Scottish Court of Session Decisions

SECOND DIVISION, INNER HOUSE, COURT OF SESSION

[2016] CSIH 59

CA178/15

Lord Justice Clerk

Lord Malcolm

Lord McGhie

OPINION OF THE COURT

delivered ex tempore by LADY DORRIAN, the LORD JUSTICE CLERK

in the reclaiming motion

by

(FIRST) DOONEEN LIMITED, trading as MCGINNES ASSOCIATES; and
(SECOND) DOUGLAS DAVIDSON

Pursuers and Respondents;

against

DAVID EMANUEL MERTON MOND

Defender and Reclaimer:

Act: Bartos; bto

Alt: Howlin, QC; Balfour + Manson LLP

13 July 2016

[1]        On 29 September 2006, the second pursuer granted a trust deed for creditors.  The defender is the trustee thereunder.  The trustee made what he referred to as a “final distribution” of 22.41p in the pound, on 5 November 2010.  In January 2015 the second pursuer appointed the first pursuer as his agent to pursue a claim for mis-selling of PPI.  A claim was made, and compensation was paid in April 2015.

[2]        When he made the distribution, the trustee was unaware of the claim, but it was agreed by parties that it formed part of the estate which vested in the trustee under the deed.  The sole question in this reclaiming motion relates to whether the Lord Ordinary was correct to find that, in terms of the trust deed, the making by the trustee of a distribution to creditors brought the trust to an end, with the result that neither the trustee nor the creditors have any claim on the compensation.

[3]        The reclaimers argued that the Lord Ordinary was wrong to do so.  A distribution can only be “final” for the purposes of the trust deed if all the estate vested in the trustee has been applied to payment of the debts. This was understood to be the position under statute, and the same should follow under the trust deed. Reference was made to Whyte v Northern Heritable Securities (1891) 18R (HL) 37. A distribution cannot be a final one where, unknown to the trustee, part of the estate had not been taken into account.

[4]        It was submitted that clause 7 sets out a compulsory order of distribution of the estate, namely expenses of the trustee, payment of creditors, and finally, but only after making payment to the trustee and creditors, reconveyance to the debtor of such estate as the trustee may not have realised and payment of any surplus to the debtor.  Allowing the debtor the benefit of the compensation payment effectively amounts to payment of a surplus.  It was submitted that this was contrary to clause 7 where a surplus could only be created after payment of the creditors, and the distribution made in ignorance of the claim could not be a “final” one for the purpose of clause 11.  What is a “final distribution of my estate ….in accordance with this Trust Deed” requires to be determined as a matter of fact, rather than according to how the trustee may, as in this case, mistakenly, characterise it.  The deed should be construed in such a way as to avoid permitting the debtor to enjoy such a windfall when the creditors remained only partly paid.  It was unlikely that creditors would have been willing to accede to a deed importing such a construction.  If the trust deed were to be interpreted as enabling the trustee to terminate the trust by declaring a final dividend, the effect would be a unilateral abandonment by the trustee, without consulting the creditors, of any unknown assets.  The Lord Ordinary was wrong to say that it was a consequence of the reclaimer’s argument that unknown acquirenda might always be capable of realisation and that on this basis the trust might never end.  The effect of the reference to section 32 as a means to identifying acquirenda, meant that acquirenda forming part of the estate were limited to those obtained between the date of the sequestration and the date of the discharge, if one assumed that the matter had proceeded as a sequestration. On that basis acquirenda would cease to form part of the estate at a date three years from the granting of the deed.

[5]        The arguments were developed in a detailed written Note of Argument, and under reference to the further cases of Flett v Mustard 1936 SC 269, Kinmond Luke & Co v James Finlay & Co (1904) 6F 564 and Whyte v Knox (1858) 20 D 970.

[6]        Mr Howlin stressed the need to pay close regard to the facts in each case.  The Kinmond Luke case should be understood in the context of a situation where the asset in question had never vested in the trust, and Whyte v Knox should be understood in the context of an insurance policy which had no value at the time of the discharge.  He founded on Whyte v Northern Heritable Securities where the critical question, admittedly in the context of a statutory sequestration under the Bankruptcy Act 1856, was the same as in the present case: namely what was meant by a “final distribution”.  The answer, per Lord Watson at p 39, supported his argument.  Whatever the actual language used, the respondent’s argument turned on the proposition that the creditors had to be seen to have agreed to abandon a chance to recover £55,000.

[7]        For the respondent, counsel submitted that the clear purpose of clause 11 was to escape the effect of the common law and the imposition of a potentially indeterminate duration of the trust until creditors had received a full dividend.  A construction giving effect to this purpose should be adopted.  Clause 10 tied the debtor’s discharge to the termination of the trust.  Termination is contemporaneous with the complete discharge of the debtor. In terms of the deed, the intention was that assets would continue to vest in the trustee as acquirenda only until termination. An argument that “final distribution” only occurs on the distribution of all assets transferred to the trustee under clause 1, whether or not the debtor or trustee are aware of their existence, leads to a circularity: assets will continue to accrue until termination which can only occur when sufficient acquirenda have followed to allow a full dividend, or until the death of the debtor.  It leads to uncertainty, since it can never be known whether a trust has in fact been terminated.  It would mean that all dividends declared by the trustee would be interim, and that the terms of clause 7 which grants the trustee power to declare a dividend to be interim or final would be defeated.  It was submitted that the respondent’s construction avoids both this circularity and uncertainty, is consistent with the wide powers accorded to the trustee not only in clause 7 but in clauses 10 and 12, accords with the purpose of modifying the common law, and is consistent with creditors taking the risk of not obtaining a full dividend.  It has the advantage of making it clear that the trust has terminated.

Analysis
[8]        A trust deed for the benefit of creditors sets out the terms on which a debtor proposes that his indebtedness to his creditors be resolved.  By acceding to the trust deed the creditors must be taken as agreeing to the terms proposed.  The construction of the deed requires to be premised upon what a reasonable person would have understood the terms of the deed to mean, taking account of the background knowledge which such individuals would have had, and against all the relevant surrounding circumstances, including the ordinary meaning of the words, the purpose of the deed in question and the whole terms thereof.  Amongst the specific provisions made in the trust deed with which the court is concerned are provisions relating to the termination of the trust.  These are the provisions of clauses 10 and 11, from which it may be seem that the termination of the trust is linked to the discharge of the debtor:

“Discharge of Debts

(10)      This Trust Deed is granted by me on condition that the creditors acceding to the Trust Deed shall discharge me of all my debts due to them on the termination of this Trust Deed unless:-

(i)         My Trustee reports that in his opinion I have not made full and fair surrender of my Estate or;

(ii)        The Trust Deed terminates on an award of sequestration of my Estate being made.

Termination of Trust Deed

(11)      This Trust Deed shall terminate on the earliest of the following events:-

(i)         An award of sequestration of my Estate …

(ii)        The final distribution of my Estate (which for the avoidance of doubt shall include a nil distribution) by my Trustee in accordance with this Trust Deed.

(iii)       The acceptance by my creditors of any composition by me.”

At common law a discharge of the debtor does not affect the estate, which continues to be subject to the trust until claims have been settled in full, unless there is composition, abandonment (or presumably a judicial sequestration).  The debtor is thus not discharged, from his obligation to meet the outstanding debts from the trust estate, even if knowledge of the existence of part of the estate comes later, or the estate comes in the form of acquirenda.

[9]        The effect of composition however is to grant an absolute discharge to the debtor in return for payment of a proportion of the debts, and thus does have the effect of terminating the trust and removing any remaining estate therefrom as at the date of discharge.

[10]      In our opinion the operation of clauses 10 and 11 together are designed to achieve the latter effect, as can be seen for several reasons.  First, the wording of clause 10 ex facie clearly contemplates an absolute discharge on termination; second, clause 11 contemplates that full recovery may not have been achieved before termination of the trust deed; and, third, clause 11 places final distribution of the estate, even at nil value, on a par with composition.

[11]      The distribution which brings the trust to an end, bringing about the discharge of the debtor is the distribution determined by the trustee under clause 7 to be the final dividend. Clause 7 specifies that:

“… My Trustee shall determine as he thinks fit the time(s) when payment should be made, what notice of payment should be given and whether payment should be made by way of interim or final dividend(s). “

The Lord Ordinary determined that the phrase “final dividend” and the phrase “final distribution” should be read as interchangeable.  We agree.  The clause itself is introduced with the words “Distribution of my estate”.  In determining whether a dividend should be declared to be a final dividend under the deed, as opposed to an interim one, the trustee may be taken to be aware of the effect of doing so as expressed in other terms of the deed.  In particular he must be taken to be aware that in doing so he would be bringing about the termination of the trust, and the discharge of the debtor, unless there has been a surrender report suggesting that there has not been full or fair surrender, or sequestration has intervened.  Equally, the creditors would have been aware that the effect of such a declaration, even if the dividend was a nil-dividend, would have the effect of terminating the trust.

[12]      In the present case we are concerned with the meaning of the language used in the trust deed entered by the debtor.  That language must take its meaning from its context.  The context is quite different from that of a statutory process which applied in the case of Whyte v Northern Heritable Securities, and which expressly provided that dividends were to be made from time to time “until the whole funds of the bankrupt shall be divided.”  The bankrupt was to be discharged “after a final division of the funds”.  The dictum of Lord Watson relied on by Mr Howlin was in the following terms:

“I think the final close of the sequestration contemplated by the statute was the discharge of the trustee after the final distribution – after the whole of the funds vested in him by force of the statute had been applied to their proper purpose, namely, payment of the debts ranked in the sequestration.  When I speak of final distribution, I mean distribution of what were in fact the last funds available for the purpose.”    

There can be no doubt that his comments were intended to be a comment on the statutory provisions.  He was not attempting to define “final distribution” for all purposes, least of all attempting to construe a modern agreement between debtor and creditors.  We cannot accept the proposition that the case was on all fours with the present.  A specific difference was that section 132 of the relevant statute expressed matters in impersonal terms.  Division was to continue “until the whole funds of the bankrupt shall be divided”.  In the deed before us the termination provision was based on a decision by the trustee as to when to pay a final dividend.  But it is unnecessary found on specific differences.  We are satisfied that the general context of construction of the elaborate provisions of the Bankruptcy Act 1856 was quite different from construction of a trust deed such as this. 

[13]      The trustee’s discretion to determine whether a dividend should be final is not entirely unfettered, since the trustee acts in a fiduciary capacity in respect of the creditors whose interests he represents, which guards against capricious behaviour on the part of the trustee.

[14]      The discharge also sets the date beyond which assets accruing to the debtor can no longer be classified as acquirenda, since the acquirenda which form part of the estate are to be identified by reference to acquirenda which would vest in a permanent trustee under section 32.  These are (section 32(10)) assets acquired by the debtor after the date of sequestration (for which read “execution of trust deed”) and up to the effective date of discharge. In our opinion this means the date of discharge under the trust deed, which coincides with termination of the trust.  It remains the case therefore that there is uncertainty and circularity inherent in the reclaimer’s argument.  We do not accept Mr Howlin’s contention that to determine the date of discharge for this purpose it would be necessary to ask the hypothetical question “what would have been the effective date of discharge had this been a sequestration under the Act”. 

[15]      Clause one simply provides for a means of identifying the estate which is covered by the trust deed.  The nature of the property covered by the trust deed includes rights of the kind referred to in section 31(8)(b) (right to take proceedings etc) and 32(6)(a) (acquirenda), but it does not follow that the temporal restrictions in relation to such property which apply under the 1985 Act apply equally under the deed.  Clause 1 does not specify that the trustee holds the property on the same terms as a trustee under the Act.  It does not incorporate the provisions of sections 31-33 of the 1985 Act; and it certainly does not incorporate the terms of section 54.  Sections 31(8) and  32(10) provide that for the purpose of these sections a “relevant date” is a date between the sequestration and the date upon which discharge becomes effective.  Since section 54 is not incorporated, nor is the general scheme of the Act, this cannot mean the period of 3 years which the reclaimer now suggests. Accordingly, the argument that the reclaimer’s submission might result in a never-ending trust remains valid.

[16]      A repeated feature of Mr Howlin’s submission was the proposition that, whatever precise term was used, the respondents’ argument amounted to the proposition that the creditors had agreed to abandon an asset worth £55,000.  If the trustee’s decision to make a final payment terminated the trust, this was abandonment by the trustee without authority of the creditors.  In our view it is entirely misleading to view matters in this way.  We are concerned with the effect of the agreement at the time it was made or acceded to.  Mr Howlin himself made the point that in the normal case there was no problem.  In most cases there was no additional asset.  What the creditors were agreeing to at the outset was a simplified procedure which would allow them to obtain some payment from the debtor with the minimum of fuss.  Properly advised they might have had to weigh up the advantages of simply agreeing to procedure by way of trust deed against the greater protection of formal bankruptcy.  They might have been advised of the possibility that by doing so they would lose the chance to claim if any worthwhile asset unknown to the debtor unexpectedly came to light after the trustee had terminated the operation of the trust.

[17]      On a proper construction of the deed, therefore, “a final dividend” means a dividend declared to be such by the trustee – not one carried out when all the available assets have been distributed to the trustees.  The “final distribution” of the estate referred to in paragraph 11(ii) is at the hands of and for the decision of the trustee.

[18]      This interpretation is necessary because the termination of the trust deed, as we have noted, is tied to, amongst other things, final distribution.  The final distribution acts not only as the trigger for a discharge of the debtor by creditors, but, in effect, a composition, whereby the trust deed (the voluntary equivalent of a sequestration) is ended and the debtor is entitled to be re-invested in any remaining trust estate.  As was explained in Flett v Mustard (Lord President Normand, p 275):

“If abandonment is out of the way, the only other mode by which retrocession can be established, short of full payment of the creditors, is by showing that there was a discharge on composition—Northern Heritable Securities Investment Co., Lord Watson at p. 39.  There may be a discharge of a debtor under a trust-deed for creditors which does not expressly bear to be a discharge on composition but which is intended to have that effect, and that intention may be found in the terms of the trust-deed and of the discharge. That was the view taken by Lord Trayner (at p. 570) in Kinmond, Luke & Co. v James Finlay & Co.”

In Kinmond, where there was a provision in similar terms to clause 11(ii), Lord Trayner had said (p 570):

“Under the trust-deed, to which the pursuers' creditors acceded, it was made matter of contract that on receiving a final dividend (as declared by the trustee) the pursuers should, ipso facto, stand discharged of all claims ranked on their estate. Such a dividend has been paid and the discharge given.  In my opinion, that operated practically as a discharge on a composition would have done, and had the effect of reinvesting the pursuers.”

The discharge in the present case has the same effect, terminating the trust and reinvesting the truster in any unrealised estate, which includes the PPI payment.

[19]      For the reasons which we have given, we will refuse the reclaiming motion and adhere to the opinion of the Lord Ordinary.