RBS ordered to make PPI payout after failing in ‘insolvency set-off’ appeal 

The Royal Bank of Scotland has had an appeal rejected against a decision that it could not avoid paying out a successful payment protection insurance (PPI) mis-selling claim to a loan customer who became insolvent.

The Inner House of the Court of Session upheld a decision of the Sheriff Appeal Court to dismiss RBS’s defence of “insolvency set off” after the bank sought to defend the action against it on the basis that there was an unpaid balance owed to it under the loan agreement.

‘Protected trust deed’

The Lord Justice Clerk, Lady Dorrian, sitting with Lord Menzies and Lord Drummond Young, heard that the respondent Alison Donnelly borrowed money from the appellant RBS between 1997 and 2003.

At the same time, the bank sold Mrs Donnelly PPI in respect of those loans.

Mrs Donnelly became insolvent in 2006 and entered into a protected trust deed, appointing an insolvency practitioner as trustee to administer her estate and use assets to pay off her debts. 

But the amount of Mrs Donnelly’s estate ingathered by the trustee was insufficient to pay the creditors’ claims in full. 

Creditors, including RBS, received payments but the dividend was about 22 pence in the pound.

That left unpaid, so far as the bank was concerned, a balance of £21,617.42. 

The final dividend was paid to creditors in December 2013, at which point, in terms of the provisions of the trust deed, the trust deed terminated.

Under the terms of the Bankruptcy Act 1985, after payment of the expenses of the trust deed and the trustee’s remuneration, once the estate was distributed Mrs Donnelly was legally discharged from all her debts.

Mrs Donnelly subsequently complained that she had mis-sold PPI and her claims were upheld by the Financial Ombudsman Service.

‘Insolvency set-off’

Having agreed to settle her claim for £11,927 RBS paid her just one instalment of £1,111, but then argued it was entitled to offset the unpaid balance of £10,815 against the £21,617 which it claimed remains owed to the bank under the previous loan agreements.

Mrs Donnelly raised an action against RBS in the sheriff court for payment of the balance due under the settlement agreement.

However, the bank sought to defend the claim on the basis that, after setting off against Mrs Donnelly’s claim the unpaid balance due to it under the loan agreements, nothing further was due. 

The sheriff found in the bank’s favour, ruling that, “balancing of accounts in bankruptcy operates to discharge the defender from any obligation to make further payment to the pursuer”.

Mrs Donnelly challenged the decision in the Sheriff Appeal Court, which - following the decision of the Inner House in Dooneen Ltd v Mond [2016] CSIH 59; 2017 SCLR 199, later affirmed by the UK Supreme Court [2018] UKSC 54 - granted decree in her favour after ruling that the defence of insolvency set off could not succeed.


RBS appealed to the Court of Session, arguing that insolvency set-off could apply between the parties post termination of the insolvency and release of the debtor, but the appeal judges dismissed the set-off defence as “irrelevant”.

Delivering the opinion of the court, Lord Glennie said: “Mrs Donnelly’s debts to the bank under the loan agreements were discharged on termination of the trust, before Mrs Donnelly brought her claim in the sheriff court for payment of the agreed PPI compensation and before the bank sought to plead set-off in answer to that claim. 

“Since any claim by the bank against Mrs Donnelly under the loan agreements had been discharged by the time the bank raised its plea of set-off, there was no longer any debt owing from her to the bank which could be made the subject of that set-off. The plea of set-off is therefore irrelevant.”

The judges observed that there were “practical considerations” which supported this interpretation of the trust deed.

Lord Glennie explained: “If at the moment the trust deed terminated the debtor was not fully discharged from all his debts due to his creditors, in the sense of his liability for those debts being extinguished, that would leave him in a state of uncertainty.”

He continued: “If it were open to a creditor to rely by way of set-off upon a debt due from the debtor but discharged only in the limited sense contended for by the bank, it would have consequences for the validity of the final distribution by the trustee under the trust.”

RBS argued that the court could make it a condition of allowing the set-off in this action that the bank make payment to the other creditors in the amount by which they had been disadvantaged.

“But”, Lord Glennie added, “such an arrangement would involve identifying all other creditors who had been paid a dividend and ascertaining the amounts they had been paid and what further sums were due to them.

“The assistance of the (former) trustee would be required, to assist in identifying the other creditors and calculating how much should be paid to each. But the trustee’s remuneration for administering the trust has already been ascertained and paid, so provision would have to be made for further remuneration to be paid for this additional work. 

“In short, such an approach is virtually unworkable; and, if it could be made to work, it would effectively amount, in substance if not in name, to a re-opening of the trust deed, requiring the trustee to make a further final distribution.”

The court concluded: “In the present case the trust proceedings came to an end with an agreed discharge of all debts due from the debtor to acceding creditors. In those circumstances the bank has no debt owing to it capable of being used by way of set-off to defeat Mrs Donnelly’s claim to enforce payment of the sums agreed to be due to her as a result of the PPI mis-selling.”

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