Debtor wins PPI set-off dispute
The Sheriff Appeal Court has issued its judgement in the case of Donnelly v RBS concluding that the bank cannot exercise set-off when the debtor has already been discharged from their trust deed.
The issue of beneficial interest in payment protection insurance “PPI” where the debtor has been subject to a trust deed has come under the Court spotlight once again.
The Court of Session considered the matter in July 2016 in the case of Dooneen Ltd & Others v Mondand concluded that once a debtor has been discharged then any subsequently identified PPI claim will belong to the debtor.
At the time of reporting that case, I noted that an appeal was still to be heard by the Sheriff Appeal Court in relation to the decision of Sheriff Reid in the case of Donnelly v The Royal Bank of Scotland  SC GLA 13 where the point under consideration was whether a lender is able to apply set-off of any PPI claim monies against any balance of lending which remained unsettled following conclusion of the trust deed. The Sheriff Appeal Court has now issued its judgement.
Facts of the case
Between 1997 and 2003, Mrs Donnelly borrowed money from RBS, and RBS sold to Mrs Donnelly 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. 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 the Bank for payment of the balance of the PPI compensation of some £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 judgement 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 on that point.
Although there was a sole issue before the Sheriff Appeal Court, the argument changed since the decision of the sheriff on 11 February 2016 following the appeal decision of the Court of Session in Dooneen Ltd & Others v Mond.
That decision upheld the opinion of the Lord Ordinary, about the construction and effect of a trust deed in the same terms as the trust deed in this case. In Dooneen Ltd & Others v Mond it was held that the trust deed had come to an end on the making of a distribution by the trustee with the result that neither the trustee nor the creditors had a claim to the PPI compensation subsequently sought and received by the debtor.
On behalf of Mrs Donnelly, it was argued that Dooneen was determinative of the issue in this case and Mrs Donnelly’s obligation to pay the balance of the loan debt to RBS had been extinguished by her discharge and payment of the final dividend per the particular terms of the trust deed. Any property left in the insolvent estate was re-invested in her, and thus she was entitled to any PPI settlement personally and RBS could not plead set-off of the balance of the loan debt owed to it.
An “ingenious argument”
On behalf of RBS, the judgement refers to an “ingenious argument” being put forward to circumvent the decision in Dooneen. In Dooneen, there was a surplus generated from the PPI claim after the trust had terminated while in this case there was not because the Bank’s claim for the loan debt was larger than Mrs Donnelly’s PPI claim.
RBS claimed that when compensation or a balancing of accounts in bankruptcy is pleaded, it operates at the date of insolvency. At that date, Mrs Donnelly’s PPI claim was “extinguished” by the larger claim RBS had and as a result RBS could plead a balancing of accounts or set-off in this action.
The Sheriff Appeal Court concluded that unless Dooneen can be distinguished on the ground argued by RBS, the appeal by Mrs Donnelly must succeed.
In the Sheriff Appeal Court judgement delivered by Sheriff Morrison QC he states “we do not think that whether there was a surplus or not makes any difference to the legal effect of a trust deed which extinguishes a debt.” The issue therefore was solely whether any balancing of account could be plead to take place retrospectively, i.e. at the date of insolvency.
Counsel for Mrs Donnelly pointed out that the Bank’s argument overlooked the fact that the bankruptcy was at an end and there could be no balancing of accounts, which was a principle devised to resolve issues in insolvency. Balancing of accounts had to be pleaded and did not operate automatically and therefore the relevant date was the date when set-off was pleaded and not the date of insolvency. The question was whether the debt existed at that date (which it did not). Furthermore, both debts must be due and, if one of them has prescribed or has otherwise been extinguished, both are not due and set-off cannot be successfully pleaded.
The Sheriff Appeal Court considered that a critical point was the rule that a debt which has prescribed cannot be pleaded in balancing of accounts. If it does not operate where the debt has prescribed then it should not operate after a composition or its equivalent.
The judgement of the Sheriff Appeal Court concluded, “In light of the decision of the Inner House in Dooneen, it must follow that, in this case, the Bank cannot plead compensation or set-off of its extinguished debt against Mrs Donnelly’s claim.”
With the caveat that the Dooneen case may still be heard by the Supreme Court and that the judgement of the Inner House of the Court of Session may potentially be overturned, the decisions in Donnelly v RBS and Dooneen Ltd & Others v Mond now make it clear 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 and remained unpaid from the trust deed dividends.
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 that the decision of the Sheriff Appeal Court will be subject to further appeal.
For ongoing trust deeds (and sequestrations) the judgement of the Sheriff Appeal Court highlights 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.