ALISON DONNELLY AGAINST THE ROYAL BANK OF SCOTLAND PLC
SHERIFFDOM OF GLASGOW AND STRATHKELVIN AT GLASGOW
[2016] SC GLA 13
CA115/14
JUDGMENT OF SHERIFF S REID, Esq
In the cause
ALISON DONNELLY
Pursuer;
Against
THE ROYAL BANK OF SCOTLAND PLC
Defender:
Act: M Upton, Advocate; Friels, Uddingston
Alt: D Thomson, Advocate; Pinsent Masons LLP, Glasgow
GLASGOW, 11 February 2016.
The sheriff, having resumed consideration of the cause, Repels the defender’s fifth plea-in-law due to want of insistence; in terms of ordinary cause rules 40.3, 40.14 & 40.16, Sustains, in part, the defender’s first plea-in-law and Finds that the pursuer’s averments anent (i) the nature of the defender’s obligations to the pursuer, (ii) the date upon, and mechanism by, which the defender’s obligations to the pursuer came into existence, (iii) the alleged effect of the discharge of the pursuer from her trust deed, (iv) the alleged operation of prescription, and (v) the alleged non-application of the principle of the balancing of accounts in bankruptcy, are irrelevant; Repels the pursuer’s first and fifth pleas-in-law; Reserves the issue of expenses meantime; Assigns Monday 22 February 2016 at 9.45am as a case management conference to determine further procedure and the question of expenses, said hearing to proceed by way of telephone conference call before Sheriff Reid.
SHERIFF
NOTE:
Summary
[1] This commercial action raises a number of interesting and novel issues, including the extent of a creditor’s right of set-off in insolvency, the effect on creditors’ claims of the discharge of a debtor from a personal insolvency process, and the proper legal classification of a complaint or claim by a customer concerning the alleged mis‑selling of payment protection insurance (“a PPI claim”).
[2] At first glance the action appears unremarkable.
[3] The pursuer sues for payment of three liquid sums totalling £10,815.76. There is no dispute that the defender agreed to pay these sums in settlement of three PPI claims by the pursuer against the defender. The parties’ agreements are recorded in three written contracts, in simple and broadly similar terms, signed in February and March 2014 (“the PPI agreements”).
[4] But the defender now refuses to pay.
[5] The defender argues that it is entitled to withhold payment of the three liquid sums and to set them off against a greater alleged indebtedness (of £21,617.42) said to be due by the pursuer to the defender under contracts of loan between the parties entered into many years earlier, between 1997 and 2003.
[6] Pausing there, it may be thought that the defender is seeking to rely upon a right of compensation, or set-off, under the Compensation Act 1592. But that is not the defender’s position.
[7] The interesting complication in the present case is that in the intervening period, between the dates of the contracts of loan and related PPI sales (in 1997 and 2003) and the dates of the PPI agreements (in 2014), the pursuer became insolvent. She granted a trust deed in favour of her creditors in 2006.
[8] To add further twists to the tale, the defender submitted claims in the trust deed for payment of roughly the same aggregate indebtedness now founded upon by way of set‑off; those claims were adjudicated upon by the pursuer’s trustee and the defender received payment of dividends on the claims; and, in 2012, the pursuer was discharged from the trust deed.
[9] The defender’s primary position is that it is entitled to plead set-off by application of the principle of the balancing of accounts in bankruptcy.
[10] The pursuer disputes the application of any such insolvency set‑off. She argues inter alia that the principle of the balancing of accounts in bankruptcy has no application because she is no longer in bankruptcy (having been discharged from the trust deed); that the effect of that discharge is to extinguish any obligation she may have had to pay any outstanding loan balance due to the defender at the date of her insolvency; that, even if the pursuer’s discharge did not extinguish her indebtedness to the defender, any obligation to the defender under the loan contracts was extinguished by operation of prescription (the defender’s claim in the trust deed not having been renewed periodically); and that the debt sought to be enforced by her, being a post‑insolvency debt which first arose after the date of her insolvency under the PPI agreements in 2014, cannot be set-off against the pre‑insolvency obligations founded upon by the defender under the loan agreements dating back to the period from 1997 to 2003.
[11] In my judgment, the defender is entitled to plead set‑off. Specifically, I have concluded inter alia that (i) absent a discharge on composition, the mere discharge of the pursuer from the trust deed does not have effect to extinguish any obligation owed by the pursuer to the defender to pay the unsatisfied balance due under the pre-insolvency contracts of loan; (ii) upon a proper analysis, the indebtedness now sought to be enforced by the pursuer against the defender has its source and origin in a contingent obligation that was in existence prior to the date of the pursuer’s insolvency; (iii) as a result, the pursuer’s correlative right to enforce that contingent obligation properly falls within, and forms part of, the pursuer’s insolvent estate under her trust deed; (iv) the contingencies attaching to the defender’s obligation were purified, post-insolvency, by the pursuer submitting complaints to the defender regarding the PPI sales and by the defender determining those complaints in favour of the pursuer; (v) the effect of the PPI agreements themselves was merely to ascertain the present value of the pre-insolvency contingent obligation by the defender; (vi) while the pursuer has title to sue for payment of that newly ascertained and newly non‑contingent indebtedness, she does so as constructive trustee for the benefit of her creditors under the trust deed; (vii) to the extent that there is a greater extant contra‑indebtedness owed by the pursuer to the defender under the pre‑insolvency contracts of loan, the defender is entitled to set it off against the defender’s newly ascertained and newly non‑contingent indebtedness to the insolvent estate, by virtue of the principle of the balancing of accounts in bankruptcy; and, lastly, (viii) the pursuer’s obligations to repay any sums due to the defender under the contracts of loan have not prescribed because the defender’s acts in submitting claims to the trustee under the trust deed for implement of those obligations constitute “relevant claims” for the payment of those debts, in terms of the Prescription & Limitation (Scotland) Act 1973, section 9(1)(c); and those claims have effect continuously to interrupt or suspend the operation of the applicable five‑year prescriptive period, for as long as the claims subsist before the trustee, until such time as the claims are finally adjudicated upon and accepted by the trustee.
Factual background
[12] Between 1997 and 2003, the pursuer borrowed sums of money from the defender. In connection with those loans, the pursuer was allegedly mis‑sold payment protection insurance (“PPI”). The averments do not disclose the precise dates or amounts of the loans, or the date(s) of demand for repayment, or the date(s) on which the pursuer’s PPI claims were first made.
[13] On 29 August 2006 the pursuer executed a trust deed for behoof of her creditors.
[14] On 24 October 2006, the trust deed became a protected trust deed.
[15] On 20 September 2006, 25 September 2006 and 2 October 2006, the defender submitted claims to the pursuer’s trustee representing the balances due under the loans made by the defender to the pursuer.
[16] On 11 December 2013 the pursuer was discharged from the trust deed.
[17] On 31 December 2013 the defender received payment from the trustee of a dividend in respect of its three claims on the trust estate.
[18] On 21 & 26 February, 4 & 8 March, and 6 & 10 March, all in 2014, the parties concluded three agreements (“the PPI agreements”) in terms of which the defender offered to pay, and the pursuer accepted, three sums totalling £11,927.39 in full and final settlement of, in short, all and any PPI claims that may be competent to her relating to the loans. Two of these agreements expressly provide that payment of the settlement sums would take into account any “arrears” the pursuer may have with the defender. The third agreement makes no such express provision.
[19] The defender subsequently paid the sum of £1,111.63 to the defender, leaving a balance of £10,815.76 due under the PPI agreements. The defender avers that the sum of £1,111.63 was paid in error.
[20] On 7 August 2014 the pursuer served the present action upon the defender seeking payment of the balance allegedly due under the PPI agreements. The defender pleads a right to set‑off the sum sued for against a greater alleged indebtedness due by the pursuer under the pre‑insolvency loan contracts.
[21] Having heard submissions at debate, I reserved judgment.
Submissions for the defender
[22] By way of preliminary comment, it should be observed that certain differences are discernible in the defender’s stated positions in the pleadings, the defender’s first note of arguments (no. 17 of process) (lodged on 17 November 2014), and the defender’s supplementary note of arguments.
[23] In the pleadings, the defender’s position is three-pronged: (i) first, that set off operates “contractually” (Answer 2); (ii) second, esto there is no “contractual agreement on set-off”, nevertheless set‑off operates by virtue of the balancing of accounts in bankruptcy (Answer 2; defender’s second plea-in-law); and (ii) third, in any event (on some unspecified basis) the defender is entitled to set-off the arrears owed to it against the balance of the sum payable under the PPI agreements (Answer 2, final sentence; defender’s third plea-in-law).
[24] In its first note of arguments, that position is repeated and augmented to some extent. In this first note the defender submits that, upon a proper interpretation, each of the three PPI agreements provided for “contractual set-off” (paras. 2(ii) & 12). Alternatively, irrespective of contractual set-off, the defender relies upon the common law principle of the balancing of accounts in bankruptcy. Lastly, the defender invokes additional alleged discrete rights of set‑off: first, a right purportedly arising at common law, by reference to Inveresk plc v Tullis Russell Papermakers Ltd 2010 SC 106; second, something called “Banker’s set-off”, of which no further details are provided; and, third, a right of set‑off under the Compensation Act 1592.
[25] However, the defender’s supplementary note of arguments rests the defence solely upon “insolvency set‑off” (which I take to mean the principle of the balancing of accounts in bankruptcy).
[26] In his submissions the defender’s counsel adopted and spoke only to the terms of the supplementary note of arguments. He founded the defence solely upon the principle of the balancing of accounts in bankruptcy. The so-called “contractual set-off” morphed into a fleeting submission merely that the PPI agreements, on a proper interpretation, did not exclude the right of set-off. It was in this limited sense that the PPI agreements were said to “allow” set-off to operate. No submission was offered, and no reliance was placed, upon any rights under the Compensation Act 1592 or otherwise.
[27] Focussing the defence in this way, counsel for the defender submitted that, upon a proper interpretation, the PPI agreements merely settled an underlying liability of the defender to the pursuer. That liability was said to be either an unascertained liability or a contingent liability arising out of the financial services regulatory regime narrated in the pleadings. Howsoever characterised, that liability to the pursuer was said to exist as at the date of the pursuer’s trust deed and thereby vested in the trustee as part of the trust estate. The effect of the PPI agreements was either to ascertain that pre-insolvency liability or to satisfy a contingency attaching to it.
[28] Further, it was submitted that the pursuer’s averments anent the effect of her discharge from the trust deed were irrelevant because, in law, such a discharge does not operate to reinvest a debtor in any assets or rights which had vested in the trustee prior to her discharge nor does such a discharge have effect to extinguish an otherwise unsatisfied liability of a debtor to a creditor in respect of pre-insolvency obligations.
[29] The defender disputed that the pursuer’s unsatisfied obligation to the defender under the loan contracts was extinguished by operation of the short negative prescription. The making of a claim in the trust deed was said to constitute a “relevant claim” by the defender for the purposes of the Prescription and Limitation (Scotland) Act 1973; that such a claim operated on a “continuous” basis, while it remained before the trustee for consideration; and, in any event, that the payment of a dividend by the pursuer’s trustee in respect of the defender’s claim constituted a “relevant acknowledgement” of the underlying obligation to the defender. The pursuer’s averments to the contrary were said to be irrelevant.
[30] There was acknowledged to be a factual dispute between the parties which required to be resolved at proof, namely whether, as at the date of the trust deed, any indebtedness was actually owed by the pursuer to the defender (and the precise amount of that alleged indebtedness). To that extent, the defender’s counsel acknowledged that dismissal of the action could not properly be granted at this stage. Accordingly, if the defender’s submissions were upheld, I was invited to make appropriate findings under ordinary cause rule 47, and to put the case out for a case management conference to determine further procedure.
[31] Reference was made to the following authorities: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900; Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43; Edwards v Skyways Ltd [1964] 1 All ER 494; Integrated Building Services v PIHL [2010] BLR 622; Liquidator of Highland Engineering Ltd v Thomson 1972 SC 87; Miller v McIntosh (1883) 11 R 729; Powdrill v Murrayhead Ltd 1997 SLT 1223; Liquidator of the Ben Line Steamers Ltd, Noter 2010 SLT 535; In re Nortel Gmbh [2014] AC 209; Fleet v Mustard 1936 SC 269; Geddes v Quistorp (1889) 17 R 278; Macdonald v Mackintosh (1905) 7 F 771; Mill v Paul (1825) 4 S 219; Hannay & Sons’ Trustee v Armstrong (1877) 4 R (HL) 43; M S Fashions Ltd & Ors v Bank of Credit and Commerce International [1993] Ch 425; Young v Accountant in Bankruptcy 2010 SLT (Sh Ct) 37; Law Society v Shah [2009] Ch 223; R (British Bankers Association (“BBA”)) v Financial Services Authority (“FSA”) & Anr [2011] Bus LR 1531; McBryde, Bankruptcy (2nd ed), paragraphs 18‑56, 20-53 and 8-75; McBryde, The law of contract in Scotland (3rd ed), paragraph 25-70; Johnstone, Prescription and Limitation in Scots Law, paragraphs 4-101 and 5‑33 et seq.
Submissions for the pursuer
[32] For the pursuer, I was invited to repel the defender’s first plea-in-law, sustain the pursuer’s first plea-in-law, and grant decree as craved.
[33] Firstly, the pursuer’s counsel criticised an alleged lack of candour, clarity and specification in the defender’s pleadings. There was said to be equivocation and contradiction in the defender’s averments as to whether there had been any mis‑selling of PPI, whether the pursuer’s claims were well-founded, and, by extension, whether there was any alleged pre‑insolvency obligation owed by the defender to the pursuer. Absent clarity on that key issue, the defender’s averments quoad a right of set-off were said to be irrelevant.
[34] Secondly, the pursuer’s counsel submitted that the grounds upon which the defender asserted a right of set-off were misconceived. Insolvency set‑off, or the principle of the balancing of accounts in bankruptcy, was said not to be available because that principle only operated in the context of a subsisting insolvency. It was said that this action proceeded upon three post-insolvency agreements to pay liquid sums to the pursuer; the pursuer was not insolvent at the dates of any of the agreements; she is not insolvent now; therefore the principle of the balancing of accounts in bankruptcy had no application. The debt sought to be enforced was not a “pre-insolvency debt” (second note of arguments for the pursuer, paragraphs 2 & 10: no. 11 of process). Instead, the debt first came into existence in 2014, by virtue of the PPI agreements, which operated as a novation of any pre-existing obligation. It was submitted that the defender’s attempt to invoke insolvency set-off outwith an insolvency process was unprecedented, unsupported by authority and evinced “desperation to get out of a bad bargain”.
[35] Further, no right of set-off was available to the defender because, it was said, the pursuer had been discharged from all liability to the defender by virtue of her discharge from the trust deed on 11 December 2013. The effect of that discharge was to extinguish any pre-insolvency liability of the pursuer to the defender. It was submitted that, upon discharge, the pursuer was given a “clean sheet”.
[36] Separately, no right of set-off was available because, it was said, even if there had been a pre‑insolvency liability of the pursuer to the defender under the contracts of loan, any such liability had been extinguished by operation of prescription. The pursuer’s counsel acknowledged some difficulty in identifying the precise commencement date for the running of the five year prescriptive period. However, on the assumption that the five year prescriptive period started to run, at latest, on or about the date of the last claim in the trust deed (in 2006), the five year prescriptive period would have elapsed in 2011, long before any plea of set‑off was asserted by the defender in the present action. Any claim by the defender in the trust deed was characterised as a “one-off” or single event and not as a “continuing” claim, for the purposes of section 9 of the Prescription and Limitation (Scotland) Act 1973, and would require to have been renewed by the creditor every five years in order to stave off extinction by prescription.
[37] It was submitted that the PPI agreements did not confer any contractual right of set‑off. Only the first two agreements made any reference to “arrears”. Upon a proper interpretation, there were no “arrears” because any indebtedness of the pursuer to the defender had been discharged or extinguished as explained above. The third agreement (which related to the bulk of the claim) made no reference whatsoever to “arrears”. The defender had therefore failed to seize the opportunity to make express provision for the operation of any contractual set-off; and no such right should be now conferred by implication or by process of strained interpretation (pursuer’s second note of arguments, paragraphs 5 to 9: no. 11 of process).
[38] Lastly, if the sum sought by the pursuer did fall within the pursuer’s insolvent estate, it was submitted that the appropriate remedy was for the defender to seek reappointment of the trustee to ingather that asset. It was not competent for the defender unilaterally to exercise a right of set‑off. The balancing of accounts in bankruptcy could only be given effect by a duly appointed trustee, not by a creditor at its own hand.
[39] In any event, neither the existence nor the quantification of the defender’s alleged contra-claim against the pursuer was admitted. As a result, if all else failed, it was acknowledged that a proof on that factual issue would be required.
Discussion
[40] Sequestration, like liquidation, is a process of collective enforcement of debts for the benefit of a debtor’s general body of creditors (Re Lines Bros Ltd [1983] Ch 1 at 20 per Brightman LJ).
[41] Both processes share two essential features. First, the individual enforcement by creditors of the debtor’s obligations is suspended. Instead, creditors of the insolvent debtor are compelled to submit to the mechanism of collective enforcement of their debts, whereby a trustee adjudicates upon the creditors’ claims and distributes the estate in accordance with a prescribed order of priority. The obligations (or debts) so affected are the obligations of the insolvent debtor that were in existence as at the date of insolvency. Second, the obligations of the insolvent debtor can be satisfied only from the insolvent estate of the debtor. The insolvent estate comprises the whole property, rights and assets of the debtor that were in existence as at the date of insolvency. The same principles apply to a trust deed for the benefit of creditors.
[42] So both the creditors’ claims and the debtor’s insolvent estate (from which, alone, the creditors’ claims are to be satisfied) are ring-fenced as at the date of insolvency. In Re Humber Ironworks and Shipbuilding Co (1868-69) LR 4 Ch. App. 643, Selwyn LJ stated:
“I think the tree must lie as it falls; that it must be ascertained what are the debts as they exist at the date of the winding up, and that all dividends in the case of an insolvent estate must be declared in respect of the debts so ascertained”.
The arborial metaphor is an apt one. The insolvent estate is like a fallen tree. As the fallen tree is severed from the ground, so the insolvent estate is separated from the debtor’s whole other patrimony. Creditors can look only to that ring-fenced estate for the satisfaction of their debts ‑ and the debts and the estate must have been in existence at the date of insolvency.
[43] The present case involves a tangle of legal conundrums. At the heart of the puzzle, though, lies the single question: were the respective obligations of the pursuer and the defender, which are sought to be set‑off, in existence as at the date of the pursuer’s insolvency? A convenient though perhaps less illuminating shorthand may be to ask whether the parties’ respective obligations are pre-insolvency debts. If so, then, in my judgment, by application of the equitable principle of the balancing of accounts in bankruptcy, those pre-insolvency obligations can competently be set-off against each other.
Terminology
[44] Before embarking upon an analysis of the law, I should clarify the following points. First of all, the pursuer in the present case granted a trust deed in favour of her creditors. She was not sequestrated. The two insolvency processes are different though they share certain features. However, in the debate before me neither party sought to found upon any material distinction between the two processes and, for the purposes of my decision, the differences are not material. This accords with dicta in Mill v Paul (1825) 4S 219. It was also not in dispute that the debtor’s trust deed was a trust deed as defined in section 5(4A) of the Bankruptcy (Scotland) Act 1985.
[45] Secondly, the parties’ contracts of loan (and related PPI sales) were entered into between 1997 and 2003. It is a matter of admission that the defender is (and has been for the purposes of the action) an “authorised person” in terms of the Financial Services and Markets Act 2000 (“the 2000 Act”) and that the defender was and is subject to the regulatory regime prescribed by the 2000 Act (albeit the identity of the regulator has again since changed). Neither party (in the pleadings or in submissions before me at debate) suggested that a different (or no) statutory regulatory regime applied to the parties (or to any particular contract of loan). In this context, though, one specific point of contention should be noted. The pursuer does aver that her right to make a claim for the alleged mis‑selling of PPI did not arise before her insolvency, with specific reference being made to the Financial Services Authority’s Policy Statement PS10/12 which was not published until April 2010. I deal with that specific issue below, when considering the detail of the statutory regulatory scheme.
[46] Lastly, for ease of reference and to avoid confusion in the context of an analysis of cross-obligations, I shall refer to the pursuer as “Mrs Donnelly” or “the debtor” (a convenient shorthand, on the basis that she was the debtor under the trust deed) and to the defender as “the Bank”.
[47] I begin by considering the nature of Mrs Donnelly’s alleged obligation to the Bank.
Was the debtor’s obligation to the Bank in existence at the date of insolvency?
[48] The averments regarding the debtor’s alleged obligation to the Bank are sparse but they are sufficient to discern the nature of the obligation in question.
[49] It is a matter of admission on the pleadings that the parties entered into agreements for the making of a number of loans between 1997 and 2003 (article 2; answer 2), that claims in respect of those loans were made by the Bank upon the debtor’s insolvent estate following the grant of the debtor’s trust deed; and that those claims resulted in payment of a dividend to the Bank. Beyond that, the debtor does not admit the existence or amount of any balance allegedly due by her to the Bank under those loan agreements (or, I observe, whether the Bank’s claims were adjudicated upon and accepted in full by the trustee). As a result, it was a matter of agreement between the parties’ counsel that, in due course, a proof will be required for the Bank to establish the existence and quantum of the alleged outstanding loan balances.
[50] As an aside, I would have thought that it would be difficult for either party now to go behind, and to challenge, the formal final adjudication of the trustee as to the existence and quantification of the debtor’s alleged indebtedness to the Bank. A creditor or debtor, who, for whatever reason, does not appeal a trustee’s adjudication within the statutory time limits cannot seek to have the adjudication set aside and thereby disturb the related scheme of division (Bankruptcy (Scotland) Act 1985, section 49; Scottish Law Commission Report, Bankruptcy and Related Aspects of the Insolvency and Liquidation (No. 68) (February 1982), paragraph 17.19; Goudy, The Law of Bankruptcy, 328; Barbour v Williamson, 1835, 14 S 27). Whatever the formal adjudication of the debtor’s trustee may have been on the Bank’s claims, I assume that the statutory time limit to appeal against it must have long expired.
[51] Be that as it may, that disputed factual issue apart, on the hypothesis that some outstanding loan balance does in fact exist, in my judgment such a liability would plainly be categorised as a pre‑insolvency debt. Indeed, that much, at least, was not in dispute. The debtor’s liability (if any) to the creditor originates in pre-insolvency contracts of loan; and although the date of demand for repayment is not averred, it is not in dispute that the Bank’s claims under the loan contracts formed a valid claim (to some extent at least) in the debtor’s trust deed, as they resulted in the distribution of a dividend to the Bank. The debtor’s obligation to repay each loan may have been conditional or contingent (for example, upon a demand for repayment of the loan in question) but whether or not it was enforceable, the obligation was in existence by virtue of each contractual relationship of loan that existed between the parties as at the date of the debtor’s insolvency (Ben Line Steamers Limited, supra, 543B-D).
Was the debtor’s obligation to the Bank extinguished upon her discharge from the trust deed?
[52] The next question is this. If there was such a pre-insolvency indebtedness owed by the debtor to the Bank, was it extinguished by virtue of her discharge from the trust deed? The answer is no.
[53] In law, neither the discharge of the debtor nor the discharge of the trustee will end a trust deed or sequestration process, unless (i) the discharge takes the technical form of a discharge on composition or (ii) all of the creditors’ claims have been paid in full (Henderson v Bulley (1849) 11D 1470 at 1473; Fleet v Mustard 1936 SC 269; Goudy, The Law of Bankruptcy, 376 & 388; McBryde, Bankruptcy, 18-56 et seq).
[54] The discharge of a debtor has two limited consequences: (i) it frees the debtor personally from any further claim against him by a creditor for any pre-insolvency debt that is, or might properly have been, ranked upon his insolvent estate, and (ii) it frees the debtor’s property (so far as acquired after the date of the discharge and not otherwise forming part of the insolvent estate) from any pre‑insolvency debt that is, or might properly have been, ranked upon his insolvent estate (Fleet, supra, at 277). In a sense, the discharge of the debtor marks the final severing of the insolvent estate from the debtor personally and from the debtor’s whole other patrimony. But the trust subsists. The sequestration or other insolvency process continues. The insolvent estate remains ring-fenced and preserved for the purpose of being distributed among the unsatisfied creditors, however long that takes.
[55] Likewise, a debtor is not re-invested in any part of the insolvent estate merely upon the occurrence of his discharge. Again, the insolvent estate remains subject to the trust or sequestration, unless (i) the creditors’ claims have been satisfied in full, or (ii) a composition has been entered into, or (iii) the estate in question has been abandoned. If, following the discharge of a debtor, an asset is discovered which properly forms part of the insolvent estate, the debtor’s trustee is entitled to ingather that asset for distribution to the creditors to the extent that their claims remain unsatisfied. Indeed, even if the trustee has been discharged, any creditor (or the trustee himself) may seek his re‑appointment in order to ingather and distribute the newly-discovered asset. Like fruit scattered far from the fallen tree, the newly-discovered asset is available to be gathered up and distributed to the unsatisfied creditors. The insolvency process continues in this way, for however long it may take, until the day arrives when the creditors’ adjudicated claims are finally satisfied in full.
[56] It follows, therefore, that the mere discharge of a debtor from a trust deed or sequestration process does not have the effect of extinguishing or discharging unsatisfied obligations owed to the debtor’s creditors. No authority to the contrary was cited to me.
[57] I note that broadly similar arguments to that advanced by the pursuer (concerning the alleged extinction of a debtor’s pre‑insolvency obligations) were rejected by Floyd J in Law Society & Others v Shah [2009] Ch. 223 (at paragraphs 31 to 38) and by Sheriff G. Way in Young v Accountant in Bankruptcy 2010 SLT (Sh. Ct.) 37.
[58] By way of contrast, a discharge on composition is a procedure whereby the creditors agree to an absolute discharge of the debtor, usually in return for part-payment of their debts. Composition may be judicial or extra-judicial, and it may be general (i.e. it applies to all creditors) or partial (i.e. it applies to some creditors) (McBryde, Bankruptcy (2nd ed.), 18-62). There is only one form of judicial composition and it is general in nature (Bankruptcy (Scotland) Act 1985, section 56 & schedule 4). In any event, the essence of a composition is that it operates as a complete discharge, freeing the debtor from all debts and obligations for which he was liable at the date of sequestration, terminating the trust or sequestration process, and reinvesting the debtor in his estate to the same extent as it had vested in the trustee (Goudy, supra, 408).
[59] Neither a discharge on composition, nor full satisfaction of the debtor’s creditors, nor abandonment by the trustee of the PPI claims is averred in the present case. Accordingly, the pursuer’s averments anent the effect of her discharge from the trust deed are irrelevant.
Was the debtor’s obligation to the Bank extinguished by prescription?
[60] Next, the debtor avers (in article 3) that any obligation that may have been owed by her to the Bank at the date of her insolvency has been extinguished by operation of the five‑year negative prescription (Prescription & Limitation (Scotland) Act 1973, section 6, schedules 1 & 2). Accordingly, it is averred that the Bank cannot competently set‑off any such extinguished obligation of the debtor against the subsisting obligations of the Bank under the PPI agreements.
[61] For the purposes of calculating the prescriptive period, Mrs Donnelly’s counsel conceded some difficulty in identifying precisely the date when the debtor’s obligations to repay the loans first became enforceable (“the appropriate date”). Nevertheless, he submitted that, at latest, any such obligation was enforceable by 2 October 2006 (being the undisputed date of the Bank’s last intimated claim under the trust deed), so that the five‑year prescriptive period would have expired on 2 October 2011, absent any averred intervening relevant claim or relevant acknowledgement.
[62] This submission is predicated upon the proposition that a creditor’s “relevant claim” in an insolvency process is, in nature, a “one off” event which interrupts the operation of the applicable prescriptive period on a single day only. In my judgment, that proposition is not correct for the reasons set out below.
The continuing nature of claims made in insolvencies
[63] A debtor’s obligation to repay money borrowed under a contract of loan is an obligation to which the five‑year prescriptive period applies. A claim by the creditor for implement of the debtor’s obligation made to a trustee under a relevant trust deed is a “relevant claim” (1973 Act, section 9(1)(c)). A “relevant claim” interrupts the running of the five-year prescriptive period (1973 Act, section 6(1)(a)).
[64] But what is the nature of such a claim? The competing arguments are (i) that such a claim is “continuing” in nature and that it subsists (and is being “made”) for as long as the claim in question is before the trustee, or (ii) that it is an instantaneous event and is made only on the date when it is submitted to the trustee. For the Bank, I was urged to adopt the former construction; for the debtor, I was urged to adopt the latter construction. Neither party addressed me in any detail upon the relevant authorities. I was referred to textbook commentary in Johnstone, Prescription and Limitation (2nd ed.), chapter 5.
[65] In my judgment, the effect of a creditor submitting a claim to a trustee under a relevant trust deed for implement of a debtor’s obligation is continuously to interrupt the running of the prescriptive period in respect of that obligation, for as long as the claim subsists before the trustee and up to the date of the final, formal adjudication of the claim.
[66] That is because, in the first place, in my judgment it is appropriate in general terms to acknowledge the similarities between ‑ and broadly to equate ‑ the various “relevant claim” procedures set out in sections 9(1)(a), (b) (c) & (d) of the 1973 Act. Claims pursued in court or arbitration proceedings (per section 9(1)(a), 1973 Act), and claims submitted in a sequestration, or under a relevant trust deed, or in a winding‑up (per sections 9(1)(b), (c) & (d), 1973 Act), share certain essential characteristics. They all involve formal, manifest, unequivocal steps of enforcement or prosecution of the obligation in question before an independent third party adjudicator. The key material difference between “appropriate proceedings” (per section 9(1)(a)) and the other three claim procedures (per sections 9(1)(b), (c) & (d)) is that the former involves the individual enforcement of a debt by the creditor, whereas the latter involve the collective enforcement of debts (the creditors’ right to individual enforcement having been suspended upon the debtor’s insolvency).
[67] In the second place, against that background, I note that the current judicial consensus is that a relevant claim in the context of a court action (being “appropriate proceedings” under section 9(1)(a), 1973 Act) should be treated as being continuous in nature, and not merely instantaneous (GA Estates Ltd v Caviapen Trustees Ltd 1993 SLT 1045; George A. Hood & Co v Dumbarton District Council 1983 SLT 238). In other words, as long as a court action is subsisting, a relevant claim in respect of the obligation is being made. There is no similar guidance in relation to the treatment of claims in insolvencies. However, the adoption of a similar construction in relation to each of the relevant claims described in sections 9(1)(a) to (d) would achieve consistency and predictability in the context of what are, in essence, broadly analogous concepts.
[68] In the third place, judicial reasoning in the analysis of claims pursued in court actions appears to have been driven by a large measure of pragmatism. In obiter dicta in GA Estates Ltd, supra, the Inner House noted (at pages 1051 and 1059):-
“If a person makes a relevant claim in proceedings and then takes any step in process, such as lodging an open record or a closed record or an amended record or enrolling a motion to cause the case to proceed further, he is of new positively asserting and reasserting his claim… [T]he only realistic way to look at a litigation in court is to regard it as a continuous making and asserting of the claim which the pursuer seeks to enforce in the proceedings.”
Similar pragmatic considerations can be said to apply in relation to claims submitted in insolvencies. For example, in the context of a sequestration, liquidation or trust deed, a creditor must submit a claim by a prescribed deadline in order to obtain an adjudication by the trustee (or liquidator) as to his entitlement to a dividend out of the debtor’s estate (so far as funds are available) in respect of any accounting period (1985 Act, section 48(1), as applied to liquidations by the Insolvency (Scotland) Rules 1986). Where such a claim is submitted, and is not rejected in its entirety, it is “deemed” to have been re‑submitted for various purposes, including for the purpose of obtaining an adjudication as to the creditor’s entitlement to a dividend in respect of any subsequent accounting period (1985 Act, section 48(2)(b)). In other words, under statute, the initial submission by a creditor of a claim (whether for voting or distribution purposes, or both) triggers an automatic, recurring re-submission of the claim (so far as not rejected) for certain purposes (including, but not limited to, sharing in distributions in subsequent accounting periods). An “accounting period” generally occurs every 12 months, subject to sanction to the contrary (1985 Act, section 52). The result is that the initial submission of a claim may trigger a deemed re‑submission (and repeated reassertion) of the claim at periodic intervals thereafter. However, the precise date of the deemed re-submission is not entirely clear. Moreover, it is not uncommon for accounting periods to be shortened or extended, often without intimation to creditors (in order to minimise expense to the insolvent estate). If each claim by a creditor (whether for voting rights or participation in a distribution) is regarded as a single event interrupting the related prescriptive period from the date of submission (and deemed re‑submission) of that claim, the precise computation (and administrative supervision) of this repeatedly-interrupted, repeatedly-recommencing prescriptive period is at risk of becoming unmanageable and unnecessarily complex. From a pragmatic perspective, as with a court action where each individual step in process might be viewed as the making of a fresh claim, the “only realistic way” (GA Estates Ltd, supra) to look at a creditor’s claim in an insolvency (sequestration, trust deed or winding-up) is to regard it as being continuous in nature. The submission of the claim continuously interrupts ‑ or, it may be said, suspends ‑ the operation of prescription, for as long as the claim subsists, up until the date of its final adjudication.
[69] Lastly, in the fourth place, the continuing interruption (or suspension) of prescription by virtue of the submission of a claim in the insolvency is consistent with the specific provisions of the 1985 Act itself, so far as touching upon the issue of time-bar. Sections 22(8) and 48(7) of the 1985 Act provide, in identical terms, that the submission of a claim in a sequestration (for, respectively, certain voting rights or for adjudication of an entitlement to a dividend) will “… bar the effect of any enactment or rule of law relating to the limitation of actions in any part of the United Kingdom”. The same applies to a claim under a trust deed or in a winding-up (1985 Act, schedule 5, paragraph 3; Insolvency (Scotland) Rules 1986, rule 4.76). Section 73(5) goes on to equate such a claim with “an effective acknowledgment of the creditor’s claim”.
[70] It must be conceded that these specific provisions “do little to introduce clarity” (Johnstone, Prescription and Limitation, 5.50). The references to limitation (as opposed to prescription) and to “effective acknowledgment” (rather than to “relevant claim”) do not sit comfortably with the terminology of the Scottish law of prescription. However, from a purposive perspective (bearing in mind that these statutory provisions seek to regulate the effect of such claims in other legal jurisdictions, where the terminology may be different), they are consistent with the notion of a suspension, or continuing interruption, of time‑bar generally, during the subsistence of the insolvency process ‑ rather than its mere instantaneous interruption (see Johnstone, supra, page 131, paragraph (3)). To that limited extent, I draw comfort from these specific provisions for the construction set out above.
The effect of a formal adjudication of the “relevant claim”
[80] Lastly, in my judgment, upon the formal adjudication and acceptance by the debtor’s trustee of the Bank’s claims, the five-year prescriptive period ceased to be applicable, by virtue of the 1973 Act, schedule 1, paragraph 2(a). Instead, at that point, the long (20-year) prescriptive period became applicable.
[81] That is because a new and different “obligation” was then engaged for the purposes of prescription. That new obligation was the obligation to “recognise or obtemper” the order of “an authority exercising jurisdiction under any enactment” (1973 Act, schedule 1, paragraph 2(a)). In adjudicating upon claims submitted to him under the 1985 Act, the debtor’s trustee is an “authority exercising jurisdiction” under an enactment; and his adjudication is an “order” to be recognised or obtempered. Such an obligation is explicitly excluded from the operation of the five-year prescriptive period (1973 Act, schedule 1, paragraph 2) and falls under the ambit of the long (20-year) negative prescription (1973 Act, section 7). In simple terms, the trustee’s formal adjudication (when neither revoked nor quashed, upon review or appeal) is analogous to a court decree.
[82] That construction of the 1973 Act is also consistent with the suggested analogous treatment of “relevant claims” in court actions (under section 9(1)(a)) with “relevant claims” in insolvency processes (under sections 9(1)(b), (c) & (d)). A court claim or arbitration, if successful, will conclude with a court decree or decree-arbitral, to which the long (20-year) prescriptive period applies. A claim submitted in an insolvency, if accepted, will result in a formal adjudication thereon, to which, by analogy, the long negative prescription should also apply. That construction has the attraction of simplicity, practical utility and jurisprudential consistency.
The debtor’s pleadings anent prescription
[83] Turning to the pleadings in the present case, it is a matter of admission that the trustee was appointed on 29 August 2006, and that, between 20 September 2006 and 2 October 2006, the Bank submitted a series of claims to the trustee for payment of the loans. There is no suggestion that the debtor’s obligations to the Bank had prescribed prior to 29 August 2006. Instead, the debtor is content to found the plea upon the proposition that the five-year prescriptive period commenced on 2 October 2006 (corresponding to the date of the Bank’s “latest claim to the trustee”) and expired on 2 October 2011.
[84] Standing those averments alone, the debtor’s plea and averments anent prescription are irrelevant because the submission of claims by the Bank to the debtor’s trustee has effect, in law, continuously to interrupt (or suspend) the running of the five-year prescriptive period for as long as the claim subsists before the trustee, up until the date of the final adjudication thereon. The debtor fails to aver the date of the final adjudication of the claims (or the withdrawal of the claims from the trustee). If the claims have not been adjudicated upon, the five-year prescriptive period remains suspended. If the claims have been adjudicated upon, the 20-year prescriptive could not conceivably have elapsed (as the trustee was first appointed in August 2006).
Was the Bank’s obligation to the debtor in existence at the date of the debtor’s insolvency?
[85] I turn now to consider the nature of the Bank’s obligation to the debtor, specifically whether it is an obligation that was in existence as at the date of her insolvency. This involves a consideration of the nature of the debtor’s PPI claims.
[86] If the Bank’s obligation to the debtor was in existence at the date of her insolvency then her correlative right against the Bank can properly be said to constitute an asset falling within, and forming part of, her insolvent estate, being the estate that is held in trust for the benefit of her creditors.
[87] For the debtor, counsel advanced an attractive argument that her claim against the Bank was founded solely upon rights constituted by the PPI agreements dated 21 & 26 February, 4 & 8 March and 6 & 10 March 2014. On that logic the Bank’s obligations to the debtor are all post-insolvency obligations and are therefore incapable of being set-off against any pre-insolvency indebtedness to the Bank. For the Bank, it was submitted that, on a proper analysis, the Bank’s liability to the debtor (and the debtor’s corresponding rights) were in existence as at the date of the debtor’s insolvency, either in a pure, but unascertained, form or “contingent” in nature.
[88] In my judgment, properly analysed the obligations which the pursuer seeks to enforce in the present action are obligations that find their source or origin in a binding statutory regulatory scheme that was in existence – and to which the parties were committed ‑ prior to the date of the debtor’s insolvency. Those obligations were not enforceable as at the date of insolvency, but they were in existence by virtue of that statutory regime, albeit contingent in nature and unascertained. The statutory scheme in question was the regulatory regime prescribed by the Financial Services and Markets Act 2000, to which the Bank was subject. That statutory scheme imposed multiple obligations upon the Bank, including (i) the obligation to comply with adjudications by the Financial Ombudsman Service (“FOS”), as the independent statutory adjudicator, upon customer complaints concerning the Bank’s regulated activities and (ii) the obligation to handle, process and – in the first instance – determine such customer complaints in accordance with the Financial Services Authority (“FSA”) Handbook, specifically to determine such complaints and to make redress to customers in a manner consistent with the approach that would be taken by the FOS. In law, those obligations had effect to impose a contingent liability upon the Bank to pay compensation (or to make other redress) to a customer. The liability was subject to various contingencies, notably (i) the making of a customer complaint and (ii) the adjudication of the complaint in favour of the customer, by either the first‑instance determination of the Bank (in compliance with its regulatory obligation to that effect) or the final adjudication of the FOS (as the independent statutory adjudicator of such complaints). Those contingencies were purified, post-insolvency, by the debtor’s submission of complaints to the Bank and the Bank’s subsequent decisions to uphold and accept the complaints, and to make redress to the customer (by the payment of compensation), all ex facie pursuant to that statutory regulatory scheme. The conclusion of the PPI agreements (upon the debtor’s acceptance of the Bank’s offer letters) merely had the effect of ascertaining the present value of the Bank’s previously unascertained (contingent) liability.
[89] Since the obligation now sought to be enforced against the Bank has its origin or source in a statutory scheme to which the parties were already committed as at the date of the debtor’s insolvency, it is properly characterised as a pre-insolvency obligation; and the debtor’s correlative right to enforce that obligation (albeit only through the regulatory scheme) constitutes an asset of the debtor that forms part of her insolvent estate.
[90] It may assist if I explain my reasoning in more detail. To that end I shall consider, first, the general classification of obligations in Scots law; second, the treatment of contingent obligations in insolvency proceedings; and, third, the legal nature of the PPI claims themselves (and any correlative obligations) in the present case.
The general classification of obligations
[91] An obligation may be pure, future or contingent (Costain Building and Civil Engineering Ltd v Scottish Rugby Union Plc 1994 SLT 573 at 576-577). A pure obligation is an obligation that is presently subsisting and enforceable; a future obligation is one that will definitely be enforceable either on a fixed date or upon the occurrence of some event which is certain to happen (for example, upon a person’s death); an obligation is contingent (or conditional) if its enforceability is dependent upon an event which may or may not happen (or if, though enforceable at once, it will cease to be so on the occurrence of some uncertain event) (Erskine, Institute III.1.6; Gloag on Contract, page 272; Costain, supra; Ben Line Steamers Ltd, supra; In re Sutherland, deceased (sub nom Winter v Inland Revenue Commissioners) [1963] AC 235 at 262-263). These three obligations are conceptually discrete.
[92] The distinction between a pure obligation (being one that is presently subsisting and enforceable) and a future obligation is invariably clear; but, in individual cases, the distinction between a future obligation and a contingent obligation may be less clear. For example, an obligation at a future date to pay a fixed sum plus a share of profits is an obligation that is, in part, future and, in part, contingent (Ben Line Steamers Ltd, supra, at paragraph [25]). In any event, though conceptually distinct (borderline cases aside), future and contingent obligations have this in common: an obligation is treated as being in existence, irrespective of the occurrence or non-occurrence of the certain or uncertain event, from the moment when it is entered into, albeit its enforceability may be dependent upon the occurrence of the certain or uncertain event, as the case may be (Ben Line Steamers Ltd, supra, at 543B-D).
[93] Each of these obligations (pure, future and contingent, but notably the latter) must be distinguished from a mere spes obligationis or the hope or expectancy of an obligation yet to emerge.
[94] Some sort of obligation, normally either contractual or statutory, is required before there can be said to be a pure, future or contingent obligation (Ben Line Steamers Ltd, supra, 543H).
[95] Contingent obligations tend to present the most difficulties. Specifically, when can it be said that a contingent obligation comes into existence? The answer is when the debtor in the obligation has “committed” itself (In re Sutherland, deceased, supra, at 274-278 per Lord Reid) in some manner, usually to a contractual or statutory “relationship” or “duty” or “scheme” or “provisions” (Ben Line Steamers Ltd, supra, at paragraphs [23] & [27]; In re Nortel GmbH [2014] AC 209 at 238-239 per Lord Neuberger and at 252 per Lord Sumption).
[96] Lord Reid’s lucid explanation of the concept in In re Sutherland is often repeated. He stated (at pages 274-278):-
“If I see a watch in a shop window and think of buying it, I am not under a contingent liability to pay the price: similarly if an Act says I must pay tax if I trade and make a profit, I am not before I begin trading under a contingent liability to pay tax on the event of my starting trading. In neither case have I committed myself to anything. But if I agree by contract to accept allowances on the footing that I will pay a sum if I later sell something above a certain price I have committed myself and I come under a contingent liability to pay in that event.”
In In re Nortel, supra (at 238-239) Lord Neuberger offered further guidance on this concept of “commitment” (to a statutory relationship or scheme) in the context of interpreting a specific provision of the English Insolvency Rules. He stated:
“… I would suggest that, at least normally, in order for a company to have incurred a relevant “obligation” …. it must have taken, or been subjected to, some step or combination of steps which (a) had some legal effect (such as putting it under some legal duty or into some legal relationship), and which (b) resulted in it being vulnerable to the specific liability in question…”.
[97] One final point should be noted in relation to contingent obligations. It is succinctly explained by Lord Drummond Young in Ben Line Steamers Ltd, supra (at 543 H-J) as follows:
“Contingencies can arise from various different sources. In many cases, an obligation will be contingent because it is conditional upon the occurrence of some possible future event. In other cases, an obligation may be contingent because someone has the power to determine whether or not it is to be due, or to determine its amount.”
Thus, an insurance policy is an example of the former contingency, because the sum is payable in the event that the insured risk occurs. In contrast, a guarantee payable on demand, or a call upon shares, will be examples of the latter, more complex, type of contingency, because it is payable in the event that it is called upon by the creditor (in whose power it is to determine whether or not the contingency occurs). The critical point is that “…the contingency may arise from the existence of a liability to the exercise of a power by another person” (Ben Line Steamers Ltd, supra, at 543I-J). Indeed, that power may comprise an unfettered discretion, the exercise of which is untrammeled by “absolute factors” or criteria (In re Nortel, supra, at paragraph 179E-F). This merely underscores that the occurrence of the contingency need not be certain.
[98] The contingency may even take the form of a liability to the exercise of a “double power”, in the sense that the creditor in the obligation – or even a third party – requires to exercise one power in order to enable the exercise of a second power.
[99] In all such cases, it is the existence of the power that creates the correlative vulnerability or liability on the part of the debtor in the obligation.
[100] The decisions in the Ben Line Steamers Ltd and In re Nortel cases, which I shall consider in more detail below, illustrate complex contingent obligations of this nature. In my judgment, the present case has distinct parallels with them.
[101] It may be said that a peculiarity of the present case is that one of the contingencies involves the exercise of a decision-making “power” by the debtor in the obligation (i.e. the Bank), rather than by the creditor in the obligation (i.e. Mrs Donnelly) or a third party. For the reasons explained in paragraph [128] below, in my judgment the proper analysis is that the Bank is carrying out a duty or obligation to decide (rather than exercising a liberty to do so). The apparent peculiarity does not detract from the general principle.
Contingent obligations in insolvency
[102] The proper categorisation of an obligation is of particular importance in the context of insolvency, personal or corporate. The nature of the obligation, and the precise date upon which it is said to have come into existence, require to be ascertained for two reasons: firstly, because the only obligations (or debts) that may be enforced in an insolvency process are those that are in existence as at the date of the insolvency (Re Humber Ironworks and Shipbuilding Co, supra), whether they are pure, future or contingent in nature; and secondly, the nature of the obligation will determine the manner in which it is valued.
[103] In order to establish whether a contingent obligation was in existence at the date of an insolvency, the contingent obligation founded upon by the creditor must “originate in a contract (or other source such as a statute) that was in existence as at the date of the [insolvency]” (Ben Line Steamers Ltd, supra, paragraph [23] J-K]).
The Ben Line Steamers case
[104] The elegant opinion of Lord Drummond Young in the Ben Line Steamers Ltd case provides a pertinent illustration of a complex contingent obligation that was in existence as at the date of an insolvency but where the contingency did not come to be purified or ascertained until many years later. It has broad similarities with the PPI claims in the present case. However, in contrast with the present case, the contingent obligation in Ben Line Steamers Ltd found its source in a contractual scheme.
[105] The Ben Line Steamers Ltd had been a participating employer in a pension scheme since 1978. The pension scheme was governed by a trust deed and rules dated 2 January 1978 (as amended from time to time thereafter). The company was a party to the trust deed and rules.
[106] The trust deed conferred a power upon the trustee to vary or amend the trust deed and rules by a specified procedure.
[107] One of the rules provided that if there appeared to be a deficiency in the assets of the pension scheme, the trustee had to consider what action should be taken to restore the scheme to solvency, whether by increasing contributions, decreasing benefits, amending the trust deed and rules, or winding-up the scheme.
[108] In March 2000, the company resolved to wind itself up voluntarily, in terms of section 84 of the Insolvency Act 1986.
[109] Pausing there, it will be observed that as at March 2000 – the date of the company’s insolvency – the company was already committed to a contract (the trust deed and rules); that contract conferred certain powers (including a power of amendment) upon another party (the trustee); the powers might never be exercised but, having acceded to the granting of them, the company had already obliged itself to be bound by their proper exercise; and, to that extent, the mere existence of those powers imposed a correlative contingent liability or obligation upon the company long before its formal insolvency commenced.
[110] In June 2000 – nearly three months after the date of insolvency – the trustee of the pension scheme exercised his power of amendment. The trust deed and rules were amended to introduce a new rule which provided that each participating employer would be required to make such further contributions, if any, to the pension scheme from time to time as might be decided by the trustee in order to reduce or eliminate any deficit or anticipated deficit.
[111] In March 2004 – over four years after the date of insolvency – an actuarial valuation of the pension scheme was obtained by the trustee. This indicated the existence of a substantial deficit. The trustee calculated that the company’s share of that deficit was just over £4 million. (That sum was calculated in accordance with the new rule which had, of course, been introduced by an amendment effected nearly three months after the date of commencement of the company’s liquidation.)
[112] In June 2006 – over six years after the date of insolvency – the trustee executed a further amendment to the rules. This newly amended rule had the effect of permitting the trustee to calculate a participating employer’s share of the deficit in the scheme by a different method, namely on an estimated “buy-out” basis where inter alia an insolvency event had occurred in relation to a participating employer. Relying on this new rule, the company’s share of the deficit was re-calculated in a sum exceeding £20 million. This sum was then claimed by the trustee in the liquidation of the company.
[113] The liquidator applied to the court for directions as to the proper distribution of the insolvent estate. Specifically, a direction was sought as to the proper value to be attributed to the trustee’s claim, as creditor, in the liquidation of the company. In effect, the liquidator wanted to know whether the post-insolvency amendments to the trust deed and rules (and the valuations flowing from them) should be disregarded.
[114] Lord Drummond Young concluded that, as at the date of the liquidation of the company (in March 2000), it had entered into an elaborate system of contractual rights, obligations and powers contained in the trust deed and rules. This included a liability (properly characterised as a “contingent liability”) to the exercise of a power of amendment of the trust deed and rules by the trustee, and to a demand from the trustee for a calculated contribution to a deficit, if that should be necessary to meet the minimum funding requirements of the scheme. It did not matter that the emergence of the ascertained claim against the insolvent company depended upon the exercise of a “double” power, in the sense that the trustee (as creditor in the obligation) required to exercise one power in order to enable the exercise of a second power. It did not matter that the powers were exercised after the date of the insolvency. The fundamental issue was that the powers found their “source” or origin in contractual provisions that existed, and to which the company was “committed” (per Lord Reid, in In re Sutherland, deceased, supra), prior to the date of insolvency.
[115] Accordingly, the trustee’s claim (in August 2006) represented merely the present value of a contingent obligation which the company owed to the trustee at the date of the insolvency (in March 2000).
The In re Nortel case
[116] In In re Nortel, supra, the Supreme Court was concerned with the interpretation of the words “obligation incurred” in the context of the (English) Insolvency Rules 1986.
[117] Again, the case involved the disputed liability of certain insolvent companies to contribute to an under-funded pension scheme of a third party company within the same group. However, in this case the obligation arose, not from a contractual scheme or relationship (as in Ben Line Steamers Ltd), but from statute – specifically, a financial support direction issued by a statutory regulator under the Pensions Act 2004 after the date of insolvency, in exercise of powers available to it under a statutory regime that was in existence before the date of the insolvency. Lord Sumption observed (at paragraph 132):
“Contract is not the only legal basis on which a contingent obligation of this kind may arise. A statute may also give rise to one.”
[118] It was held that the insolvent companies were indeed subject to a contingent liability, as at the date of their insolvency, to contribute to the under-funded pension scheme in compliance with the financial support direction (“FSD”) (and subsequent statutory contribution notices) issued by the statutory regulator, notwithstanding that those notices were not issued until after the date of insolvency. That was not simply because the FSD statutory regime was in force prior to the date of insolvency. Instead, the contingent liability arose because the insolvent companies had taken, or were subject to, certain steps which placed them in a “legal relationship” rendering them “vulnerable” to the specific liability in question (namely, liability under an FSD). That legal relationship was their membership of a group of companies during the required statutory period, which group included an entity with an insufficiently resourced pension scheme. In a colourful passage, Lord Neuberger concluded that these circumstances alone meant that the insolvent companies:
“… were not in the sunlight, free of the FSD regime, but were well inside the penumbra of the regime, even though they were not in the full shadow of the receipt of a FSD, let alone in the darkness of the receipt of a [contribution notice].”
[119] I should observe that Lord Neuberger spoke of the vulnerability being such as to give rise to a “real prospect of that liability being incurred” (paragraph 78). The concept of a “real prospect” of a liability being incurred is repeated in the Bank’s pleadings. With all due deference to the eminent source, in my respectful judgment this concept is an unnecessary gloss on the principle. If the debtor has indeed “committed” itself to a relationship, which makes it vulnerable to the liability in question, the likelihood or “prospect” of the liability ever materialising is neither here nor there. The contingent liability in question may take the form of a liability to the exercise of a wholly unfettered discretionary power (or “double” power). The likelihood or prospect of that power ever being exercised may be impossible to predict. The prospects may fluctuate from time to time across a broad spectrum of possibilities – from a remote chance to a bare possibility; from a distinct possibility, to more than likely, to virtually certain. But that does not detract from the conclusion, if that be the case, that the debtor has “committed” and subjected itself to the necessary relationship or scheme, thereby exposing itself to the exercise of that power and the resulting contingent liability. In any event, as far as I can see nothing in the present case turns upon an assessment of the likelihood or otherwise of the contingency occurring.
The Bank’s contingent liabilities under the statutory regulatory scheme
[120] Applying these principles to present case, many years prior to her insolvency, Mrs Donnelly and the Bank entered into contractual relationships for the loan of money and the related sale of PPI.
[121] In my judgment, by doing so, the parties simultaneously engaged with – and “committed” themselves (In re Sutherland, deceased, supra) to – an elaborate statutory scheme of regulation to which the Bank was and is subject, as an “authorised person” under the 2000 Act. In effect, that statutory scheme was superimposed upon the parties’ contractual relationship.
[122] Firstly, the statutory regulatory scheme includes a liability (properly characterised as a “contingent liability”) upon the Bank to comply with an adjudication by the FOS, as the independent statutory adjudicator, of a customer complaint, by making such redress to the customer (including by payment of compensation) as the FOS determines. For its part, the FOS is enjoined by statute to determine any such complaint by reference to what is “fair and reasonable in all the circumstances of the case” (2000 Act, section 228(2)) and is empowered to require authorised persons, such as the Bank, to make such redress (including payment of compensation) as it considers “just and appropriate” (2000 Act, section 229(2)).
[123] Secondly, the statutory regulatory scheme includes a liability (again properly characterised as a “contingent liability”) upon the Bank to handle, process and determine any such customer complaint in the first instance, and to do so in a manner consistent with the approach that would be taken by the FOS (as described above). These particular duties or obligations are articulated in the FSA Handbook (including in DISP 1.4.1R, DISP 1.4.2G, DISP 3.6.1R and DISP 3.6.4R); they were issued by the Bank’s statutory regulator (formerly the FSA, now the Financial Conduct Authority (“FCA”)) pursuant to powers conferred on the regulator by the 2000 Act; and they are binding upon the Bank.
[124] Accordingly, prior to the debtor’s insolvency, the parties were committed to a statutory scheme or relationship (and the Bank was subject to certain duties thereunder in respect of customer complaints) by virtue of which a liability on the part of the Bank to pay compensation (or otherwise make redress) to the debtor was a contingent outcome. Specifically, that liability arose by virtue of the regulatory duties and obligations of adjudication and determination of customer complaints, to which the Bank was subject. These regulatory duties and obligations were in existence long before the date of the debtor’s insolvency in August 2006 (R (British Bankers’ Association) (“BBA”) v Financial Services Authority (“FSA”) [2011] Bus LR 1531 at paragraph 79).
[125] The Bank’s liability was contingent in nature. The contingency was twofold: first, it was contingent upon the making of a complaint by a customer; and, second, it was contingent upon a first-instance determination by the Bank, or a subsequent adjudication by the FOS, of that complaint in favour of the customer.
[126] The effect of the Bank’s three offer letters (preceding the PPI agreements in 2014) was to purify the latter contingency; the subsequent acceptances of the offers, and conclusion of the PPI agreements, ascertained the present monetary value of the Bank’s long-dormant contingent liabilities.
[127] It does not matter that the emergence of the debtor’s ascertained claim against the Bank depended upon the occurrence of multiple contingencies. It does not matter that the purification of all or any of these contingencies occurred after the debtor’s insolvency. The fundamental issue is that the Bank’s liability to pay compensation to the debtor for alleged PPI mis-selling finds its “source” or origin in duties incumbent upon it under a statutory regulatory scheme that was in existence ‑ and to which the Bank was bound – prior to the date of the debtor’s insolvency.
[128] From the moment the PPI was sold – or, as appropriate, from the date that the 2000 Act came into force – the parties were committed and subject to a statutory scheme and relationship which was pregnant with liability.
[129] Nor does it matter that one of the contingencies – a “first-instance” decision or determination of the complaint by the Bank in favour of the debtor – may appear, at first blush, to be within the gift of the debtor (i.e. the Bank) in the relevant obligation. That is because it is a determination that is made by the Bank under compulsion, in the sense that the Bank is constrained, under regulatory sanction, and within the parameters of the regulatory scheme, to determine the complaint in the first instance; it is compelled to do so in a manner consistent with the FOS approach; and, in any event, its determination is subject to review by the FOS. In determining the customer complaint, the Bank is not merely exercising a liberty or power; it is carrying out its duty and obligation under the statutory regulatory scheme. Viewed in that light, the Bank’s determination of the complaint is not truly voluntary in nature. It is not comparable to the gratuitous bestowing of a benefit in the exercise of some unfettered discretion.
The detail of the statutory regulatory scheme under the 2000 Act
[130] It may assist if I explain my reasoning in a little more detail.
[131] The regulatory scheme prescribed by the 2000 Act comprises a panoply of rights, obligations, powers and remedies, derived from primary and secondary legislation, including (i) the rule-making powers and jurisdiction of the FSA and (ii) the independent adjudicatory powers and jurisdiction of the FOS. The Bank, as an “authorised person” under the 2000 Act, was bound by this regulatory regime and was liable inter alia to regulatory sanction for failure to comply with it.
[132] It is worth pausing to note the extent of the promulgatory powers of both the FSA and the FOS, the breadth of the principles and rules prescribed by the FSA, and the scope of the adjudicatory powers of the FOS, all as they existed both before and after the date of the debtor’s insolvency in 2006.
[133] The FSA was empowered by the 2000 Act to issue statements of principles, rules and guidance concerning regulated activities of authorised persons. These came to be contained (together with other background information) within the so-called FSA Handbook. The FSA principles comprise broad statements of standards of conduct such as that an authorised person “must conduct its business with integrity” (principle 1) and “with due skill, care and diligence” (principle 2); that customers must be treated “fairly” (principle 6); and that information must be communicated to customers which is “clear, fair and not misleading” (principle 7). Although breach of a principle does not give rise to a discrete cause of action at the instance of a customer for breach of statutory duty (principle 3.4.4R: a limitation that was explicitly permitted by section 150(2) of the 2000 Act), the FSA Handbook does state that such a breach may make an authorised person liable to disciplinary sanction (principle 1.1.7G). The principles have been so stated, in this or a very similar form, since the passing of the 2000 Act and, indeed they had been preceded by broadly similar statements from predecessor regulatory entities which laid down standards for various aspects of the financial services industry (R(BBA) v FSA, supra, paragraph [39]). The FSA Handbook also includes rules, binding upon the Bank, regulating the handling and determination of customer complaints (including DISP 1.4.1R, DISP 1.4.2G, DISP 3.6.1R & DISP 3.6.4R of the FSA Handbook).
[134] As for the FOS, the 2000 Act conferred upon it a compulsory jurisdiction to adjudicate upon disputes and complaints relating to regulated activities, and to do so quickly and with minimum formality (2000 Act, section 225). The definition of the adjudicatory power of the FOS is startling in its breadth. Section 228 of the 2000 Act states that “[a] complaint is to be determined by reference to what is, in the opinion of the [FOS], fair and reasonable in all the circumstances of the case.” That broad definition of the adjudicatory power has applied from the date of inception of the ombudsman scheme, up to and beyond the date of the debtor’s insolvency. The forms of redress available to the FOS are drafted in similarly wide-ranging terms. Where a complaint is upheld the FOS is empowered, among other forms of redress, to direct the authorised person to take such steps “as the [FOS] considers just and appropriate” and to make a “money award” against the authorised person “of such amount as the [FOS] considers fair compensation for loss and damage” suffered by the customer (section 229(2), 2000 Act).
[135] The FOS is also empowered to “publish guidance” as to the operation of the ombudsman scheme (2000 Act, schedule 17, paragraph 8) and to issue “rules” specifying “the matters to be taken into account in determining whether an act or omission was fair and reasonable” (2000 Act, schedule 17, paragraph 14) . The FSA Handbook includes the FOS rules within the “Redress” section entitled “Dispute Resolution: Complaints”. The FSA rules on the handling of customer complaints (including FSA Handbook DISP 1.4.1R), which have been in existence in very similar form since at least 2001, direct authorised persons, such as the Bank, to apply the same approach as the FOS when handling a customer complaint and issuing a first-instance determination thereon (R (BBA) v FSA, supra, paragraph 79).
[136] In short, for many years prior to the date of the debtor’s insolvency (in August 2006) there had been, and remains, in existence a statutory regulatory scheme prescribing standards of conduct of the Bank and prescribing a mechanism for the adjudication and determination of customer complaints (including appropriate redress). The Bank is and was bound to comply with that scheme.
[137] That scheme also incorporated extensive powers on the part of both the FSA (as regulator) and FOS (as the independent adjudicator) to issue rules, guidance and decisions. In a sense, those statutory powers of amendment and promulgation may be regarded as creating an unpredictable and ever-fluctuating field of play for authorised persons and customers alike. That may be so, but it was nevertheless the fluid statutory relationship to which the parties were committed long before the date of the debtor’s insolvency in August 2006. The potential for amendment, alteration or determination of the parties’ rights and obligations – by virtue of the exercise of these statutory powers – was an inescapable component liability of that regime to which the Bank was committed.
[138] I mention the susceptibility or liability to amendment or fluctuation for two reasons. Firstly, it has similarities with the contingent liability (in the form of a liability to amendment to meet a funding deficiency) to which the insolvent debtor was subject in the Ben Line Steamers Ltd case. Secondly, after the date of the debtor’s insolvency in the present case the FSA and FOS exercised their statutory powers to promulgate rules and guidance dealing specifically with the sale of PPI (both before and after 2005) and with the proper handling of complaints in relation to PPI sales.
[139] To explain, in November 2008 the FOS published guidance on its approach to PPI disputes, including how it assessed complaints and approached redress. It stated that, when adjudicating upon complaints, the FOS took account of “the relevant regulatory, legal and other standards at the time of the sale”.
[140] Thereafter, in April 2010 (nearly four years after the date of the debtor’s insolvency) the FSA published an important Policy Statement PS10/12. (Both parties refer to this document in their pleadings and a copy was produced at the debate.) That Statement comprised what the FSA described as a “package of measures” stemming from its “serious concerns about wide-spread weaknesses in previous PPI selling practices” to the detriment of many customers (para. 1.3). The package included formal amendments to certain rules in the FSA Handbook (notably in the section concerning the handling of complaints); guidance on how PPI sales complaints should be handled and assessed, and on the appropriate form of redress if a complaint was upheld; and guidance (in the form of an “open letter”) identifying what the FSA identified as “common failings” in the selling of PPI policies. Guidance was given not only on the manner in which complaints were to be dealt with as a matter of procedure, but also on how FSA principles and rules should be considered in determining the substance of complaints. The measures were to apply to PPI sold both before and after 2005. The FSA took over formal responsibility for the regulation of insurance selling in 2005 but the FSA principles, in like or identical form, had been in place since the passing of the 2000 Act and, indeed, they had been preceded by broadly similar statements from predecessor statutory regulators of the financial services industry (R (BBA) v FSA, supra, paragraph 39).
[141] The upshot was that, following the issue of the FOS guidance (in 2008) and FSA Policy Statement (in 2010), the regulator and independent adjudicator had made it clear that breaches of FSA principles by authorised persons gave rise to regulatory liabilities; that authorised persons may have to make redress (including by way of payment of compensation) to customers where their conduct breached such principles; and that particular acts and omissions in the sale of PPI (referred to as “common failings” in the FSA “open letter”) may, depending upon the circumstances, represent a breach of FSA principles giving rise to an obligation to make redress.
[142] In 2010 judicial review proceedings against the FSA and FOS were initiated in the High Court of Justice, London by, among others, the British Bankers’ Association (“BBA”) challenging the legality of the Policy Statement and the FOS guidance (R (BBA) v FSA, supra). The BBA argued that the regulatory promulgations changed the goalposts by making actionable certain breaches of principles which were not previously (or legally) actionable at the instance of customers.
[143] The challenge failed.
[144] In a careful and complex judgment, to which I am indebted, Ouseley J acknowledged that the effect of the Policy Statement was, in part, to record that the FSA was “explicitly interpreting and applying the Principles and common failings as well as the specific rules” when determining whether PPI was mis-sold; and that the FOS was “doing likewise” (R (BBA) v FSA, supra, paragraph 156). However, Ouseley J stated (at paragraph 157):
“I am far from clear that this is a change of approach at all on either of their parts [i.e. FSA or FOS]. Indeed it appears to me very likely that this represents no change at all on the part of FOS, even though the particular identification and role of common failings is new. However what the Policy Statement has made explicit and emphasised, if it were not clear already at least in relation to the Principles, is that the FSA and FOS do not interpret or apply the specific rules as if they were an exhaustive statement of [authorised persons’] obligations in the areas to which the specific rules operate, and even compliance with them may not prevent an obligation being breached. The change to my mind is one of emphasis in the expression of what has always been the FSA and FOS approach.”
In other words, the effect of the FSA Policy Statement (and 2008 FOS guidance) was not to introduce any material new obligations, but rather to clarify, emphasise and reinforce existing obligations. (The point is repeated at paragraphs 240 & 243 of the judgment.)
[145] Further, the BBA case clarifies the status of the principles within the FSA Handbook. Ouseley J stated (at paragraphs 161-164):
“The Principles are the over-arching framework for regulation…. The Principles are best understood as the ever present substrata to which the specific rules are added. The Principles always have to be complied with… That role for the Principles has been clear from the language describing their role in the [FSA] Handbook… That was also clear from what the FSA said in the [FSA Consultation Paper (CP 13, the FSA Principles of Business) published in September 1998 and the Supplementary Memorandum of 13 April 1999 to the Parliamentary Joint Committee]… [T]he Principles remain the overarching source of obligations.”
[146] The upshot of this diversion into the detail of the 2000 Act regulatory scheme is as follows: (i) a statutory regulatory scheme has been in existence since before the date of the debtor’s insolvency; (ii) that scheme includes duties or obligations of adjudication and determination of customer complaints, to which the Bank was (and is) subject; (iii) the scheme imposes standards of conduct upon the Bank including FSA principles (“the over‑arching source of obligations”) (R (BBA) v FSA, supra); (iv) the scheme also incorporates wide powers of amendment and promulgation vested in third parties (the FSA and FOS); (v) by entering into the PPI sales the Bank and the debtor committed themselves (or, it may be said, took steps that ultimately made them subject) to that scheme, either at the time of the PPI sales or upon the coming into force of the 2000 Act; and (vi) as a consequence of being so committed, the Bank became vulnerable to a liability to make redress to the debtor (including by payment of compensation) upon the occurrence of a first‑instance determination by the Bank, in the debtor’s favour, of a complaint in relation to any such PPI sale, or as a result of an adjudication to the same effect by the FOS, all in compliance with the Bank’s regulatory complaints-handling duties.
[147] In this way, the Bank’s liability to pay compensation to the debtor in connection with the sale of PPI to the debtor can be seen to be a contingent outcome of duties or obligations incumbent upon it under a statutory regulatory scheme that was in existence, and to which it was committed, prior to the debtor’s insolvency.
Alternative analyses of the Bank’s liability
[148] Without prejudice to the foregoing conclusion, I would acknowledge that certain alternative analyses of the Bank’s liability may be available. On the one hand, the Bank’s obligation may be said to be pure in nature, albeit unascertained. On the other hand, the Bank’s liability may be said to be contingent albeit in a slightly different form to that described above.
[149] Either way, in my judgment the same conclusion is ultimately unavoidable, namely that the Bank’s liability to pay compensation to the debtor (whether that liability was pure or contingent in nature) was in existence prior to the date of the debtor’s insolvency. Therefore, the debtor’s correlative right is an asset that forms part of the insolvent estate.
[150] For my own part, I prefer the analysis summarised in paragraphs [146] and [147], above. However, for completeness I discuss the alternative analyses below, as counsel took time and care to address them in their submissions.
The first alternative analysis: A pure obligation
[151] At its simplest level, it may well be said that the Bank’s liability to the debtor arises from the breach of FSA principles or rules to which the Bank was subject as at the date of insolvency in 2006. The relevant principles and rules were in existence, and the breaches occurred, prior to the debtor’s insolvency. That liability may, perhaps, be described as being pure in nature, albeit unascertained.
[152] On this analysis, the effect of the PPI agreements in 2014 is merely (belatedly) to recognise and fix the monetary value of that pre-existing pure liability.
[153] A broad analogy may be drawn with a civil action of damages (for, say, breach of a common law or statutory duty). In such a case, the liability comes into existence upon the concurrence of the breach and the damage. It does not matter that the liability is disputed by the debtor, in principle or amount (Miller v McIntosh 1883 11R 729). The effect of a subsequent court decree awarding (or an extra-judicial agreement to pay) damages is merely to establish, constitute and ascertain a pre-existing (pure) liability.
[154] I can see some attraction in that analysis, not least because, as I discuss below, in my judgment the PPI agreements, on a proper interpretation, admit PPI mis-selling.
[155] However, that issue aside, for my own part I prefer the analysis that the Bank’s liability is contingent in nature, deriving inter alia from its regulatory duty to determine customer complaints in a particular manner. I would characterise the liability as contingent, rather than pure, principally because of the nature of the decision-making duty. The complaint-handling obligations of the Bank (and the adjudicatory obligation of the FOS) require that customer complaints be determined by reference to the wide and flexible test of what is “fair and reasonable in all the circumstances of the case”. That compels the decision‑maker to consider a much broader range of intangible considerations than simple breaches of “black letter” rules. In contrast with the judicial function, the decision-making duties of the Bank (in the first instance) and of the FOS are not dependent upon proof of a pre-existing liability, or of the breach of a principle or rule, or otherwise confined by reference to such “absolute factors” (per Lord Sumption, In re Nortel, supra). Instead, a complaint may be upheld because conduct fell short of “good industry practice at the relevant time” (per FSA Handbook DISP 3.6.4R) or, even more nebulously, “other standards” (per FOS guidance issued in November 2008) (R (BBA) v FSA, supra, paragraph 53). In my opinion, this distinguishes the regulatory adjudication or determination of a complaint from a judicial adjudication in a civil litigation.
The second analysis: contingent liability arising from the exercise of a power of amendment
[156] Second, the Bank’s liability may be said to arise from the exercise by FSA of regulatory powers that were in existence, and to which the Bank was subject, prior to the date of the debtor’s insolvency, but which only came to be exercised after the date of the insolvency. I have in mind here the action of the FSA in issuing the Policy Statement in 2010, several years after the date of the insolvency.
[157] On a practical level there can be no serious doubt but that the issuing of the FSA Policy Statement changed the regulatory landscape. It heightened public awareness of mis‑selling practices. It encouraged customers to submit claims or complaints for redress. It propelled and compelled authorised persons to investigate and to determine complaints relating to long-historic PPI sales, and to determine them in a particular way.
[158] However, in R (BBA) v FSA, supra, it was held that the Policy Statement did not effect any material legal change to the obligations upon authorised persons. It merely re‑emphasised existing obligations.
[159] Moreover, even if the conclusion of Ouseley J is wrong, and if instead the FSA Policy Statement created and imposed entirely new obligations, those new obligations nevertheless “originate” or find their “source” (Ben Line Steamers Ltd, supra, paragraph [23] J-K) in the lawful exercise of FSA regulatory powers that were in existence, and to which the Bank was subject, long before the date of the debtor’s insolvency. On this analysis, the Bank’s obligation to pay compensation is merely the contingent outcome of a liability to the exercise of a power of amendment (at the instance of the FSA as statutory regulator) to which the Bank was subject prior to the debtor’s insolvency.
[160] As with the post-insolvency amendment of the trust deed and rules in Ben Line Steamers, in a popular sense the promulgation of the FSA Policy Statement may be criticised as having “changed the goalposts”, but the regulatory power to so act was in existence prior to the debtor’s insolvency, and so the Bank’s correlative contingent liability to the exercise of that regulatory power (and its vulnerability to the changing of the goalposts) had likewise been in existence prior to the debtor’s insolvency. The liability to pay compensation to the debtor, even if it can be said to have been dependent upon the promulgation of the Policy Statement in 2010, still finds its source and origin in a pre-insolvency statutory scheme (including the liability to amendment under the regulator’s rule-making power) to which the Bank had long been committed. The publication of the FSA Policy Statement in 2010 merely purified the contingency attaching to the liability. In any event, even if one or other of these alternative analyses is correct, the same conclusion is reached (see paragraph [149], above).
The proper construction of the PPI agreements
[161] This leads me to the proper construction of the PPI agreements.
[162] There are three separate PPI agreements (items 6/1-3 of process). Their terms are admitted and adopted by both parties in their respective pleadings. For ease of reference I shall refer to them as follows: the first PPI agreement comprises the Bank’s offer letter dated 21 February 2014 and the debtor’s signed acceptance form dated 26 February 2014; the second PPI agreement comprises the Bank’s offer letter dated 4 March 2014 and the debtor’s signed acceptance form dated 8 March 2014; the third PPI agreement comprises the Bank’s offer letter dated 6 March 2014 and the debtor’s signed acceptance form dated 10 March 2014. The first and second PPI agreements are nearly identical; the third PPI agreement has similar features to the earlier agreements but overall is substantially different in its terms. The first and second PPI agreements are for modest sums (£420.70 and £915.93, respectively). The third PPI agreement is the most significant in value, agreeing compensation in the sum of £10,590.76.
[163] A recurring theme of the Bank’s submissions was that the PPI payments were ex gratia in nature, made without admission of liability. At debate the Bank’s counsel valiantly resisted pressure to concede that the PPI had been mis-sold to the debtor. This reflected averments in Answer 2 and the terms of the Bank’s first note of arguments (no. 12 of process).
[164] This stance was seized upon by the debtor’s counsel. Absent an admission of pre‑insolvency PPI mis-selling, Mrs Donnelly’s counsel submitted that there could be no pre-insolvency obligation upon which a plea of set-off could relevantly be founded. This submission was sought to be reinforced by a dissection of the defender’s pleadings aimed at identifying the Bank’s fluctuating positions, sometimes contradictory, sometimes ambiguous, as to the existence of any obligation on its part to pay compensation to Mrs Donnelly prior to the conclusion of the PPI agreements.
[165] I have concluded that the debtor’s challenge to the relevancy of the defender’s averments in this respect was not well-founded.
[166] In my judgment there is no necessity for the Bank to admit PPI “mis-selling” as such. Instead, the primary issue to be determined is whether the obligation of the Bank to pay the sums referred to in the PPI agreements is referable to – and finds its source or origin in – a liability of the Bank that was in existence prior to the debtor’s insolvency.
[167] Upon an ordinary construction of the PPI agreements, the Bank’s obligations to make the PPI payments are indeed referable to such a pre-insolvency liability of the nature summarised in paragraphs [146] & [147], above.
[168] That said, though it is not material to my conclusion on the primary issue, I would also observe that, upon an ordinary construction of the PPI agreements, the Bank has admitted the mis-selling of PPI to the debtor.
[169] In any event, the PPI payments are certainly not ex gratia in nature and the PPI agreements are not entered into without admission of liability.
[170] I reach these conclusions for the following reasons. All three PPI agreements identify the relevant PPI policy in the headings of the Bank’s offer letters and in the body of the debtor’s acceptance forms. All three PPI agreements refer to “complaints” or “concerns” of the debtor regarding the way in which the PPI policies were sold by the Bank to the debtor. The first and second PPI agreements go into no detail in this respect. Instead, the Bank’s offer letters (forming part of the first and second PPI agreements) merely record that the Bank is prepared to “uphold” both complaints. In contrast, the third PPI agreement narrates in candid detail the acknowledged deficiencies in the Bank’s conduct when the PPI was sold. (Thus the Bank’s related offer letter dated 6 March 2014 records that the PPI policy was “unsuitable” because the Bank “recommended a single premium policy that did not pay a pro rata rebate if the policy was cancelled before the end of the term”; that the Bank “should have been clearer about…the effects of the early cancellation”; and that “had [the Bank] explained the nature of the restrictive cancellation terms”, a different (cheaper) PPI policy would have been taken out by the debtor.) In each case the Bank’s offer letters refer to the sums as “redress”; the first and second PPI agreements explicitly seek to “compensate” the debtor with the offered sums; and both the Bank’s offer letter dated 6 March 2014 and the debtor’s acceptance form dated 10 March 2014 (constituting the third PPI agreement) repeatedly describe the offered sum as “compensation”. Lastly, and most importantly, each of the Bank’s offer letters expressly bears to record a “decision” by the Bank that is susceptible to review by the FOS within a defined time limit; and, in each case, the calculation of the compensation purports to be “in line with [FOS] and FCA guidance”.
[171] In light of the foregoing, in my judgment there can be no serious doubt but that in each case, in offering the payment and concluding the PPI agreement, the Bank was acting pursuant to its regulatory obligation, derived from statute, to handle, investigate and determine a customer complaint concerning its regulated activity of PPI sales. The obligation to pay compensation under the PPI agreements originates in the Bank’s pre‑insolvency complaints-handling obligation as prescribed by a statutory scheme that was in existence, and to which the Bank was committed, prior to the debtor’s insolvency. The obligation to pay compensation under the PPI agreements is merely the fruition of that pre‑insolvency contingent obligation. This analysis does not require the identification, admission or concession of any PPI “mis-selling” (such as the breach of a specific FSA principle or rule). Simply by handling, investigating and determining the complaints, without further qualification, ex facie pursuant to and in compliance with the statutory regulatory scheme, the Bank must be taken to be conceding its duty to do so, irrespective of the underlying merits of the complaints themselves. Indeed, that is consistent with the expansive definition of “complaint” in the FSA Handbook, which includes:
“any oral or written expression of dissatisfaction, whether justified or not… about the provision of, or failure to provide, a financial service…” (See R (BBA) v FSA, supra, paragraph 38).
[172] However, I would go further than that. Not one of the PPI agreements is expressly stated to be “without prejudice”, or “without admission of liability”, or otherwise ex gratia. Nor is there any basis upon which such a qualification could properly be implied. The use of such phrases would normally be interpreted as meaning that the party agreeing to pay “does not admit any pre-existing liability on his part” (Edwards v Skyways Ltd [1964] 1 All E.R. 494 at 500). On a straight-forward reading of the PPI agreements (in particular the offer letters), absent any such qualifying language, it is difficult to conclude that the agreements represent anything other than an admission or acknowledgment by the Bank of pre‑insolvency failings on its part in the sale of the PPI policies. This is most evident in relation to the third PPI agreement. It describes the Bank’s acknowledged failings in detail. Those failings correspond precisely to one of the “common failings” (specifically, number 15) listed in the FSA open letter within the 2010 Policy Statement. That particular “common failing” (number 15) was identified by the FSA as constituting inter alia a breach of FSA principles 6 & 7 (which narrates obligations to afford fair treatment to customers and to communicate clearly and fairly with them). The first and second PPI agreements give less detail, but record, in unequivocal terms, that the debtor’s “complaint about the way in which the PPI policy was sold” has been upheld by the Bank. Absent any qualification, what other interpretation is to be afforded to a decision to “uphold” a complaint than that the complaint is accepted, conceded, admitted? The Bank’s unilateral, post-contractual attempts to row back on that unqualified admission (in submission and averment) are of no consequence.
[173] In my judgment it is enough that the obligation to pay the sums referred to in PPI agreements is, on an ordinary construction of the agreements, referable to and derived from the Bank’s pre-insolvency regulatory obligation inter alia to determine the debtor’s complaints concerning PPI sales to the debtor. Separately, though not strictly necessary for my decision, I also conclude that in each case, in offering the sums referred to in the PPI agreements on the terms in which it did, without qualification, the Bank admitted the pre‑insolvency breach by it of regulatory obligations owed to the debtor.
[174] It is conceivable, I suppose, that a bank could agree to pay a sum of money to a customer (or former customer) that was truly ex gratia; which did not in its terms bear to involve the implement of a pre‑insolvency obligation to handle and determine a complaint (or acknowledge a liability to review by the FOS); and which did not in its terms concede the breach of any pre-insolvency regulatory obligation. But this is not such a case.
The effect of the debtor’s insolvency and subsequent discharge
[175] Since the Bank’s obligations to the debtor arising from the PPI sales – whether contingent or pure in nature – were in existence as at the date of the debtor’s insolvency, the debtor’s correlative rights against the Bank were likewise in existence at that date. Accordingly, those rights vested in the trust estate for the benefit of her creditors in August 2006.
[176] It does not matter that contingencies attaching to such an obligation were purified long after the date of insolvency. The nascent correlative right vested in the trustee at the date of insolvency. Like a late-flowering bud on a fallen tree, the newly-emerged asset still forms part of the insolvent estate that was severed from the debtor’s whole other patrimony at the date of insolvency.
[177] It does not matter that the debtor or trustee may have been discharged. The debtor is not thereby re-invested in any part of the insolvent estate, absent abandonment of the PPI claims by the trustee, or a discharge on composition, or settlement in full of the creditors’ claims. I refer to paragraphs [52] to [59], above.
Does the pursuer have title to sue at all?
[178] A related interesting question arises as to Mrs Donnelly’s title to sue. The defences include a preliminary plea challenging her title to sue, though at debate the plea was not insisted upon.
[179] In my judgment, the Bank was correct not to insist on this plea. Following the discharge of a trustee, an insolvent debtor re-acquires title to pursue and recover assets forming part of his insolvent estate, by virtue of his radical right to the estate. However, while title may revive, it is, in nature, a bare title to sue. The debtor can pursue and recover assets forming part of his insolvent estate but only as a constructive trustee for the benefit of the creditors. The beneficial interest in the assets remains with the creditors (McBryde, Bankruptcy, paragraph 8-75).
[180] Two leading cases illustrate the point. In Geddes v Quistorp 1889 17 R 278 the debtor, having been sequestrated, was subsequently discharged but without composition with his creditors. Thereafter the trustee was also discharged. The debtor then sued his sister-in-law for payment of a loan allegedly advanced prior to the debtor’s insolvency. The sister-in-law claimed that the debtor had no title to sue because the debt was properly vested in his sequestrated estate. The First Division disagreed. It held that, when the trustee was discharged, the debtor’s “radical right” to pursue recovery of the debt “revives” (per the Lord President, page 280; per Lord Adam, page 281). However, the debtor’s title to sue is limited. He was held to be “only a constructive trustee for his creditors” (per Lord McLaren, page 282). The underlying policy rationale is that “legal title must be somewhere” and, if not restored to the debtor himself upon the trustee’s discharge, then “nobody has a title” (per Lord Adam, at page 281).
[181] In Macdonald v Mackintosh 1905 SC 771, again the bankrupt debtor and the trustee were discharged. There was no composition. There was no retrocession of the insolvent estate to the debtor. The debtor sued for recovery of an asset that formed part of the sequestrated estate. The peculiarity of the Macdonald decision is that the debtor, quite candidly, asserted that he was entitled to recover the asset for his own benefit (not for behoof of his creditors). That stance was founded upon the argument that the asset had been “abandoned” by the trustee and creditors. While the argument may have been tenable in principle, the Second Division had no difficulty in concluding that there were no relevant averments of any such abandonment (not least because it was not averred that the existence of the asset had ever been made known to creditors). Accordingly, the debtor’s action (to recover the asset for his own benefit, rather than as constructive trustee for his creditors) was dismissed.
[182] Incidentally, the Geddes case also scotches the argument, hinted at in averments by the debtor, that her ignorance of the existence of (and resulting alleged inability to enforce) any of the PPI claims until after the date of her discharge somehow prevented those rights from vesting in the trust and forming part of the insolvent estate. The bankrupt in Geddes had also omitted to include an asset in his statement of affairs. There was not said to be any concealment, fraud or fault on his part. The reason for the omission was irrelevant. In law, the asset was in existence at the date of the insolvency and vested in the trustee as part of the insolvent estate.
Is the Bank entitled to plead set-off?
[183] This brings us to the nub of the issue in the present case.
[184] I have concluded that the debtor’s alleged obligation to the Bank is an obligation that was in existence at the date of insolvency (and, therefore, forms part of the creditors’ claims upon the insolvent estate).
[185] I have also concluded that the Bank’s obligation to the debtor (to pay the sums referred to in the PPI agreements) is the present ascertained value of a contingent obligation that was in existence at the date of the debtor’s insolvency (and, therefore, forms part of the debtor’s insolvent estate).
[186] The question then arises: is the Bank entitled to plead set-off in respect of the two obligations, by virtue of the principle of the balancing of accounts in bankruptcy?
[187] I pause to observe that it would have been competent for a creditor (or the debtor, or the trustee himself) to apply for reappointment of the debtor’s trustee, in order that the trustee could recover payment of the PPI sums. Such applications (at the instance of former trustees) are relatively common. If that had been done, it is incontrovertible that the Bank would have been entitled to plead set-off, on the principle of the balancing of accounts in bankruptcy. Of course, it would be for the trustee to adjudicate on the merits of that plea in the first instance, subject to a right of appeal to the court.
[188] The peculiarity of the present case is that there is no trustee in office. (The discharge of the trustee is not specifically averred, but it was not in dispute at the debate before me.) It is the discharged debtor herself that is seeking to recover the asset, and the Bank, from whom the asset is sought, is itself (allegedly) an unsatisfied creditor of the debtor.
[189] In my judgment, the Bank is indeed entitled to plead set-off in such circumstances. I reach that conclusion for the following reasons. Firstly, like compensation, the balancing of accounts in bankruptcy must be pled. However, its application is not confined to circumstances in which it is pled before a trustee. The entitlement to plead the principle arises from the fact of the debtor’s insolvency (Integrated Building Services Engineering Consultants Ltd (t/a Operon) v PIHL UK Ltd [2010] Building L.R. 622 at 629), not from the identity of the person against whom it is asserted.
[190] Secondly, the debtor sues qua constructive trustee for the benefit of her creditors (Geddes, supra; Macdonald, supra). In that sense, she stands in the shoes of the trustee under the trust deed. If the trustee had sued for payment he would, indubitably, have been met with a competent plea of set-off in respect of the debtor’s (allegedly much greater) indebtedness to the Bank. The discharged debtor (qua constructive trustee for the benefit of her creditors) can be in no better position than the trustee would have been under the trust deed.
[191] Thirdly, when one appreciates that Mrs Donnolly, as a discharged debtor, is seeking to recover an asset that properly falls within her insolvent estate; that the Bank remains a creditor of that insolvent estate; and that the Bank is seeking to set-off its pre-insolvency indebtedness to the debtor against the debtor’s (alleged) pre-insolvency indebtedness to the Bank, it becomes plain as a matter of practical common sense that the whole rights and pleas that are available to the Bank as a creditor in the insolvency of the debtor ought to remain exigible by the Bank, whether or not the trustee is in office. Otherwise, a pointlessly circular situation would arise whereby an application would require to be made for the re‑appointment of the trustee; the trustee, once restored to office, would be met with a plea of set-off by the creditor; and the entire process immediately grinds to a halt. The expense and delay involved in that futile exercise can readily be avoided simply by recognising the subsisting right of the creditor to assert the plea in response to the debtor’s claim. Besides, no creditor is ever likely to seek the re-appointment of a trustee to collect this debt because, in practical terms, standing the inevitability of the Bank asserting a plea of set-off, there is nothing to be gained by them in doing so. I can see no persuasive justification, in law or in policy, to compel the interposition of the trustee as claimant (in place of the debtor qua constructive trustee). It would be an artificial and unduly formalistic exercise.
[192] Insolvency set-off – or the principle of the balancing of accounts in bankruptcy – may normally work at the hand of the trustee. But if there is no trustee, it operates at the hand of the creditor.
[193] Fourthly, a pragmatic conclusion along these lines is consistent with the underlying rationale of the principle of the balancing of accounts in bankruptcy, which is “to do substantial justice” between the parties (Stein v Blake [1996] A.C. 243 at 251). The principle involves an equitable adjustment of the right of compensation in order to achieve justice between the debtor and creditors, and the creditors inter se. In my judgment, substantial justice is achieved by allowing an unsatisfied creditor, such as the Bank, to invoke the principle of the balancing of accounts in bankruptcy – even after the discharge of the debtor and the trustee – in answer to a claim by the discharged debtor (as constructive trustee for the body of creditors as a whole) for payment of a pre-insolvency debt. That is because, if set-off is not allowed in those circumstances, the Bank as creditor will face the invidious situation of having to pay in full to the insolvent estate (by implementing a pre-insolvency obligation) in circumstances where it would be entitled to recover only a dividend on the unsatisfied obligations owed by the insolvent estate to the Bank.
[194] Fifthly, for the pursuer it was submitted that the principle of the balancing of accounts in bankruptcy could not be invoked because the pursuer was no longer in bankruptcy following her discharge. The pursuer’s second note of arguments (paragraph 11) reads:
“The period of time in which the law of the balancing of accounts in bankruptcy applies has therefore ended… The rules on the balancing of accounts apply to the process of settling claims in the bankruptcy process. That process is over”.
There is an elementary error in this argument. The bankruptcy or insolvency process is not over. It continues until the creditors’ claims are satisfied in full or there is a discharge on composition. The simple discharge of a debtor has a very limited effect, as discussed earlier.
[195] Lastly, I acknowledge that English law relating to insolvency set-off differs in origin from, and operates within a different (statutory) framework to, the law of Scotland. However, it has been held that Scots law in this area “… is in effect very nearly if not precisely the same as the law of England…” (Hannay & Sons v Armstrong 1877 1 R 43 at 45 per Lord Blackburn). Against that background I draw some comfort for my conclusion from the Court of Appeal decision in M.S. Fashions Ltd & Others v BCCI S.A. (in liquidation) 1993 Ch 425 in which Lord Hoffman (then sitting as Hoffman L.J.) considered some of the practical difficulties arising in insolvencies from contingent claims, specifically (as in this case) from contingent claims available to an insolvent party against a creditor. He stated (at page 432):-
“The problem of contingent claims can often be solved by the hindsight principle….. Sometimes, however, the insolvent estate needs to be wound up before it is known either that the contingency has occurred or that it will not occur. The court must then put some value on the contingent claims… There is no similar mechanism for valuing claims by the insolvent, but I am not sure that is a real problem. Until the contingency occurs, the liquidator or trustee will not be able to use the claim as either a cause of action or a set-off. If the other party has a cross-claim, he will be able to prove for the full amount. I suppose it may happen that the contingency occurs long after the winding-up has been completed and the company is then restored to the register and brings an action. The defendant may have proved for his cross-claim and received a small dividend. Can he still rely on the full claim as a set-off, giving credit for the dividend? For my part, I do not see why not.”
[196] Though obiter, these comments are directly in point here. Lord Hoffmann envisaged that, in answer to a claim against a creditor by an insolvent debtor (following purification of a contingency), set-off could operate at the hand of the creditor, even after adjudication of that creditor’s claim and even after the discharge (of the liquidator, in that case), provided the creditor’s claim remained unsatisfied.
[197] For the foregoing reasons, I conclude that the debtor’s averments anent the alleged non-application of the principle of the balancing of accounts in bankruptcy are irrelevant.
Decision
[198] For the foregoing reasons, I have concluded that the pursuer’s averments anent (i) the nature of the defender’s obligations to the pursuer, (ii) the date upon, and mechanism by, which the defender’s obligations to the pursuer came into existence, (iii) the alleged effect of the discharge of the pursuer from her trust deed, (iv) the alleged operation of prescription, and (v) the alleged non-application of the principle of the balancing of accounts in bankruptcy, are irrelevant.
[199] The defender’s general preliminary plea to relevancy (plea-in-law 1) seeks dismissal of the action. Dismissal is not the appropriate disposal at this stage because a material factual issue remains in dispute, namely the amount of the subsisting loan balance, if any, owed by the pursuer to the defender. The defender’s plea of set-off is, of course, predicated upon the factual existence of that contra-indebtedness in excess of the sum sued for. That factual issue requires to be determined at proof (though, if my preliminary observation at paragraph [50], above, is correct, it ought to be a short proof). Technically, the defender’s general preliminary plea is not apt in its terms to support the exclusion of averments from probation. However, in the context of this commercial action, in exercise of the broad powers available to me under chapter 40 of the ordinary cause rules, I shall sustain, in part, the defender’s preliminary plea to the effect of finding the foregoing discrete parts of the pursuer’s pleadings to be irrelevant. I shall assign a case management conference to hear submissions on inter alia the identification of the precise averments that fall to be excluded from probation as a consequence of my findings.
[200] In order to assist the parties, my preliminary thoughts are that the following averments necessarily fall to be excluded from probation: (1) in article 1 of condescendence, the following sentences: “The defenders’ obligations to pay those sums were constituted by the contracts on which the pursuer brings the action. Those obligations were accordingly constituted on and between about 21st February and 10th March 2014”; (2) in article 1, the sentence reading: “Explained and averred that the liability of the defenders to pay the debt on which this action is brought arose from the contracts condescended upon.”; (3) in article 3, from and including the sentence commencing “On the pursuer’s discharge any obligation to pay any debt for which she had been liable….” up to and including the sentence reading “….. Consequently by 21 February 2014 the pursuer had no arrears with the defender”; (4) in article 3, from and including the sentence commencing “They have no right to do so in terms of the parties’ contracts, ….” up to and including the sentence ending “….offset those sums against their claim before the trust deed coming to an end”; (5) in article 3, all averments after the sentence “Quoad ultra denied.”
[201] Separately, the defender’s fifth plea-in-law (concerning the pursuer’s title to sue) also falls to be repelled due to want of insistence. I shall also repel the pursuer’s general plea to relevancy (plea-in-law 1) and prescription plea (plea-in-law 5).
[202] The issue of expenses is reserved meantime.