Out-Law Legal Update | 23 Nov 2018 | 2:51 pm | 3 min. read
On 29 September 2006 a Mr Davidson entered into a trust deed for the benefit of his creditors. The trust deed was in a standard form and was a 'protected trust deed' which applied the provisions of the Bankruptcy (Scotland) Act 1985. One of the deed's termination events was the 'final distribution' of the estate, if not already terminated due to the sequestration of Davidson or his creditor's acceptance of any composition offered.
A Mr Mond was assumed as trustee in July 2010. He wrote to Davidson's creditors on 16 September 2010 to advise he had completed "the administration of the case and make payment of the first and final dividend", and that all assets had been realised. On 5 November 2010 Mond paid the creditors a dividend of 22.41 pence in the pound. Mond was discharged as trustee on 19 November 2010 and on 5 April 2011 sent the Accountant in Bankruptcy (AIB) a statement for registration in the Register of Insolvencies that indicated how the estate had been realised and distributed. Mond also asked the AIB to register his discharge in the Register of Insolvencies. These acts satisfied the requirements under the Bankruptcy (Scotland) Act 1985.
However, before entering into the trust deed, Davidson was mis-sold PPI insurance -something not known by Mond. In January 2015 Davidson appointed Dooneen Ltd as his agent for making the mis-selling claim. Dooneen Ltd then sought compensation for Davidson. Davidson was awarded £56,000, with 30% of any compensation being assigned to Dooneen.
The focus of the dispute was whether the PPI compensation vested in Mond as trustee, or Davidson and Dooneen. It was accepted that Davidson's right to compensation formed part of the estate transferred to Mond for the benefit of creditors. However, Davidson and Dooneen argued that when the 'final' distribution was made, the trust came to an end. Whereas Mond argued that such a distribution could only be made when either all assets have been distributed or enough assets had been distributed to pay creditors in full. Davidson and Dooneen had been successful in both the Outer and Inner House of the Court of Session before the case was heard in the Supreme Court.
The Supreme Court ruled in favour of Davidson and Dooneen, agreeing with the Court of Session. In considering the individual trust deed, the Supreme Court said that it could never be certain if a distribution was in fact 'final', so there is potential for the deed to be of "indeterminate duration". This sort of uncertainty would bring difficulty to debtors, their business associates and creditors alike. The debtor would not know for certain if they had been discharged of their debts, their business associates may be unknowingly dealing with an undischarged bankrupt, and creditors would not be certain if a distribution received was final.
The Court also acknowledged that this uncertainty would lead to potential inaccuracy at the public Register of Insolvencies, with certificates of final distribution made under insolvency legislation being unable to be relied on as accurate.
However, in the decision's postscript, Lord Reed acknowledged that this "is scarcely a satisfactory outcome". With the Court inviting parties to make submissions on the power of either party to either seek reduction of the trust deed itself or the acts of the trustee. The reason for the Court's request was to consider "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." Neither party made submissions in this regard, so the Court did not consider them any further.
This decision provides clarity as to what constitutes a 'final' distribution to creditors. However, as Lord Reed suggests, this decision is not one that will be welcomed by insolvency practitioners. It raises questions of a trustee's investigation of a debtor's assets and could result in creditors litigating against them if it is believed the trustee ought to have known about vested but unrealised assets when making a final distribution. It highlights that a trustee should carefully consider before calling a distribution a 'final' one.
However, it is clear that the Supreme Court is open to discussing the reduction of the acts of the trustee if found to be made in error - which may offer some relief to trustees. Unfortunately, with the lack of submissions and exclusive jurisdiction of the Court of Session in Scotland on reduction, this is something that will need to be discussed another day.
Kevin Mulligan is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com