Debtor wins latest PPI set-off dispute
The Inner House of the Court of Session has issued its long-awaited judgment in the case of Donnelly v RBS, reaffirming that the bank cannot exercise set-off when the debtor has already been discharged from their trust deed.
The issue of beneficial interest in PPI where the debtor has been subject to a trust deed has been considered yet again by the Inner House of the Court of Session.
The Court of Session considered the matter previously in July 2016 in the case of Dooneen Ltd & Othrs v Mond (‘Dooneen’) and concluded that once a debtor has been discharged then any subsequently identified PPI claim will belong to the debtor. That decision was subsequently upheld by the UK Supreme Court in October 2018 and that judgment was considered in an article on icas.com.
Between 1997 and 2003, Mrs Donnelly borrowed money from RBS and RBS sold to Mrs Donnelly payment protection insurance (“PPI”). On 29 August 2006, Mrs Donnelly became insolvent and entered into a trust deed. RBS submitted claims in respect of the loans in the trust deed. Mrs Donnelly was discharged on 11 December 2013 and the trustee paid a final dividend to creditors on 31 December 2013. RBS was not paid in full, with an outstanding balance of £21,617.42 remaining. The trustee was discharged.
In February and March 2014, claims by Mrs Donnelly that she had been mis-sold the PPI were upheld and settlement agreements provided for payment to her of sums totalling £11,927.39. RBS paid £1,111.63 to Mrs Donnelly and Mrs Donnelly sued RBS for payment of the balance of the PPI compensation amounting to £10,815. RBS claimed compensation or set-off, by application of the principle of balancing of accounts in bankruptcy, in respect of the debt which remained due to it by Mrs Donnelly for the loans.
Sheriff Reid, in his original judgment in February 2016, decided that Mrs Donnelly remained obligated to RBS in respect of the outstanding loan balance despite her discharge from the trust deed having been granted, and that RBS could plead set-off. He held that Mrs Donnelly sued as constructive trustee to recover the PPI compensation as an asset of her insolvent estate of which the Bank remained a creditor.
Mrs Donnelly appealed and the Sheriff Appeal Court, having had the benefit of the decision of the Inner House in Dooneen, which they regarded as indistinguishable, allowed the appeal. They held that the defence of insolvency set-off could not succeed and granted decree in favour of Mrs Donnelly. This latest judgment follows an appeal by RBS against that decision.
Discussion and decision
RBS argued that the only thing decided by Dooneen was that the trust was brought to an end by the payment of the final distribution and that any assets which had initially vested in the trust estate would revert to the debtor.
It was contended that, in Dooneen, the issue was whether the newly discovered asset (the PPI mis-selling claim) should be regarded as belonging to the former trustee, for the benefit of (former) creditors of the (former) debtor, or as belonging to the former debtor in his own right. There was no claim by a creditor to enforce their debt against the new fund or any claim by a creditor who had a right of set-off against that new fund. It followed that nothing said in Dooneen was intended to decide the issue before the court in RBS v Donnelly.
It was submitted on behalf of RBS that the Sheriff Appeal Court had made an error in concluding that the termination of the trust deed had the effect of preventing the retrospective application of insolvency set-off (as at the date of the trust deed). There was nothing that RBS could have done to enforce its claim as Mrs Donnelly made no claim for PPI mis-selling during the trust deed, and the trustee himself had made no such claim on behalf of the estate against which set-off could have been asserted. It was argued that the discharge given to Mrs Donnelly was not absolute and did not preclude the exercise of insolvency set-off which had accrued but could not have been exercised.
RBS considers that a valid claim was submitted to the trustee, the lodging of which should be treated as an assertion of all legal rights as a creditor of the trust, including any right to insolvency set-off.
On behalf of Mrs Donnelly it was emphasised that the terms and effect of the trust deed are as explained by the Inner House and the Supreme Court in Dooneen. On a final distribution by the trustee, which had happened here, the trust came to an end and the debtor was discharged of all her pre-insolvency debts, including sums formerly due under the loan agreements with the bank. That occurred as a matter of agreement in accordance with the terms of the trust deed. The debt previously owing by Mrs Donnelly to RBS under the loan agreements had been extinguished and therefore could not form the basis of any set-off against claims by Mrs Donnelly against RBS. The insolvency had come to an end with the termination of the trust deed and the discharge of the debtor from all her debts.
These arguments were developed in more detail and ultimately led to the appeal by RBS being dismissed. The Court concluded the that the arguments submitted on behalf of RBS must fail:
Simply as a matter of construction of clause (10) of the trust deed and the word “discharge” as used in it. As is made clear in Dooneen, the trust deed takes effect as a contract between the debtor and the acceding creditors. The ordinary meaning of the word “discharge” in that context is that the debts due to the creditors are extinguished upon payment by the trustee of the final dividend and termination of the trust. That is the deal which the parties have agreed. Nothing in the surrounding circumstances supports any different construction. In our opinion the meaning of clause (10) is clear: debts due to creditors are discharged or extinguished upon termination of the trust deed.
Ultimately the trust proceedings came to an end with an agreed discharge of all debts due from the debtor to acceding creditors. At that point RBS had no debt owing to it capable of being used by way of set-off to defeat Mrs Donnelly’s claim to enforce payment of the sums agreed to be due to her as a result of the PPI mis-selling.
This latest judgment, following on from the Supreme Court’s decision in Dooneen, reaffirms that once a trust deed is terminated the debtor will benefit from any PPI claim which remains outstanding.
In such situations, the bank will not be able to claim set-off against any loan or other account balance which the debtor had which remained unpaid following the trust deed dividend(s).
Given the potential sums involved where RBS (and other banks) may already have offset PPI claims against outstanding balances unrecovered following insolvency and the implications of those amounts now having to be paid across to the debtor, then it may be RBS will consider an appeal to the Supreme Court.
It is also noted in the judgment that the discharge of the debtor was reduced in Baillie v Young (1837) 16 S 294 so as to allow set-off to be operated, and that RBS may consider a similar action as a result of its unsuccessful appeal. The latest judgment does not express any view “on the merits or otherwise of such a course”.
For ongoing trust deeds (and sequestrations) the judgment reaffirms that creditors must plead set-off and that this is not an automatic right. The set-off will apply as at the date of pleading and is not retrospectively applied to the date of insolvency.