Dooneen Ltd (t/a McGinness Associates) & Anor v Mond (Scotland) [2018] UKSC 54

After a debtor's protected trust deed was administered and a 'final' dividend paid in ignorance of mis-sold PPI compensation, the Supreme Court held the trust had terminated, the debtor was discharged, and the former trustee had no claim to the later-discovered asset.

Facts

On 29 September 2006, Mr Davidson (the second respondent) granted a protected trust deed for his creditors under the Bankruptcy (Scotland) Act 1985. Mr Mond (the appellant) was assumed as trustee in July 2010. On 16 September 2010 he wrote to creditors stating he was in a position to make payment of the first and final dividend, all assets having been realised. On 5 November 2010 he paid creditors a dividend of 22.41 pence in the pound, and received his discharge later that month. On 5 April 2011, in accordance with paragraph 9 of Schedule 5 to the 1985 Act, he submitted a certificate to the Accountant in Bankruptcy stating that a full distribution had been made.

Unknown to all parties, before granting the trust deed Mr Davidson had been mis-sold payment protection insurance by the Bank of Scotland. In January 2015 he appointed Dooneen Ltd (the first respondent) to pursue a claim, assigning Dooneen 30% of any compensation. The Bank agreed to pay around £56,000. Mr Mond claimed that the right to compensation had vested in him as trustee and remained so vested. The Bank paid the compensation to Mr Mond, and the present action sought declarator that the compensation had not vested in Mr Mond, and payment of the sum to the respondents.

Issues

The narrow issue was the proper construction of the trust deed: specifically, whether the distribution made on 5 November 2010 constituted a ‘final distribution’ within the meaning of Clause 11(ii), thereby terminating the trust and discharging the debtor under Clause 10, despite the existence of an asset (the PPI claim) of which the trustee had been unaware.

Arguments

Respondents (Dooneen and Mr Davidson)

They accepted that the right to compensation had originally formed part of the trust estate but argued that the debtor’s radical right became disburdened of the trust when the avowedly ‘final’ distribution was made, ending the trust under Clause 11(ii) and discharging the debtor under Clause 10.

Appellant (Mr Mond)

He argued there had been no ‘final’ distribution within the meaning of the trust deed, since a distribution cannot be final if, owing to ignorance, it leaves part of the trust estate out of account. He relied on Whyte v Northern Heritable Securities Investment Co Ltd (1891) 18 R (HL) 37, contending the same principle should apply to a voluntary trust deed to prevent the debtor receiving a windfall at creditors’ expense. He also relied on Clause 1’s incorporation of section 32 of the 1985 Act, arguing acquirenda acquired more than three years after the commencement of the trust were excluded.

Judgment

The Supreme Court (Lord Reed giving the leading judgment, with whom Lord Kerr, Lord Hodge, Lady Black and Lord Briggs agreed) dismissed the appeal, upholding the Inner House’s construction. A ‘final dividend’ or ‘final distribution’ meant a dividend or distribution declared to be such by the trustee acting in accordance with his fiduciary duty. The trust deed effected, in substance, a composition between debtor and acceding creditors, conditional on the trustee’s final distribution.

Lord Reed identified three serious consequences flowing from the appellant’s construction which the debtor could not reasonably have intended. First, no distribution could ever be regarded with certainty as ‘final’, so the trust would be of potentially indeterminate duration, which was inconsistent with Clauses 1 and 2 vesting acquirenda in the trustee and requiring income contributions during subsistence of the trust. Secondly, the debtor could never be certain of his discharge under Clause 10, with serious practical consequences for him and third parties dealing with him. Thirdly, reliance could not then be placed on the public Register of Insolvencies, which was inherently unlikely to have been intended.

The Court rejected the argument based on section 32 and section 54 of the 1985 Act: incorporation of section 32 for defining the trust estate did not entail incorporation of section 54 for determining when discharge occurred. Clause 10 read with Clause 11 was inconsistent with automatic discharge after three years.

The Court distinguished Whyte v Northern Heritable Securities: that case turned on specific statutory provisions of the Bankruptcy (Scotland) Act 1856 (sections 132 and 155 in particular) which had no equivalent in the present trust deed. Lord Watson there had been explaining the sense in which he used ‘final distribution’, not defining a term of art. Furthermore, in the present case the debtor had been discharged on what was in effect a composition with his creditors, a situation Lord Watson had accepted would be different.

The Court accordingly held that the trust came to an end on 5 November 2010, the debtor was then discharged of his debts, and the former trustee had no entitlement to the asset discovered in 2015.

Implications

The decision establishes that, on the proper construction of a protected trust deed in standard form of the kind in issue, a determination by the trustee that a particular distribution is ‘final’ is definitive (subject to possible reduction), even where the trustee was unaware of part of the trust estate. The trust terminates and the debtor is discharged from the relevant date, and previously unknown assets vest in the debtor rather than remaining subject to the trust.

The judgment matters to insolvency practitioners administering protected trust deeds, to debtors and to third parties dealing with them after apparent discharge, who can rely on the certainty of the trustee’s determination and the public Register of Insolvencies. It distinguishes the contractual structure of voluntary trust deeds from statutory sequestration under earlier legislation, where different statutory machinery may produce a different result.

The Court itself acknowledged in a postscript that the outcome was ‘scarcely a satisfactory outcome’, since an asset that ought to have been applied to creditors will instead pass to the debtor merely because of the trustee’s ignorance. The Court had invited submissions on whether the trustee’s acts might be reduced as the result of an error as to the extent of the trust estate, drawing attention to Scottish Law Commission materials and authorities including Dundee General Hospitals Board of Management v Bell’s Trustees, Hunter v Bradford Property Trust Ltd and Whyte v Knox. The parties declined to make submissions, and the Court expressly left that question open. The decision is therefore confined to the construction issue, and the availability of reduction as a discretionary remedy in this context remains unresolved. The Court also queried, without deciding, whether a discharged former trustee would have title to bring such an action.

Verdict: Appeal dismissed. The Supreme Court held that the distribution made on 5 November 2010 was a ‘final distribution’ within the meaning of the trust deed, the trust terminated on that date, the debtor was discharged of his debts, and the former trustee had no entitlement to the PPI compensation discovered in 2015.

Source: Dooneen Ltd (t/a McGinness Associates) & Anor v Mond (Scotland) [2018] UKSC 54