Years after a Scottish debtor’s protected trust deed appeared to have ended, compensation for mis-sold payment protection insurance came to light. The Supreme Court held that the trustee’s decision to pay a final dividend ended the trust and discharged the debtor, so the former trustee was not entitled to the newly discovered asset. His appeal was dismissed.
The trust deed
On 29 September 2006 Mr Davidson granted a protected trust deed for his creditors. Under Scots law this is a voluntary alternative to sequestration, the formal bankruptcy process. He transferred to a trustee the rights and assets which would have vested in a permanent trustee on sequestration, including rights of action. The trustee was to pay the expenses of the deed and his own remuneration, then the creditors, and to return any surplus to Mr Davidson. The trustee decided whether a payment to creditors was an interim or a final dividend.
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Creditors who acceded to the deed were to discharge Mr Davidson of all debts due to them when the trust ended, unless the trustee reported that he had not made a fair and full surrender of his estate, or he was sequestrated. The trust was to end on the earliest of sequestration, the final distribution of the estate (expressly including a nil distribution), or the creditors’ acceptance of a composition. The trustee could then call a final meeting and seek his own discharge.
The dividend and the later claim
Mr Mond became trustee in July 2010. On 16 September 2010 he told the creditors that the known assets had been realised and that he would pay a first and final dividend. Their claims exceeded that estate. On 5 November 2010 he paid 22.41 pence in the pound. He was discharged on 19 November 2010. In April 2011 he sent the Accountant in Bankruptcy the statement and certificate required after a final distribution under a protected trust deed, stating that a full distribution had been made, and asked for his discharge to be registered.
Before the deed, Mr Davidson had been mis-sold payment protection insurance on loans from the Bank of Scotland. There was no suggestion that the claim had been concealed, or that he had even known of it. It was unknown to Mr Mond. In January 2015 Mr Davidson appointed Dooneen Ltd to pursue the claim and assigned it 30 per cent of any compensation. In April 2015 the Bank agreed to pay about £56,000. Mr Mond said that the right had vested in him under the deed and remained vested in him. The Bank paid him.
Dooneen and Mr Davidson sought a declaration that the compensation had not vested in Mr Mond, and payment of it. They accepted that the right had formed part of the estate transferred to the trustee. They argued that the trust ended when the distribution which he had treated as final was made, so Mr Davidson’s underlying right was freed from the trust. Mr Mond argued that a distribution cannot be final if, through ignorance, it leaves part of the estate out of account. He relied on the treatment of a similar discovery after a statutory sequestration.
What “final distribution” meant
The Lord Ordinary, Lord Jones, found for Dooneen and Mr Davidson. The Second Division of the Inner House — Lady Dorrian, the Lord Justice Clerk, Lord Malcolm and Lord McGhie — agreed. A final dividend, and the equivalent final distribution, meant one declared to be final by the trustee. The payment on 5 November 2010 had been made on that basis. The trust therefore ended that day and Mr Davidson was discharged, even though an asset unknown to the trustee still existed. The Inner House treated the deed as operating in substance as a composition: a final dividend discharged the debtor and restored him to any estate which had not been realised.
Lord Reed, with whom Lord Kerr, Lord Hodge, Lady Black and Lord Briggs agreed, held that this construction was correct. The deed provided in effect for a composition between Mr Davidson and the acceding creditors, conditional on the trustee’s final distribution and subject to the exceptions in the discharge clause. It was for the trustee, acting in accordance with his duty to the creditors, to decide when that distribution should take place.
The contrary reading — that nothing was final until every asset had in fact been distributed, whether or not the trustee knew of it — would have consequences which Mr Davidson could not reasonably be taken to have intended. No one could be sure that any distribution was final, so the trust might last indefinitely. That was difficult to reconcile with the provisions vesting later-acquired property in the trustee and requiring surplus income to be paid over while the trust continued. The debtor, and anyone dealing with him after an apparent discharge, could not be sure that he was free of his debts. If a later discovery undid a distribution already certified, the public Register of Insolvencies could not be relied on. Lord Reed thought it inherently unlikely that the deed was meant to produce that result.
The Court rejected an argument that a statutory three-year automatic discharge on sequestration limited the property caught by the deed. The deed used the statute to describe the estate, but it made its own provision for the date of discharge. Discharge did not occur automatically after three years. It occurred when the trust ended, and each event which could end the trust might occur more than three years after it began.
The sequestration case
Whyte v Northern Heritable Securities Investment Co Ltd, decided in 1891, concerned undistributed estate discovered after both a bankrupt and his trustee had been discharged. Under the Bankruptcy (Scotland) Act 1856 the debtor’s property vested in the trustee absolutely and irredeemably, dividends were to continue until the whole funds were divided, and only a surplus after payment of the debts was to go to the debtor. The House of Lords held that the sequestration had not been completed. Absent a composition or other transaction, or payment in full, a new trustee should be appointed.
Lord Reed distinguished that decision. It turned on statutory provisions which this deed did not contain. Lord Watson’s reference to a final distribution explained how he was using those words; it did not define a general term of art. He had also accepted that the result would differ where the debtor was discharged on a composition. That, in substance, was the position here. Lord Reed noted, without deciding the point, that Whyte had been brought by the creditors. It might be questioned on what basis a claim of the present kind could be brought by a trustee who had already received his discharge.
A remedy which was not argued
Lord Reed described the result as scarcely satisfactory. An asset which had vested in the trustee for the creditors, and which ought to have been applied to their debts, would reach the debtor merely because the trust had been administered in ignorance of it. Before the hearing the Court asked whether the trustee’s acts might be reduced — set aside — if they resulted from a mistake about the extent of the estate. On the construction upheld, the acceding creditors had in effect given the trustee power to extinguish their rights by deciding that a dividend was final, and that decision had been made in ignorance of a critical fact. Reduction is discretionary: it may be granted on terms, or withheld, to protect third parties. The parties declined to make submissions, so the Court held that it would be inappropriate to consider the point further.
Verdict: The Court unanimously dismissed the former trustee’s appeal. The final distribution had brought the trust to an end, so Dooneen and Mr Davidson were entitled to the compensation. The Court left open whether the trustee’s decision might have been reduced on a properly argued application.
Source: Dooneen Ltd (t/a McGinness Associates) and another v Mond [2018] UKSC 54
