Readers will no doubt be familiar with the previous reported cases in the litigation between the Royal Bank of Scotland (RBS) and Mrs Donnelly. In the latest reported decision, the Court of Session considered whether the discharge of a debtor from a protected trust deed could be reduced following the discovery of assets of which the creditor and trustee were unaware prior to the discharge. The court confirmed that, in principle, reduction is possible, however it clarified that whether it will, in any particular case, exercise its discretion to reduce a discharge will depend upon the individual facts and circumstances.
Between 1997 and 2003, Mrs Donnelly obtained loans from RBS, however she was unable to keep up with repayments, became insolvent and entered into a protected trust deed. The trustee under the trust deed granted her discharge on 11 December 2013, with approximately £25,000 remaining unpaid to RBS, which was Mrs Donnelly's only creditor. After her discharge, Mrs Donnelly claimed she had been mis-sold Payment Protection Insurance (PPI) by RBS. The complaint was upheld and compensation agreed at £11,927.39. Neither Mrs Donnelly nor her trustee took any steps prior to her discharge from the trust deed to inquire whether she had taken out such a PPI policy or was eligible for compensation.
Mrs Donnelly raised an action against RBS for payment of her agreed compensation (the Payment Action). In the Payment Action, RBS argued that the PPI compensation should be set off against the balance owed by Mrs Donnelly (after deduction of the small dividend that it had received from the trust deed). This argument was rejected by the Inner House on the basis that Mrs Donnelly had already been discharged from the trust deed in respect of these sums and the effect of that discharge was that RBS was precluded from pursuing the sum owed or asserting set off in respect of this sum. RBS then raised the latest set of proceedings seeking reduction of Mrs Donnelly's discharge from the trust deed, to allow RBS to assert its right of set off in relation to the PPI compensation.
The court held that Mrs Donnelly's discharge from the trust deed was gratuitous, which following the decision in Hunter v Bradford Property Trust Ltd, meant that it could be reduced by the court on the basis of an "essential error" on the part of the granter (i.e. the trustee). The essential error in the present case was that had the trustee known of the existence of Mrs Donnelly's PPI claim, the trustee would have taken steps to make the claim and ingather any compensation awarded for the benefit of Mrs Donnelly's creditors, and would not have granted her discharge until this had been done. In principle, therefore, a debtor's discharge from a trust deed could be reduced.
Ultimately, however, the court held that it was not prepared to reduce Mrs Donnelly's discharge from her trust deed. The court said that in arriving at a decision whether to exercise its discretion, it would also require to have regard to "equitable considerations", and would have to balance the benefit to RBS of the discharge being granted against the impact it might have on Mrs Donnelly. In doing so, the court noted that while the value of the PPI claim was "paltry" to RBS (particularly when compared to the legal fees that had been incurred in the procedure to date), the grant of the discharge was of great value to Mrs Donnelly, for whom it represented a fresh start following her insolvency free from pre-trust deed debts. This was considered of greater relevance to the court due to the period of time that had passed since her discharge had been granted (more than six years). Of interest to the court was that RBS had not sought reduction of her trustee's discharge, only that of Mrs Donnelly from her trust deed. This would have resulted in Mrs Donnelly being returned to insolvency without a trustee in place to grant her discharge after the matter had been resolved. The court did comment that this procedural issue could be overcome in other cases and so this left open the door for this to be resolved in a future case. The court concluded that the "equitable considerations" weighed heavily in favour of Mrs Donnelly and refused to reduce her discharge.
From a creditor's perspective, the judgment gives with one hand and takes with the other. The court did hold that, where a debtor is discharged from a trust deed and assets are then discovered later that could have been realised during the currency of the trust deed, the court can reduce a debtor's discharge in appropriate circumstances. However, what is clear from this latest decision is that the "equitable considerations" will need to be in the creditor's favour before the court will be willing to exercise its discretion in favour of the creditor. If a number of years have passed since the discharge was granted, or the asset in question is not particularly valuable, then those are likely to be factors that will weigh against a creditor. The judgment also suggests that the creditor will need to provide for re-appointment of a trustee to allow the debtor to be discharged once the relevant matter had been dealt with. So, while reduction of the discharge from a trust deed is, in theory, possible, it could be very challenging for creditors to persuade the court to agree to this.
Practically speaking, there are certain steps that a creditor can take to try and minimise the scope for a later argument about offset. Creditors should, where possible, check their records to confirm if an insolvent debtor has an outstanding or agreed PPI claim, or any other claim. If so, these should be brought to the attention of the relevant insolvency practitioner as soon as possible so that any sums owed can be set off as part of the creditor's claim being submitted and the relevant insolvency process kept open to allow any claim by the debtor/the debtor's trustee to be fully investigated and resolved.
Additional reporting by Olivia Steven.
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