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RBS Told They Cannot Apply Set-Off to Debts After Bankruptcy

The Inner House has refused an appeal by RBS to allow it to offset PPI compensation payments against debts which formed part of a protected trust deed.

The Opinion, delivered by Lord Glennie, in The Royal Bank of Scotland plc v Donnelly [2019] CSIH 56 on this ‘important and novel question of law’ found that the bank was not entitled to apply insolvency set-off after Mrs Donnelly had been discharged from her debts.

The facts

Mrs Donnelly borrowed money from RBS between 1997 and 2003, and was sold PPI in respect of the loans. She entered into a protected trust deed in 2006. RBS submitted claims in her trust deed for the unpaid loans. In 2013, Mrs Donnelly was discharged from the trust deed. Around £20,000 remained unpaid to RBS.

Mrs Donnelly then applied to RBS for compensation for missold of PPI in respect of the loans. The Financial Ombudsman Service found that Mrs Donnelly was entitled to almost £12,000. The Bank paid her just over £1,000, and offset the remainder of the award against the unpaid loans.

Mrs Donnelly raised an action in the Sheriff Court for payment of the balance of the PPI award. The bank defended the action. On appeal, the Sheriff Appeal Court followed the Supreme Court in Dooneen Ltd v Mond [2018] UKSC 54, 2018 SLT 1255. It held that the Bank’s defence could not succeed and awarded Mrs Donnelly the PPI compensation. The Bank appealed to the Inner House of the Court of Session.

The decision

The Court held that no ‘the bank no longer had a debt owing to it which it could use to set off against Mrs Donnelly’s claim’. This is because the trust terminated on the trustee’s final distribution. Mrs Donnelly was discharged from her debts. They became extinguished on the final dividend. The contractual nature of the trust deed between Mrs Donnelly and her creditors also meant the bank could not plead set-off as a defence.

One of the Court’s main deciding factors was the uncertainty for debtors and creditors if set-off could be applied after insolvency. The Court took the view that, if a creditor is entitled to apply set-off after final distribution, ‘it stands to make a windfall ... at the expense of other creditors.’ Even if payment was made to other creditors, set-off would require ‘policing by the court’. This would involve reopening the trust deed to identify all creditors and amounts due to them, and would be ‘virtually unworkable’.

The implications

According to the The Herald, solicitors specialising in financial claims have numerous clients with similar circumstances to Mrs Donnelly, who have eagerly awaited this judgment. It is not clear whether the bank will seek leave to appeal the decision to the Supreme Court, but it was suggested in the judgment that the bank’s next step will be to raise an action to reduce the discharge of the debtor, and reopen the trust to apply set-off in insolvency.  

Significance was also placed on the fact that the bank did not object to Mrs Donnelly’s discharge. It may be that lenders now change their practices in this regard, and leave their consent to a debtor’s discharge conditional going forward.

Lenders may instead try to reopen historic trust deeds, or mass compensation may be issued in wrongfully reduced PPI settlements. Whilst the judgment is a victory for borrowers, it remains to be seen what happens next.

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