On 31 October the Supreme Court handed down the judgment in the case of Dooneen Limited t/a McGuiness Associates v David Mond.
The judgment confirmed that a trustee is not entitled to property discovered after a trust deed has been terminated and the trustee discharged and therefore provides some much needed clarity for banks, debtors and trustees who face this situation.
In September 2006 Mr Davidson (the Second Respondent) entered into a trust deed. The trust deed had the purpose of conveying Mr Davidson's property to his trustee (Mr Mond) to administer for the benefit of his creditors. Trust deeds are considered an alternative to sequestration. The trust deed provided for the trust deed’s termination once a “final distribution” of the estate had been made. The final distribution was made on 5 November 2010 and the trustee subsequently discharged.
Before entering the trust deed Mr Davidson had been mis-sold payment protection insurance (PPI) in connection with various bank loans. After the trust deed ended Mr Davidson appointed Dooneen Ltd (the First Respondent) to make a claim in respect of this mis-sold PPI. The bank agreed to pay £56,000 to Mr Davidson, with Dooneen Ltd taking a pre-agreed percentage. The bank paid the PPI compensation to the trustee on the basis that the right to compensation vested in him as part of the trust estate.
This distribution was disputed by Dooneen Ltd and Mr Davidson. The Court of Session was therefore tasked to rule on the allocation of PPI money post the final distribution under a trust deed.
The trustee contended that he was entitled to recover the PPI money on the basis that a distribution under a trust deed cannot be final where, unknown to the trustee, part of the estate had not been taken into account.
Mr Davidson contended that under his trust deed, once final distribution was made by the trustee, the trust deed was terminated and he was completely discharged. As the trust deed had been terminated, Mr Davidson argued that he was entitled to the PPI money.
The Lord Ordinary and, on appeal, the Inner House agreed with the Mr Davidson. This decision was appealed to the Supreme Court.
Supreme Court decision
The Supreme Court unanimously upheld the decision of the Court of Session and dismissed the appeal – Mr Davidson and Dooneen Ltd were entitled to the PPI compensation payment. The Supreme Court held that the final dividend is the one declared to be such by the trustee as a failure to acknowledge this could have unintentional consequences, namely:
- A trust deed could end up lasting indefinitely as it would never be clear when a final distribution has been made;
- there would be uncertainty for debtors (and anyone looking to do business with them) around the status of the trust deed; and
- the Register of Insolvencies could become unreliable as certificates recognising that a final distribution has been made could no longer be considered accurate.
Whilst this gives much needed clarity on the situation to banks, debtors and trustees, the court has recognised that this may be considered as an unsatisfactory outcome as any undiscovered assets which come to light after the final distribution has been made will not be realised for the benefit of creditors.
The Supreme Court specifically sought submissions from the parties as to whether the acts of a trustee might be reduced (set aside) if they were the result of an error as to the extent of the trust estate. Perhaps surprisingly, at least from the perspective of Insolvency Practitioners, parties declined to address the court on this point. Given the unease with which the court came to its decision, it might be inferred that the court would have looked favourably upon an application for reduction of the act of declaring a final distribution. Whether or not trustees or creditors in similar circumstances to Mr Mond will have the inclination to test this point remains to be seen.