A debtor discharged from a trust deed for creditors can still be subject to set-off of any claim from an obligation arising pre-insolvency against a creditor who received a payment under the deed, a sheriff has ruled.

Sheriff Stuart Reid at Glasgow held that the Royal Bank of Scotland was entitled to withhold payment of sums totalling £10,815 due to Alison Donnelly in settlement of three claims for mis-selling payment protection insurance, against alleged indebtedness of £21,617 of Ms Donnelly under loans taken out between 1997 and 2003. The PPI insurance related to payments due under those loans.

In 2006 Ms Donnelly granted a trust deed in favour of her creditors including the Royal Bank, who received certain payments under the deed. She was discharged in 2012. 

RBS argued that it was entitled to plead set-off under the principle of application of accounts in bankruptcy. Ms Donnelly argued that since her discharge she was no longer in bankruptcy; that her discharge extinguished any obligation to pay any outstanding loan balance due at the date of her insolvency; in any event any obligation under the loans had prescribed; and that the debt she sought to enforce, which arose post-insolvency, could not be set off against her pre-insolvency obligations.

Upholding RBS's claim, Sheriff Reid concluded that without a discharge on composition, the mere discharge of Ms Donnelly from the trust deed did not have effect to extinguish any obligation she owed to RBS to pay the unsatisfied balance of the loans. On a proper analysis, the indebtedness she now sought to enforced against RBS had its origin in a contingent obligation that was in existence prior to the date of her insolvency, and her right to enforce that obligation properly formed part of her insolvent estate under her trust deed.

The effect of the settlements was merely to ascertain the present value of the pre-insolvency contingent obligation by RBS. While Ms Donnelly had title to sue for payment of that indebtedness, she did so as constructive trustee for the benefit of her creditors under the trust deed. RBS was entitled to apply the principle of the balancing of accounts in bankruptcy to set off Ms Donnelly's debts under the pre-insolvency loans; her obligations had not prescribed because RBS’s acts in submitting claims under the trust deed constituted “relevant claims” and had effect continuously to interrupt or suspend the operation of the five‑year prescriptive period for as long as the claims subsisted before the trustee, until finally adjudicated on and accepted by the trustee.

Click here to view the sheriff's judgment.