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Ruling allows banks to claim debtors’ PPI cash

Posted: 2nd February 2021

Banks will be able to reduce the amount of compensation paid to customers who claimed they were mis-sold payment protection insurance (PPI) in order to recover debts owed by those customers.

A landmark ruling by the Court of Session in Edinburgh found that the Royal Bank of Scotland (RBS) were entitled to reduce the discharge of a customer’s Trust Deed.

This will allow banks to limit compensation due in circumstances where a customer entered into a Trust Deed having been unable to repay borrowings to the bank, but who later makes a PPI Complaint after the Trust Deed process has concluded.

The case before the Court of Session concerned a dispute between RBS and customer Alison Donnelly who between 1997 and 2003 borrowed money from the bank but was unable to repay these sums.

She entered into a protected trust deed and appointed an insolvency practitioner as trustee to administer her estate to pay off her debts. In December 2013, the trustee paid a first and final dividend of approximately 21 pence in the pound to RBS and granted Donnelly’s discharge.

Subsequently, Donnelly raised a PPI claim against RBS through a claims management company, which both parties settled for approximately £11,000, of which RBS paid one instalment of approximately £1,000 only. Donnelly raised legal proceedings against RBS in respect of the unpaid balance.

Insolvency disputes expert Joanne Gillies of Pinsent Masons, who acted for RBS, said the court finding provides much needed clarity and will be welcome news for creditors and insolvency practitioners who discover liabilities previously owed to a debtor after they have discharged a trust deed.

Ms Gillies said: “This is particularly relevant to creditors facing PPI claims from customers who have a history of insolvency. The Court of Session confirmed that the discharge of a trust deed for creditors can be reduced. This finding leaves open the possibility for sums subsequently found due to the debtor to be set off against amounts remaining owed to the creditor.”

The Court of Session ruling follows a 2018 ruling by the UK Supreme Court which determined that where a debtor’s right to compensation only comes to light after a trust deed has been discharged, that right reverts to the debtor and the trustee’s right to it ends when the final distribution is made by the trustee and the trust deed comes to an end. However, the Supreme Court left open the possibility that a remedy may be found in the law of reduction and that a discharge might be reduced.

Following the Supreme Court’s decision, the Inner House of the Court of Session decided that as Donnelly had been discharged in respect of the unpaid balance owed to RBS, this sum could not be set-off against the outstanding sum owed to her by the bank.

Consequently RBS raised a new action seeking reduction of the trust deed’s discharge. In its latest ruling in the case, the Outer House of the Court of Session decided that the trustee’s failure to ingather Donnelly’s PPI claim as an asset of her estate was a material error, which was capable of founding an action of reduction, notwithstanding that Donnelly was unaware of the potential for raising the PPI claim during the trust deed process.

“The Court of Session’s decision highlights that although insolvent debtors with PPI claims may have been discharged, the underlying debt owed to the creditor is not extinguished and that following a reduction of the discharge, which the Court has suggested is permissible, the creditor may set-off their PPI claims liability against sums due to them”, Gillies said.

“The Court has confirmed that failure by a trustee to ingather any existing PPI claims which would be treated as an asset of the estate will be considered a material error upon which any discharge may be reduced, even if the debtor was unaware of the existence of the PPI claim at the time of ingathering the trust assets,” she said.

The court also found that the trustee’s decision to grant the discharge did not involve any discretionary or qualitative judgement but was instead an administrative decision, challengeable on grounds including material error.

While the Court decided not to grant reduction in this case, due to the unique circumstances which included a long running Court action with the bank, the judgment of Lady Wolffe is clear that the remedy would be available to the bank in other cases.

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