PPI Claims and Protected Trust Deeds

PPI Claims and Protected Trust Deeds

The recent decision of the Inner House in the Case of Douglas Davidson against David Mond addressed the issue of how a claim for mis-sold Payment Protection Insurance should be dealt with when the claimant had previously signed a Trust Deed and a final distribution in the Protected Trust Deed (PTD) had been made.

The issue in that case was whether a debtor who had made a successful claim for Payment Protection Insurance could receive the payment, or whether the funds should be paid to his former Trustee in a Protected Trust Deed.

In the case Mr Davidson had signed a Trust Deed on the 29th September 2006 and received his discharge from the Protected Trust Deed on the 5th November 2010, on the same date that the Trustee made a final dividend payment to the creditors of the Protected Trust Deed.

The Trustee then sought his discharge from the Creditors and received this on the 19th November 2010.

It appears to answer in the negative the long running question of whether a Trustee in a Protected Trust deed is able to re-open a Protected Trust Deed after it has been closed and both the Trustee and debtor discharged, to deal with assets which vested with him during the Trust Deed, but were possibly not known of at the time.

It also found that Mr Davidson, the debtor, was entitled to keep the payment protection insurance payment.

However, a similar case decided in Glasgow Sheriff Court earlier this year by Sheriff Reid, now being appealed, dealt with similar issues, but different facts and held the debtor was not able to keep the payment protection payment.

The issue is whether in light of the Mond decision, that case might now be dealt with differently.

Donnelly vs RBOS

In this Case, the Pursuer had also previously signed a Protected Trust Deed and like Mr Davidson had received her discharge, as had her Trustee in her Protected Trust Deed. However, when she subsequently made a claim for PPI, the claim was accepted, but as no Trustee was still in office the defenders sought to set her claim off against the original debt she had owed during the Protected Trust Deed.

In the case Sheriff Reid, in a lengthy decision held, the bank was permitted to do so, producing a different result to that in Mond.

Although normally, the rules of precedent would mean that the decision of the Inner House would supersede the decision of Sheriff Reid, the facts of each case are different, raising the issue of whether a creditors’ debt in a Protected Trust Deed continues in some form after a final distribution in a Protected Trust Deed and the Trustee has received their discharge.

In Donnelly, Sheriff Reid addressed a number of issues, which it is useful to summarise below:

  • He held that the obligation to pay compensation for PPI-mis-selling was a contingent obligation in the Protected Trust Deed, as it had as its source the original pre-insolvency credit agreements that were included into the Protected Trust deed. This meant although they had yet to be purified by Ms Donnelly making a claim, they did vest with the Trustee in the Trust Deed, even if they were not known of at the time.
  • He also held that by signing a Trust Deed for the benefit of her creditors, she had made a relevant acknowledgement of the debt that she owed to the bank, which interrupted the running of prescription for the purposes of the Prescription and Limitation (Scotland) Act 1973. He further held that the creditors claim in the Protected Trust Deed acted as a continuous claim for the purposes of the 1973 Act, meaning Miss Donnelly could not argue that the debt had become extinguished by operation of law and she could not claim there was no debt against which the PPI claim could be set off against.
  • He also held that the effect of the Trustee’s adjudication on the Creditor’s claim at the end of the Protected Trust Deed also had the effect of meaning going forward when prescription did start running again, the debt was no longer covered by short term prescription (5 years), but long term prescription (20 years).

However, he also made the observation that the effect of the debtor’s discharge in a Protected Trust Deed was not to extinguish the debt owed to the creditor, but only to prevent the creditors making any personal claim against the debtor for their debts; and to prevent any future property acquired by the debtor vesting in the Trust Deed for the benefit of the creditors.

The debt he held could only be extinguished by the creditors receiving full payment or through the debtor receiving a discharge on composition.

Sheriff Reid makes the analogy of the insolvent estate being like a fallen tree and the debtor’s discharge only severing the debtor from their insolvent estate, but the debts continue to be owed by the insolvent estate, or as he states:

“The insolvent estate remains ring-fenced and preserved for the purpose of being distributed among the unsatisfied creditors, however long that takes.”

This, however, is not what the Inner house found in the case of Mond, where it has to be cautioned the facts depended on the wording and construction of the Protected Trust Deed in that case.

Lady Dorrian in her opinion held the effect of the Trustee making a final dividend or distribution to creditors, which were held to be interchangeable terms, was to terminate the Trust Deed and reinvest the assets held in the estate back into the hands of the debtor.

The issue of a final distribution is not one that Sheriff Reid considered in Donnelly, although he did consider what the rights of the debtor were over any estate that was reinvested back to him after a Trustee received their discharge and noted from McBryde:

“Following the discharge of a trustee, an insolvent debtor re-acquires title to pursue and recover assets forming part of his insolvent estate, by virtue of his radical right to the estate.  However, while title may revive, it is, in nature, a bare title to sue.  The debtor can pursue and recover assets forming part of his insolvent estate but only as a constructive trustee for the benefit of the creditors. The beneficial interest in the assets remains with the creditors (McBryde, Bankruptcy, paragraph 8-75)”

Short of discharge on composition, or abandonment of an asset by the Trustee or payment in full of debts owed to creditors, it would, therefore, appear that any reinvestment of an asset into the hands of a debtor, such as a PPI claim, would only give the debtor the barest of rights to raise an action, but would not prevent a creditor using a right of set off where the debt owed to them exceeded the amount of the claim being made.

However, in Mond, Lady Dorrian observed:

“… the trust deed, as we have noted, is tied to, amongst other things, final distribution.  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 (the voluntary equivalent of a sequestration) is ended and the debtor is entitled to be re-invested in any remaining trust estate.  As was explained in Flett v Mustard (Lord President Normand, p 275):

“If abandonment is out of the way, the only other mode by which retrocession can be established, short of full payment of the creditors, is by showing that there was a discharge on composition—Northern Heritable Securities Investment Co., Lord Watson at p. 39.  There may be a discharge of a debtor under a trust-deed for creditors which does not expressly bear to be a discharge on composition but which is intended to have that effect, and that intention may be found in the terms of the trust-deed and of the discharge. That was the view taken by Lord Trayner (at p. 570) in Kinmond, Luke & Co. James Finlay & Co.

It would appear, when the Donnelly appeal is heard, the case may now be decided differently. In the original case, Sheriff Reid had held the debt to the creditors continued until such time the debt was paid in full or there was a discharge on composition. However, Mond appears to now hold the final distribution, depending on the wording and construction of a Trust Deed, can amount to a discharge on composition.

As Lady Dorrian concluded in her decision: “The discharge in the present case has the same effect, terminating the trust and reinvesting the truster in any unrealised estate, which includes the PPI payment” 

Crucially, it is not just the claim that is reinvested, but the payment.

Note: A motion to remit Donnelly to the Court of Session was rejected on the 16th of June 2016. The appeal will be held by Scottish Sheriff Appeal Court.