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Jennifer Angus and Sophie Gallacher, who both work in the restructuring and insolvency team at CMS, comment on the decision which is awaited in the matter of Dooneen Ltd (t/a McGuines Associates) and anor v Mond, which is on appeal from the Inner House of the Court of Session in Scotland.

The UK Supreme Court has heard the Scottish appeal in the matter of Dooneen Ltd (t/a McGuines Associates) and Anor (“Davison”) against Mond (“Mond”). On 3 July 2018, a bench of five Supreme Court Justices considered whether both the Outer House and the Inner House of the Court of Session were right to prefer Davison’s arguments, and to rule that their construction of the term “final distribution” in a voluntary trust deed for creditors was correct. The judgment of the UK Supreme Court should be released later this year.

Background

In 2006, Davison granted a trust deed in favour of his creditors and appointed Mond as trustee. In 2010, Mond made what he described as a “first and final dividend” to the creditors of 22.4 pence in the pound. At Clause 11 of the trust deed, it was agreed that the “final distribution” by the trustee of Davison’s estate would effectively terminate the trust deed. Following Mond’s distribution, Davison was subsequently discharged from any further obligations to his creditors under the trust deed.

In January 2015, Davison became aware that a claim for mis-sold Payment Protection Insurance (“PPI”) formed part of his assets and appointed Dooneen Limited to manage the claim. The claim was successful and in April 2015 compensation of £55,000 was awarded. It was agreed by both parties that, although its existence was unknown, the claim had vested in Mond at the date the trust deed was executed. The dispute centred around who was entitled to receive the compensation award – Davison or Mond.

Earlier Decisions

Outer House

The issue for the Lord Ordinary sitting at first instance was whether the trust deed had come to an end and had discharged Davison of all responsibility to his creditors. If this was the case, any unrealised assets which had vested in Mond as trustee, on termination of the trust deed would have then re-invested in Davison.

This formed the basis of Davison’s argument and supported the claim of entitlement to the PPI compensation. Mond disagreed, claiming that the trust deed had not come to an end on the making of the final distribution and argued that he was entitled to the PPI monies to use for the benefit of the creditors.

The Lord Ordinary agreed with the arguments of Davison that the trust deed had terminated and that all unrealised assets, including the PPI claim, had re-invested in Davison’s estate. The Lord Ordinary preferred Davison’s construction of the trust deed and added that Mond’s version would lead to uncertainty over both when a final distribution is made and at what time a trust deed would in fact terminate.  A copy of the decision at first instance is available here.

Inner House

Mond appealed the Lord Ordinary’s decision to the Inner House of the Court of Session. The question for the Inner House was whether the Lord Ordinary was correct to find that Mond and the creditors had no entitlement to the PPI compensation.

In this instance, Mond again argued that “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.” They furthered their argument by submitting that the term “final distribution” should be determined as a matter of fact, rather than on the basis of the incorrect words of a trustee.

Davison argued that the purpose and effect of the Clause 11 termination was to escape the confusion and circularity that would arise from an “indeterminate duration of the trust until the creditors had received a full dividend.” They restated their position that under the correct construction of the trust deed, the deed had terminated on Mond’s first and final dividend and the unrealised assets vested in the trustee had reinvested in Davison, including the PPI monies.

The Inner House upheld the first instance decision of Lord Ordinary and agreed with Davison’s construction of the trust deed. It was emphasised that the terms of the trust deed were extremely important and their interpretation should be based on that of the reasonable person. Mond appealed to the UK Supreme Court.

Current Position

In certain circumstances, the termination of a voluntary trust deed will result in the discharge of the debtor and the reinvesting from the trustee to the debtor of all debtor assets (known or unknown) which have not been realised upon termination. This depends on the wording of the trust deed. We understand that the wording used in clause 11 of the trust deed was widely in use at the relevant time (although not at present) so the outcome of this case will likely affect a number of historic trust deeds.

What are the issues for the Supreme Court?

The main issue for the UK Supreme Court is to decide on the correct construction of the words “final distribution” in a voluntary trust deed for creditors. Key questions will be whether this includes distributions where the creditors receive less than 100 pence in the pound, and where there are unknown assets vested in the trustee which are yet to come to light. The decision is therefore eagerly awaited.  We expect judgment to be handed down by the UK Supreme Court later this year.