The question of who is entitled to payment of compensation for PPI where a debtor has been discharged from his/her Protected Trust Deed (PTD) had given rise to conflicting judicial decisions in Scotland. In our previous article, we highlighted the uncertainty created following the decision of Sheriff Reid in the case of Donnelly v The Royal Bank of Scotland (Donnelly) and the decision of Lord Jones in Dooneen Limited, t/a Mcginnes Associates and Douglas Davidson v David Mond (Dooneen). Both cases were subject to appeal and the decisions of the appeal courts have brought some much needed clarity with regards to the position in Scotland.

This is very much a live question south of the border too, with a decision from the Court of Appeal in the case of Green v Wright imminently expected. In that case, the former debtor proposed the terms of an IVA incorporating the R3 Standard Conditions (version 2), which was approved by the county court with some modifications. The debtor complied with his obligations under the terms of the IVA and this was reported to creditors in January 2013. The usual certificate of due completion was issued by the IVA supervisor. Subsequently, the supervisor received payments of some £24,500, being the proceeds of PPI policies that had been mis-sold to the debtor. The county court found that the funds should be paid to the debtor. The High Court upheld that decision on appeal on the basis that once the IVA had been concluded by the issue of a completion certificate, the debtor was released from all debts which had been the subject of the IVA. We await with interest the Court of Appeal’s decision.

On 13 July 2016, the Inner House of the Court of Session released its decision in the Dooneen case upholding the decision of the judge at first instance that the debtor was re-vested in the right to receive the compensation payment following the Trustees’ declaration of a “final dividend”. The attempts by Counsel on behalf of the former Trustee to suggest that, properly interpreted, the PTD only provides for such reinvestment once the creditors had been paid in full was rejected by the Court.

It was always going to be the case that the Inner House’s decision in Dooneen was going to heavily influence the outcome of the Donnelly appeal. In Donnelly, the Sheriff held that RBS was entitled to use the Scots law principle of the balancing of accounts in bankruptcy to set-off PPI payments against the customer’s pre-insolvency debts. The Sheriff reached this view on the basis that absent abandonment of the PPI claims by the trustee or discharge on composition or settlement in full of the creditor’s claims, the debtor was not re-invested in any part of the insolvent estate following the final distribution under a PTD. Therefore, the Inner House’s decision that the final distribution acts “not only as the trigger for a discharge of the debtor by creditors, but, in effect a composition, whereby the trust deed…is ended and the debtor is entitled to be re-invested in any remaining trust estate” meant that RBS was going to have an uphill struggle in the appeal.

It is not surprising therefore that the Sheriff Appeal Court allowed Ms Donnelly’s appeal in a decision released on 13 January 2017. Following the reasoning of the Inner House, it found that the Ms Donnelly’s discharge from her PTD and payment of the final dividend acted as a composition agreement between Ms Donnelly and her creditors and operated to extinguish her obligation to pay the pre-insolvency debts due to RBS. The payment of the final dividend also terminated the trust and therefore Ms Donnelly’s was entitled to receive the PPI compensation in full.

It is therefore now clear in Scotland that unless the wording of the PTD makes it explicit that it was to continue until creditors were paid in full, creditors who have acceded to a PTD will be taken to have done so, knowing that there is a possibility of losing the chance to claim any worthwhile asset unknown to the debtor that unexpectedly comes to light after the Trustee had terminated the operation of the PTD. It is also the case that a bank’s right of set-off is no longer available in those cases where a final distribution has been made under the PTD. It should be noted that the position in sequestration (i.e. bankruptcy) is different and the bank will still be able to apply the principle of the balancing of accounts in bankruptcy to set-off PPI payments against the customer’s pre-insolvency debts. It will also be possible in the sequestration scenario for a creditor to seek to “re-open” the sequestration and re-appoint a trustee to ingather the proceeds of any PPI claim that comes to light after the sequestration has been brought to an end.

Creditors who are asked to accede to a PTD need to be aware of these recent decisions and we may see more creditors deciding to object to a PTD given the greater protections that are available through formal sequestration.

Following the Dooneen decision, Insolvency Practitioners, can also expect to receive more requests for information regarding closed cases from claims handling companies who are likely to step up efforts to identify debtors with potential compensation claims.

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