and Lord Menzies, said that "For its plea of set-off to succeed, the bank must demonstrate that there is a debt owing to it by Mrs Donnelly and that that debt existed when it put forward its plea of set-off in this action". On the final distribution, the trust deed terminated and Mrs Donnelly was discharged of all debts due to acceding creditors, "even if it later transpires that there was a part of the trust estate of which the trustee was unaware and which had therefore not been distributed in payment of the debts", as Dooneen had decided.
The bank's argument had to fail as a matter of construction of the trust deed. There were also practical considerations against it, including that the trustee would be left in a state of uncertainty; that it would have consequences for the validity of the final distribution, since the bank stood to make a windfall at the expense of other creditors; and to reopen the payment would require the assistance of the trustee, who had been discharged and his remuneration settled.
"In short," Lord Glennie observed, "such an approach is virtually unworkable; and, if it could be made to work, it would effectively amount, in substance if not in name, to a reopening of the trust deed, requiring the trustee to make a further final distribution, a course which would run entirely counter to the practical considerations outlined by Lord Reed in paras 13-15 of Dooneen."
Nor did a claimed analogy with rights in security help the bank's argument.
Concluding, Lord Glennie noted that the bank might now seek reduction of the acts of the trustee so as to reopen the trust proceedings, adding: "Nothing we have said in this opinion should be taken as expressing any view on the merits or otherwise of such a course."