Supreme Court rules on Trust Deed appeal

On 31 October 2018 the Supreme Court issued its Judgment in the appeal of Dooneen Ltd (t/a McGinness Associates) and another (Respondents) v Mond (Appellant) (Scotland) [2018] UKSC 54.

The appeal had been brought by Mr Mond who had sought to overturn the decision of the Inner House of the Court of Session (Dooneen Ltd & Others V Mond [2016] CSIH 59).

Factual background

On 29 September 2006 Mr Davidson, the second respondent (“the Debtor”), granted a Trust Deed for the benefit of his creditors. Mr Mond (“the Trustee”) had been assumed as trustee under the Trust Deed in July 2010. The Trust Deed was a protected trust deed under the terms of the Bankruptcy (Scotland) Act 1985.

On 16 September 2010 the Trustee wrote to creditors stating that “I am now in a position to complete the administration of the case and make payment of the first and final dividend. All the assets in the Trust Deed have been realised….”

In November 2010 the Trustee distributed what he described as a “first and final dividend” of 22.41 pence in the pound to the creditors and was discharged later that month. On 5 April 2011 the Trustee sent the Accountant In Bankruptcy a statement detailing how the estate was realised and distributed together with a certificate, as required in terms of paragraph 9 of Schedule 5 to the 1985 Act, stating that that the distribution was in accordance with the Trust Deed. Paragraph 9 provides that “where the trustee under a protected trust deed has made the final distribution of the estate among the creditors”, the trustee is required to submit the statement and certificate “not more than 28 days after the final distribution”. The certificate stated that “a full distribution of the debtor’s estate has now been made in accordance with the terms of the Trust Deed”.

PPI compensation claim

Prior to entering into the deed, the Debtor had been mis-sold payment protection insurance (“PPI”). In early 2015 the Debtor had entered into an agreement with Dooneen Limited, the first respondent (“Dooneen”) in terms of which they agreed to submit a mis-selling claim to the bank on his behalf and to whom the Debtor had assigned 30% of any resulting compensation. In April 2015, the bank in question had agreed to pay him compensation in the sum of £56,000.

The Trustee was unaware that the Debtor had been mis-sold PPI and was entitled to compensation from the bank until sometime after he had distributed the “first and final” dividend.

Unsurprisingly, the Trustee claimed that the right to compensation had vested in him by virtue of the provisions of the Trust Deed and remained vested in him. The bank paid the compensation to the Trustee.

Dispute

The respondents argued that the Trust Deed had come to an end following the distribution of the “first and final” dividend in November 2010 and sought declarator that the compensation did not vest in the Trustee and for payment of the compensation.

Clause 11 of the trust deed provided that it would terminate on the earliest of the following events:

“(i) An award of sequestration of my Estate ...

(ii) The final distribution of my Estate (which shall for the avoidance of doubt include a nil distribution) by my Trustee in accordance with this Trust Deed.

(iii) The acceptance by my creditors of any composition offered by me.”

Following consideration of the terms of the Trust Deed the Lord Ordinary held that the Trust Deed had come to an end following the “first and final” dividend and that consequently the assets, including the right to compensation, which had been conveyed to the Trustee under the trust deed had reinvested in the debtor. The Inner House upheld the Lord Ordinary’s decision following an appeal by the Trustee.

The Trustee appealed to the Supreme Court on the ground that the Inner House had found incorrectly that the distribution by the Trustee in November 2010 amounted to a final distribution within the meaning of the Trust Deed. The consequences of the final distribution of course being the termination of the Trust Deed and the Debtor being reinvested in the remaining trust estate (which included the right to compensation).

The Trustee argued that there could be no final distribution within the meaning of the Trust Deed unless the distribution included the whole of the trust estate or sufficient assets were distributed to pay all creditors in full.

Supreme Court Decision

The Supreme Court unanimously dismissed the appeal. Lord Reed delivered the judgment and provided the following reasons for the dismissal:

(i) “One could never be certain that any distribution was a “final distribution” in that sense, one could never be certain that the trust had terminated. It would potentially be of indeterminate duration.” Lord Reed opined that this would be difficult to reconcile with other parts of the Trust Deed which vest in the Trustee assets and income acquired by the Debtor during the subsistence of the Trust Deed;

(ii) If one could not be certain that the Trust Deed had terminated it follows that neither the Debtor nor anyone doing business with him would know whether the Debtor had been discharged; and

(iii) “if the discovery of previously unknown assets signifies that there has not been a final distribution….then it follows that reliance cannot be placed on the accuracy of the public Register of Insolvencies. It is inherently unlikely that the trust deed was intended to have that result.”

Reduction

Lord Reed acknowledged that the outcome of the case was less than satisfactory. He referred to the fact that the Court had invited submissions from the parties on “whether the relevant acts of the trustee might be reduced if they were the result of an error as to the extent of the trust estate.” and had drawn the parties’ attention to a number of relevant authorities. The parties, however, declined to make submissions on the point.

Comment

There have been a number of cases recently concerning applications by former trustees in sequestration for reappointment after new funds (usually PPI compensation monies) were received into the sequestrated estate. The Court has the discretion whether to grant such applications and will usually do so where there would be a discernible benefit to creditors.

However, it is clear following yesterday’s decision that where a trustee under a trust deed: (i) has made a final distribution to creditors which has triggered the termination provision in the trust deed; (ii) is discharged and (iii) complies with the relevant statutory requirements following the final distribution the trustee has no claim on any assets of the debtor which had previously vested in him but which had not been distributed.

In essence, a final distribution is just that.

However, it is clear that the Supreme Court had countenanced the possibility that it may be open to a party to reduce the relevant acts of the trustee if they were a “result of an error as to the extent of the trust estate.” This may provide at least a glimmer of hope to insolvency practitioners who find themselves in a similar situation.