RBS v Donnelly: action for reduction of debtor’s discharge in PTD
The Outer House of the Court of Session has issued its latest, very lengthy judgment, in the long-running litigation involving RBS and Donnelly, this time concerning the reduction of the debtor’s discharge to enable RBS to set-off its liability to compensate the debtor for mis-selling PPI in the past. Steven Wood takes a look at some of the detail.
On 21 November 2019, the Inner House of the Court of Session issued its judgment in the case of RBS v Donnelly, which reaffirmed that the bank could not exercise set-off as the debtor had already been discharged from her trust deed.
In a previous article which examined that decision, it was indicated that, 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 having to be paid across to the debtor, it was possible that RBS would consider an appeal to the Supreme Court.
The latest issued opinion confirms that a request to make a third-level appeal to the Supreme Court in relation to that action was made and refused.
The subject of the action to which the latest judgment relates is instead the reduction of the debtor’s discharge. It was noted in the previous 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. The judgment did not express any view “on the merits or otherwise of such a course”, but RBS clearly felt a second bite at the cherry from a different angle may achieve its desired result.
The verdict runs to some 73 pages, but the key issues considered by the Court can be summarised as follows:
- Whether the pursuer had title to sue as the debtor contends that the pursuer was not a creditor of hers in respect of her pre-discharge debts, any right against the debtor in respect of her pre-discharge indebtedness was assigned and it was an entity other than the pursuer which had compromised the debtor’s PPI claim.
- Whether error or ignorance of the trustee or creditors is a relevant ground for the reduction of the discharge of a debtor from the Trust Deed, and if that is the case in respect of error or ignorance in general, whether that applies where it is either (a) error about or ignorance of the existence of an obligation of the creditor who (or whose successor) seeks reduction, or (b) error or ignorance which the trustee owed the creditors a fiduciary duty to avoid.
- Whether reduction is either competent or equitable.
- Whether the pursuer was precluded from seeking due essentially to unreasonable delay and inaction and had consequently waived any right to seek reduction.
The right to sue takes up a significant part of the judgment and is largely related to technical arguments surrounding corporate reorganisation within the RBS Group and its effect on their status as a creditor, which subsequently affects their right to set-off (or balancing of accounts in bankruptcy) as under Scots law there must be concursus debiti et crediti (each part must be a creditor and debtor to each other). This was confirmed in the judgment.
The Court found that the trustee’s failure to ingather the PPI claims could be described as a “material” error, and one capable of founding an action of reduction of the debtor’s discharge, stating “had the trustee known of the PPI claim, it is inconceivable that she would have granted the debtor’s discharge until that claim was realised as an asset for the benefit of the debtor’s creditors”.
The Court further found that the debtor’s discharge was gratuitous and that the pursuer successfully “established reduction on the ground of a substantial error in the grant of the discharge which was, quoad the debtor’s PPI claim, granted sine causa”.
Lady Wolffe goes on to note that “the pursuer has succeeded on all the grounds necessary to enable partial reduction of the discharge to be granted”.
Notwithstanding this, reduction of the debtor’s discharge was ultimately refused, essentially as a result of the Court’s discretion.
Factors cited in arriving at this decision include the passage of time – six years since the discharge of the debtor, 14 years since the trust deed commenced and more than 20 years since the debts were incurred. Further, the toll taken on the debtor as a result of being embroiled in the separate payment action for the past seven years and, the ultimately “paltry” amounts involved from the pursuer’s perspective that “is not an insignificant sum for the debtor”.
Lady Wolffe concluded “Collectively, these factors provide “cogent reasons” to refuse the reduction sought. I would regard it as bearing unduly harshly on the debtor, or it being “unjust and inconvenient” in this case, to grant a partial reduction of her discharge”.
Although ultimately the judgment went in the debtor’s favour, that was as a result of the Court exercising its equitable discretion based on the specific factors in this case.
However, in providing this judgment the Court has made clear that there is nothing inherently incompetent in seeking reduction of a debtor’s discharge in an insolvency process “so long as the discharge was given effect in a procedurally competent manner, was not prejudicial to the bona fide rights of third parties, that the parity of treatment of creditors in was preserved and the other rules governing reduction and retitutio (where it arose) could be applied”.
It is entirely possible therefore that in other circumstances, where a debtor and trustee have received their discharges and an asset is subsequently discovered, which need not have been fraudulently undisclosed, that the debtors discharge could be reduced on application to the court to allow the asset to be realised for the benefit of creditors.
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