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Scottish Court of Session Decisions

You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> THE ROYAL BANK OF SCOTLAND PUBLIC LTD COMPANY AGAINST (FIRST) ALISON DONNELLY AND ANOTHER [2020] ScotCS CSOH_106 (16 December 2020)
Cite as: [2020] ScotCS CSOH_106, [2020] CSOH 106, 2021 GWD 3-41

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2020 CSOH 106
In the cause
Pursuer: McBrearty QC, David Welsh; Pinsent Masons LLP
Defenders: Webster QC, Upton; Blacklocks
16 December 2020
Pursuers action for reduction
[1]       In this case, which is not the first litigation concerning the parties, the pursuer seeks
reduction (in whole or in part, as afterwards noted) of inter alia the discharge of the first
defender (“the debtor”) following her grant of a trust deed (“the Trust Deed”) and which
became a protected trust deed. The second defender, who was the last trustee under the
debtor’s Trust Deed (“the trustee”), did not enter the process. No reduction is sought of the
discharge of the trustee. The purpose of the reduction is to enable the pursuer to set -off its
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now-admitted liability to compensate the debtor for mis-selling payment protection
insurance (“PPI”) in the past.
The debtor’s principal lines of defence
[2]       The debtor resists this action on a number of fronts.
1) In the first place, she argues that even if reduction were granted, there is no
concursus debiti et crediti, meaning that the pursuer and debtor are not each a creditor
and debtor (in its or her own right) in respect of the other; and which is a
prerequisite for set off. The factual bases for this line of defence are that:
(i) notwithstanding the transfer of business under a ring-fenced transfer
scheme, the pursuer is not a creditor of the debtor in respect of her pre-
discharge debts;
(ii) separately, any right against the debtor in respect of her pre- discharge
indebtedness was assigned to Max Recovery Limited (“MRL”); and
(iii) in any event, it was an entity other than the pursuer which had
compromised the debtor’s PPI claim. More specifically, the debtor’s
position is that it was Royal Bank of Scotland Group plc (company no
SCO4551) (“Group”)) who dealt with and ultimately compromised her
PPI claim (“the agency issue”). This gives rise to several subsidiary
issues, namely:
a) Whether Group was acting as an agent of RBS (said, by the
pursuer, to be its predecessor in title qua creditor of the
b) Whether that agency was disclosed;
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c) If not, what was the effect of the Group acting as an
undisclosed agent of the pursuer (assuming agency was
If the debtor succeeded on one or more of these lines, which are presented in the
alternative and are not interdependent, then the pursuer had no title to sue and its
action was irrelevant and academic.
2) The debtor also maintains that the pursuer has not pled a relevant ground of
reduction. This was advanced on two broad fronts: a challenge to the ground of error
(which was the pursuer’s primary ground) and a challenge to the pursuer’s reliance
on a rule of English trust law derived from In re Hastings-Bass (deceased) [1975] Ch
25 at 41 (“Hastings-Bass). In particular,
i) The debtor’s challenge to the relevancy of error as a ground of reduction
had a number of strands:
a) error simpliciter was not a ground of reduction;
b) this was not a case of unilateral error, but mutual error;
c) esto this were a case of mutual error, it was not gratuitous.
ii) Further, it was argued that the grounds of challenge to the act of a
trustee were circumscribed, and doubly so, in respect of the acts of a
trustee of an insolvency process. In respect of a trustee, the only ground
of reduction was a want of deliberation, which the pursuer had not
pled, and reduction of the discharge of a trustee of an insolvency
process was exceptionally rare.
iii) As a further fall-back, it was contended that partial reduction of the
discharge is incompetent
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3) Even if the pursuer has title to sue and has pled a relevant ground of reduction,
the debtor argued that the pursuer is precluded from maintaining its claim on the
grounds of:
(i) personal bar;
(ii) waiver; or
(iii) mora, taciturnity and acquiescence;
4) Lastly, the debtor argued that even if a ground of reduction were established,
in the whole circumstances of this case it was inequitable to grant reduction.
Distinguishing between the pursuer and the entity formerly known as “Royal Bank of
Scotland plc”
[3]       In light of the title to sue issue it is important to distinguish between the pursuer
(with registered number SC083026) and its corporate predecessor, formerly known as “The
Royal Bank of Scotland plc” and registered under company number SC090312 (“RBS”). The
pursuer’s position, which the debtor does not accept, is that it succeeded to the rights and
liabilities of RBS (and to any pending action by or against RBS) by virtue of an arrangement
in the form of a ring-fenced transfer scheme (“the RFTS”) under Part VII of the Financial
Services Markets Act 2000 (“the 2000 Act”) sanctioned by this Court on 22 March 2018 (“the
corporate successor issue”). The debtor does not advance a positive case that contradicts the
documentation or court order giving effect to the RFTS on which the pursuer relies . The
debtor’s position is to put the pursuer to proof on the corporate successor issue. (I deal with
this issue below.) There are other companies and brands within the RBS group of
companies. I shall refer to these collectively as “the RBS Group”. The ultimate parent
company is Group.
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The debtor’s prior insolvency
[4]       The debtor borrowed sums from RBS between 1997 and 2003. In due course, being
unable to repay these sums, the debtor granted the Trust Deed on 29 August 2006. A trust
deed is a form of personal insolvency first provided for in statutory form under Schedule 5
of the Bankruptcy (Scotland) Act 1985 (“the 1985 Act”, “Schedule 5” and the “Trust Deed
process”, as the context requires). While the 1985 Act was subsequently amended, the
provisions as originally enacted applied to the debtor’s Trust Deed. RBS made three claims
in the Trust Deed process, totalling £31,992.84. The Trust Deed became a protectedTrust
Deed (“the PTD”) on 24 October 2006. (One of the many issues is whether that Trust Deed
was caught by an assignation by RBS of all accounts subject to protected trust deeds made
between 8 November 2001 and 11 October 2006 in favour of MRL (“the assignation issue”).)
[5]       RBS was the only creditor who submitted a claim to the trustee in the Trust Deed
process, a point that was not fully appreciated until the proof in this action. As will be seen,
this may affect the scope of the reduction sought (in the belief that there were other
creditors, the pursuer initially sought reduction of inter alia the discharge of the debtor, but
“only in so far as it affects the interests of the” pursuer), and whether the reduction sought is
(as the debtor contends) an impermissible recasting of the insolvency regime. The trustee
granted the debtor’s discharge on 11 December 2013 and she paid a first and final dividend
on 31 December 2013, of approximately 20.8 p in the £. Accordingly, the dividend paid to
RBS was £6,654.03. The amount unpaid, and in respect of which the debtor was discharged,
was £25,343.81 (“the unpaid balance”). The effect of the debtor’s discharge is not to
extinguish the liability for the unpaid balance, but it does preclude the creditor (RBS and, if
the successor issue is determined in favour of the pursuer, the pursuer) from asserting set off
in respect of it.
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The debtor’s PPI claim
[6]       Within 6 weeks of the payment of the final dividend, the debtor made a claim
(through a claims company) that she had been mis-sold payment protection insurance by
RBS (“the debtor’s PPI claim”). (While each instance of mis-selling was treated as a separate
claim, it is not necessary to distinguish between these.) After sundry correspondence with
Group between February and April 2014 the debtor accepted an offer of compensation made
by Group of £11,927.39 to settle her PPI claim (“the settlement sum”). The interposition of
Group gives rise to the agency issue: the pursuer maintains that Group was acting as the
agent of RBS, whereas the debtor disputes that proposition. It is in this context that the
agency issue and corporate successor issues arise: at the time of compromising the debtor’s
PPI claim, was Group acting as the agent of RBS and did the pursuer succeed to RBS’s rights
qua creditor of the debtor transferred to it under the RFTS?
[7]       It is important to note that the debtor’s PPI claim arose out of dealings pre-dating her
discharge. In other words, the debtor’s PPI claim (made against “Royal Bank of Scotland”),
was an asset that might have been ingathered in the Trust Deed process (eg by a claim
against RBS). It is a matter of agreement that at no time during the currency of the Trust
Deed process was the debtor aware she had claims for mis-selling of PPI. It was also
common ground that following the debtor’s discharge, she was free to pursue her PPI claim.
It is implicit within that common position that the debtor’s PPI claim was re-vested in her
upon her discharge. I proceed on the basis that the debtor’s PPI claims “re-vested” in her,
but express no view on that assumption.
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The payment action
[8]       While a part-payment of £1,111.63 was made to the debtor in respect of the
settlement of her PPI claim on 2 April 2014, no further payments were made. As a
consequence, the debtor was obliged to raise an action against Group for payment of the
balance of the settlement sum (“the outstanding settlement sum”), which she did in August
2014 (“the payment action”). The payment action has had a protracted history. After legal
debate (heard in June 2015), the sheriff at first instance found against the pursuer in that
action (whom I have defined as the debtor) in February 2016. However, the pursuer in that
action successfully appealed to the Sheriff Appeal Court (which decided in her favour in
January 2017). The subsequent appeal by the defender in that action (ie by Group) was
refused by the Inner House in November 2019. The defender in the payment action applied
for permission to appeal (“PTA”) to the Supreme Court in early March 2020. As noted
below (ar para [98]]), the PTA in the payment action was refused shortly before this opinion
was advised.
[9]       The Inner House in the payment action determined that the debtor had been
discharged in respect of the unpaid balance and which sum, therefore, could not be set off
against the outstanding settlement sum due by Group in respect of the PPI settlement. It
will be noted that at that point in time, it was Group’s position that it was the counterparty
and principal obligant in respect of the settlement sum. The agency issue had not yet been
The pursuer’s rationale in seeking reduction of the discharge in this action
[10]       The pursuer’s commercial rationale for seeking reduction in these proceedings of the
debtor’s discharge is to overcome the adverse decision of the Inner House in the payment
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action. The pursuer’s Senior Counsel, Mr McBrearty QC, acknowledged that the availability
of set off (or of “balancing of accounts in bankruptcy”, as it is described in Scots law) was
only relatively lately appreciated and for which reduction of the debtor’s discharge was now
necessary, following the adverse decision of the Inner House in the payment action.
Mr McBrearty was equally frank in acknowledging that the impetus for this action were the
comments made by Lord Reed in the postscript to Dooneen Ltd v Mond issued by the
Supreme Court on 31 October 2018 ((Dooneen Ltd v Mond [2018] UKSC 54, 2018 SLT 1255)
[11]       The issues in Dooneen were regarded as sufficiently related to the issues in the
payment action for the Inner House to sist the latter pending the Supreme Court’s
determination of the appeal in Dooneen. As in this case, the debtor in Dooneen made a claim
for PPI mis-selling which related to events pre-dating her Trust Deed but which was not
ingathered or otherwise resolved in the Trust Deed process. Lord Reed’s postscript in
Dooneen is as follows:
22. This is scarcely a satisfactory outcome. An asset which vested in the trustee
for the benefit of the creditors and ought to have been applied to payment of the
debts due to them, will instead be paid to the debtor, merely because the trust was
administered in ignorance of its existence. One might question whether the law is
powerless to provide a remedy in this situation.
23. Prior to the hearing of the appeal, the court informed the parties that it
would be assisted by discussion of the legal consequences of a mistake in this
context: in particular, whether the relevant acts of the trustee might be reduced if
they were the result of an error as to the extent of the trust estate. In posing that
question, the court had it in mind that on the construction of the Trust Deed which it
has now upheld, the acceding creditors effectively conferred on the trustee a power
to extinguish their rights as against the debtor by determining that a dividend should
be a final distribution; and that the determination in the present case had been made
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in ignorance of a relevant - indeed, critical - consideration. It also had it in mind that
reduction is a discretionary remedy, which may be granted on terms, or withheld,
where that is appropriate to protect the rights of third parties. The court drew the
attention of the parties to the Scottish Law Commission Discussion Paper on
Supplementary and Miscellaneous Issues relating to Trust Law (2011) (No 148),
Chapter 14, ‘Error and other defects in trustees’ exercise of discretionary powers’,
and the Scottish Law Commission Report on Trust Law (2014) (Scot Law Com No
239), Chapter 19, ‘Defects in the exercise of trustees’ powers’, where relevant
authorities are discussed. Those authorities include the decisions of the House of
Lords in Dundee General Hospitals Board of Management v Bell’s Trustees 1952 SC (HL)
78; [1952] 1 All ER 896 and Hunter v Bradford Property Trust Ltd 1970 SLT 173, to
which one might add the case of Whyte v Knox (1858) 20 D 970. In the event, the
parties declined to make submissions on these matters. In those circumstances, it
would be inappropriate for the court to consider them further on this occasion.”
(Emphasis added.)
The issues in this action
[12]       The background just noted gives rise to a number of issues. In addition to the
standard pleas (as to the relevancy of the pursuer’s case or of it being unfounded in fact), the
debtor asserts that the pursuer has no title to sue (first plea); that the action is incompetent
(second plea); that reduction is inequitable (eighth plea); that the deed or deeds under
challenge were not granted under any relevant error or with any lack of due deliberation
(ninth plea), and that the pursuer is otherwise preclu ded from maintaining this action (eg
because barred by mora, taciturnity and acquiescence (fifth plea) or personal bar (sixth plea)
or waiver (seventh plea)).
[13]       Parties produced a joint statement of 13 issues. These may be condensed into four
core issues, namely:
1. Whether there is the requisite consursus debiti et crediti between the pursuer and
debtor (which is the essen tial basis of the debtor’s plea of no title to sue) such as
to enable the outstanding settlement sum to be retained by the pursuer and used
to set off and extinguish the unpaid balance to that extent. This encompasses the
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successor issue, the agency issue and the interpretation and effect of the RFTS .
All of these issues must be determined in favour of the pursuer, for the purposes
of its proposed set off of the outstanding settlement sum against the unpaid
2. Whether error or ignorance of the trustee or creditors is a relevant ground for the
reduction of the discharge of a debtor from the Trust Deed, and if that is the case
in respect of error or ignorance in general, whether that applies where it is either
(a) error about or ignorance of the existence of an obligation of the creditor who
(or whose successor) seeks reduction, or (b) error or ignorance which the trustee
owed the creditors a fiduciary duty to avoid.
3. Whether reduction is either competent or equitable.
4. Whether the pursuer is precluded from seeking reduction by mora, taciturnity
and acquiescence, or whether it has waived any right to seek reduction. (The
debtor’s plea of personal bar was not maintained in submissions.)
The pursuer’s amendment during the proof
[14]       As noted above, it was assumed that RBS was one of several creditors in the Trust
Deed process. It was for that reason that the pursuer sought partial reduction ( in the terms
set out in para [5], above). However, once it was appreciated that RBS was the only creditor
who submitted a claim in the debtor’s Trust Deed process, the pursuer moved to amend its
summons to remove all references to creditors in the plural. The debtor resisted this,
essentially on the bases (i) that it would introduce an inconsistency between the pursuer’s
position in this litigation and in the payment action, and, under reference to my comments
in Auctaric v Glasgow Stage Crew Ltd [2019] CSOH 111, [2020] SLT 331, (ii) that so late an
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amendment was not commensurate with the practice of the commercial court. In my view,
it would be artificial in the extreme to hold a party to a certain factual position, now known
to be incorrect, in circumstances where the factual matter, which was straightforward and
easily verifiable, was on an ancillary matter. While the introduction of the correct factual
position (that RBS was the only creditor) affected one of the debtor’s arguments ( that partial
reduction of the discharge amounted to an impermissible refashioning of the insolvency
regime to the detriment of other creditors), that was a relatively minor plank of the debtor’s
case. The debtor otherwise identified no prejudice flowing from the amendment . I allowed
the amendment.
Key productions
[15]       A number of documents were put to more than one witness and it is therefore
convenient to note the terms of the key productions.
The debtor’s Trust Deed
[16]       The debtor signed the Trust Deed on 29 August 2006. Its declared purpose was “to
transfer” to her trustee “as trustee for my creditors as at the date” of the signing of the Trust
Deed, “the rights and assets which would have vested in a permanent trustee in terms of
section 31, 32 and 33” of the 1985 Act (which was defined as the debtor’s “Estate”). It is clear
that the intention was a universal transfer of her whole estate for the behoof of her creditors.
The trustee’s powers under the Trust Deed included the usual powers to defend or bring
any court action or other proceedings (power (v)) and to compromise claims enforceable by
or against the trustee or the Estate (power (vi)). I find that in light of this language it would
have been open to the trustee to advance the debtor’s PPI claim with a view to recovering
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sums for the benefit of her creditors. Parties also referred to the terms of the Trust Deed
governing the debtor’s discharge (“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
termination of this Trust Deed…”) in the context of their competing submissions as to
whether the grant of the debtor’s discharge was a unilateral or gratuitous deed.
The trustee’s correspondence with the AIB: Forms 11 and 5
[17]       Under cover of her letter of 7 January 2014 the then trustee (who had succeeded the
original trustee named in the Trust Deed, and who was called as the second defender in this
action) submitted the Form 11 (statement of realisation and distr ibution of an estate under a
protected trust deed), together with copies of the Minutes and Report of the final meeting of
creditors and the scheme of division/summary of adjudication on creditors’ claims (“the
scheme of division). The scheme of division recorded the three agreed or accepted claims
the trustee accepted from RBS, and the dividend of 20.8p in the £ payable in respect of those
claims. As noted above, RBS was the only creditor. A blank Form 5 (letter of discharge of
debtor) under schedule 5 of the 1985 Act was also appended to that letter. The Accountant
in Bankruptcy acknowledged this correspondence by return and noted that the trustee’s
discharge had been entered into the Register of Insolvencies.
Productions potentially relevant to the agency issue
The General Agency Agreement
[18]       RBS, National Westminster Bank plc (“NatWest”) and Group entered into an
agreement dated 30 June 2000 (“the General Agency Agreement”). By this time NatWest
and RBS were both wholly-owned subsidiaries of Group. The recitals narrated that RBS
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wished to enable NatWest to carry out certain activities on behalf of it (“the RBS Activities”),
that NatWest wished to enable RBS to carry out certain activities on behalf of it (“the
NatWest Activities”), and that each of RBS and NatWest wished to arrange for Group to
perform on their respective behalf “certain activities relating to the management, control
and supervision of their respective businesses (collectively “the Group Activities”) . (There
is no further definition of Group Activities.)
[19]       The General Agency Agreement was divided into three parts consistent with the
three grants of agency just described. It suffices to note that in Part III, each of RBS and
NatWest appointed Group “as their agent to perform, in their respective names, the Group
Activities on behalf of and for the account of… RBS”: clause 3.1. Part III also provided for
Group to enter into any form of commitment or undertaking on behalf of inter alia RBS in
respect of any Group Activities (clause 3.3) and Group was obliged (by clause 3.4) “at all
times to disclose to customers that it was acting as agent of… RBS prior to entering into any
commitment in such capacity”. The consequences of non-compliance with clause 34 are not
provided for in the General Agency Agreement.
The Checklist
[20]       The pursuer produced a pro forma checklist, described as a “Loanguard Checklist”
dating from July 2002 (“the Checklist”), and which it was said would have been completed
by the debtor. The pursuer’s purpose is to rely on the statement printed at the foot, stating
Agency agreements exist between members of The Royal Bank of Scotland Group. It is a
matter of agreement that the debtor has no recollection of completing a Checklist and no
completed one by her has been produced.
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The Notice of Assignation in favour of MRL
[21]       Among the productions was a “To Whom it May Concern” letter dated 8 December
2006 on Group-headed notepaper (“the Notice of Assignation”). Under the heading,
“Notice of Assignment/Assignation of Insolvent Accounts”, it provided:
“Please take notice that on 8 December 2006 The Royal Bank of Scotland plc (“RBS”)
sold and transferred to MRL (“Max”) the following assets:
1. All known accounts which are subject to an existing Bankruptcy Order or
Sequestration Order made between 8 November 2001 and 11 October 2006
where RBS is entitled to prove as a Creditor.
2. All known accounts which are subject to an existing interim order and/or
approved Individual Voluntary Arrangement or Protected Trust Deed made
between 8 November 2001 and 11 October 2006 where RBS is entitled to
prove as a Creditor.
Please note that due to the nature of the business and services provided by RBS they
may be identified as a Creditor in respect of these accounts under various different
corporate identities. Details of these identities are set out at the end of this letter .
This document serves as a Note of Assignment/Assignation of the accounts to Max
and where the Debtor is resident in England and Wales constitutes a notice of
pursuant of Rule 11.11 of the Insolvency Rules 1986.
Any future dividends and correspondence in respect of these accounts must
therefore be sent to Max at MRL, PO Box 6302, Bournemouth, Dorset, BH1 9DY.
Please note all dividend cheques should be made payable to MRL.
In order to facilitate the process of assignment, we confirm that you are authorised to
provide Eversheds LLP a full list of those accounts you are administering which
meet the above criteria.”
[22]       The pursuer relies on the transfer to it of the relevant assets and liabilities of RBS and
effected by the RFTS. In particular, the pursuer’s position is that the debtor’s obligation
under the loans (owed to RBS) and RBS’s liability to the debtor in respect of compensation
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for PPI mis-selling were both transferred to it and, accordingly, there was the requisite
concursis crediti et debiti to permit these counter-obligations to be set off against each other .
[23]       The RFTS is a complex scheme. So far as material to the issues in this case, it suffices
to note that it sought to transfer certain RBS assets and liabilities (defined as the “Adam
Destination Business”) to Adam & Company plc (company number SC083026) (“Adam &
Co”) as at the Effective Date (defined as 30 April 2018) and thereafter to rename Adam & Co
as “the Royal Bank of Scotland plc”. That entity is the pursuer in this action. The RFTS
sought to effect a like transfer of certain non-retail banking activities of RBS (eg the Covered
Bonds Business) to NatWest, but the dealings between RBS and the debtor fell outwith this
kind of specialised commercial banking. For completeness, I note that RBS was to be
renamed NatWest Markets Plc (see definition of “RBS plc”) with effect from the Effective
Time (defined as 00.01 hours on 30 April 2018).
[24]       As provided for in the RFTS, on the Effective Date the personal and business banking
carried on by RBS (including business carried on under certain brand names not here
relevant) (defined as the “PBB Business” in Part F of the RFTS) was transferred to Adam &
Co. The definition of PBB Business (in Part F) included “the provision to personal …
Counterparties … of current accounts, loans…, arranging insurance…” and where the
Assets and Liabilities “is, has been, or would be recorded or at tributable to the PBB
Segment”. The PBB Segment is defined as including “UK Personal and Business Banking”,
as referred to in Group’s 2016 Annual Accounts (see para [25], below). The operative
provisions effecting the transfer (comprehensively defined as the “Adam Destination
Business”) are in Part B (“The Transfer”), clause 6.1 and 6.2.1 and 6.2.2. Clause 6.1 provided
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“‘Each Transferring Business’, the definition of which included the Adam
Destination Business, ‘(including the Transferring Assets and the Transferring
Liabilities in each Transferring Business) shall be transferred to and vested in each
Relevant Transferee in accordance with, and subject to, the terms of this Scheme’.
The Transferring Liabilities included the liabilities of RBS in the conduct of the PBB Business
(reading the definitions of Transferring Liabilities, Adam Destination Liabilitiesand
Adam Destination Businesstogether). In my view, these provisions are habile to cover
any RBS liability for PPI mis-selling to personal customers, ie such as the debtor’s PPI claim.
The Transferring Assets included the obligations of personal customers under inter alia loan
agreements owed to RBS (again, reading together the definitions of Transferring Assets,
Adam Destination Assets, Adam Definition Arrangementsand Adam Destination
Business). In my view, these provisions are habile to include any obligation owed by a
personal customer of the RBS in respect of a loan or credit card debt, ie such as the
indebtedness the debtor incurred to RBS. Clauses 6.2.1 and 6.2.2 provided for the transfer
and vesting of the Adam Destination Assets and the Adam Destination Liabilities,
respectively, with effect from the Effective Time, and that without further act or instrument;
and that these assets and liabilities ceased to be th ose of RBS.
[25]       The interlocutor of this Court giving effect to the RFTS was produced.
The 2016 Group Annual Accounts (“the 2016 Group Accounts”)
[26]       The Group’s Annual Accounts for 2016 were lodged at the start of the proof,
essentially for its definition, found in the body of the Directors’ Report (at p 115), of
“Personal & Business Banking” (ie “PBB”) as comprising two reportable segments, of UK
PBB and Ulster Bank.
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Productions relating to the compromise of the debtor’s PPI claim
[27]       As noted above, the debtor was paid around £1,100 toward the settlement sum
agreed in settlement of her PPI claim. Five cheques were produced, drawn on the pursuer
(not Group) on an account described as “PPI Refunds Account”. By contrast, the
correspondence with the debtor and her then agents in respect of her PPI claim was on
Group letter-headed paper, and had the sub-designation PPI Customer Concerns Team,
Retail Products. There is no express statement in any of that correspondence that it is acting
on behalf of RBS.
The proof
[28]       I allowed the pursuer’s motion for a proof, as this had the merit of resolving all
issues in one hearing and its estimate was only a day longer than for the alternative proposal
of a debate. The evidence comprised one day and submissions the remaining three days.
Parties agreed certain matters in two Joint Minutes. I had the benefit of written submissions
and a Joint Bundle and Supplementary Bundle of Authorities (totalling 71 cases and other
texts) arranged by subject matter (title and interest to sue, general principles of set off,
disclosure of agency/concursus debiti et crediti, general principles of reduction, grounds for
reduction, trustee’s duties and creditors’ remedies against trustees, and on mora, personal
bar and waiver). Consistent with commercial practice, written statements (and in some
cases, supplementary statements) from each witness were lodged and adopted by witnesses
as their evidence in chief. I have had regard to all these materials. I do not propose to
repeat them.
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The pursuer’s proof
Beverley Crawley
[29]       The pursuer’s first witness was Beverley Crawley, who had been employed by the
pursuer as a Senior Manager in Resilience Risk Oversight since November 2018. Prior to
that time, she was employed as a Remediation Policy/Risk Manager with the pursuer from
2011 to 2017. Her evidence covered the processing by Group of PPI complaints, the use of
Group letterhead in that context and whether it could have proactively identified if an
insolvent borrower had a possible PPI claim against any entity in the RBS group. The latter
topic was prompted by an argument advanced by the debtor, to the effect that the pursuer
was the author of its own misfortune in failing to appreciate that the debtor might have had
a claim against it for PPI mis-selling and, had the pursuer proactively elicited this, set off
could have been effected during the Trust Deed process. This witness also spoke to the
accumulation of indebtedness on the part of the debtor and the claims RBS submitted in the
Trust Deed process (which was uncontroversial), and the statement contained in the
footnote to a pro forma checklist (“Agency agreements exist between members of The Royal
Bank of Scotland Group”) the pursuer says would have been completed at the time (which
was controversial). None of the original paperwork relating to the loans to the debtor (with
which PPI would have been associated) was extant.
[30]       The witness explained that complaints relating to PP I mis-selling were managed
centrally by a dedicated team, whose numbers varied between 1,200 and 2,500 staff at any
one time. A centralised approach was adopted because complaints were made in respect of
a wide variety of companies or brands within the RBS Group (including RBS, Nat West,
Mint Limited, Style Card, Direct Line, Trust House Forte and Churchill, among others), not
all of which were extant. A centralised approach ensured the best means of training and
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monitoring the team responding to PPI claims; it ensured consistency of treatment of all PPI
complaints and it was more efficient when, as was often the case, a complaint was received
which was not directed to a specific entity but simply against “the Royal Bank of Scotland”
or against “any and all of the policies across any Group brand”. She understood that Group
was settling claims on behalf of RBS and other entities.
[31]       The witness explained that Group letter-headed paper was used when
communicating to PPI claimants, in part because some brands no longer existed and,
operationally, it was simpler to send one letter (ie covering all brands or entities within the
RBS Group) to each customer than one from each of these brands or entities. This approach
had also been tested via customer feedback and was adopted with the knowledge of the
regulator, the Financial Conduct Authority (“the FCA”).
[32]       In relation to proactive redress, as suggested by the debtor, this would have
required a team about four times the size of the existing team. The effort involved would
have been huge and disproportionate. These were some of the factors that led the regulator
not to require this approach. In any event, sample testing of a proactive approach with a
small number of potential claimants was shown not to be particularly effective. Multiple
letters were often required to elicit a response; not all PPI policies were mis-sold and some
customers who had a potential complaint nonetheless preferred to retain the cover the PPI
policy afforded. Overall, the highest complaint percentage of those proactively approached
was, at 55%, not significantly higher than the overall percentage of those who claimed (at
[33]       To put this in perspective, the witness explained that the entities within the RBS
Group sold approximately 7.2 million PPI policies. Some of these had been sold before
records were computerised. Manual searches would therefore be required of all papers held
Page 20 ⇓
in branch basements or other archive facilities. Once a potentially relevant customer had
been identified, it would then be necessary to ascertain if this customer had already made a
claim; whether the customer remained a customer and (for the purposes of the debtor’s
argument) their insolvency status and, if insolvent, whether an insolvency practitioner could
be identified. Of the 7.2 million policies referred to, there was no, or incomplete, details for
around 70% of this cohort. At one point, she likened such a search to that of a needle in a
haystack. Even if an insolvent customer who had been sold a PPI policy was identified, a
customer could not be forced to make a claim for PPI. At a later point in her evidence, she
also confirmed that no investigation could be made into a customer’s potential PPI claim
without their consent, or even searches against their names and addresses, as this was
impermissible for data protection reasons.
[34]       In his cross-examination of this witness, the debtor’s senior counsel, Mr Webster QC,
asked her if sums paid out as compensation for PPI mis-selling were re-allocated among the
Group’s companies (she surmised that this might be the case for extant brands, but she
couldn’t speak to the details of this other than that this was dealt with by the finance
department); from what point in time the debtor’s loan documentation was missing (she
rejected the suggestion that it had only been lost in the last year; it had been identified as
missing by the point of the debtor’s PPI claim back in 2014); and the average length to
resolve a PPI claim ( it could take between 6 to 12 weeks, but usually 8 weeks) . These latter
figures were on the footing that a customer and a related PPI policy could be identified. She
was pressed to accept the proposition that it would have been feasible for Group to identify
insolvent customers as a sub-group and then to investigate whether they might have
potential PPI claims. While she acknowledged that in theory that might sound reasonable,
she referred to the difficulties she had already referred to which precluded investigating
Page 21 ⇓
claims pro-actively. More fundamentally, the management of insolvent customers was
undertaken by a completely separate department. The oversight of customers’ insolvency
process was a very specialised field. Even if the insolvency side could produce a list, or if
insolvency practitioners could be persuaded to notify insolvencies to the Gr oup for this
purpose, that would not make it any easier for Group to identify if any of those individuals
had PPI claims. She maintained that it would still be like looking for a needle in a haystack.
Furthermore, the FCA did not require this approach of the banks. The witness could not
comment on the proposition that the Group could put pressure on trustees to secure
discharges of any liability of the Group to pay PPI compensation.
Carol Paton
[35]       The pursuer’s second witness was Carol Paton, Head of Litigation & Investigations
at NatWest since 2018. Prior to that, she had been employed by the pursuer as Head of
Litigation & Investigations (2016 to 2018), Head of Litigation, Personal & Business Banking
(from 2015 to 2016) and Head of Litigation, Retail and Insurance (2010 to 2015) and in a
variety of other roles in the Royal Bank’s legal department (1997 to 2010). She spoke to the
General Agency Agreement put in place in June 2000 (noted above, at para [17]), which she
understood the pursuer, Group and NatWest to act on behalf of each other in the course of
their respective businesses, and to the RFTS (noted above, at paras [21] to [23]). In relation
to the RFTS, she confirmed that the debtor was undoubtedly a personal customer of the RBS
and therefore fell within the definition of “Personal & Business Banking”, as referred to in
the 2016 Group Accounts.
[36]       In cross-examination, Mr Webster explored with the witness her use of the word
“understood” in the passage of her witness statement where she described G roup (via the
Page 22 ⇓
PPI team) settling PPI complaints from customers of the different RBS group companies.
She explained that this was done under the General Agency Agreement. She had worked
closely with the PPI team since 2008; she remembered discussions with that team about
how best to correspond with customers and, given the sheer range of products alongside
which entities and brands within the RBS group sold PPI, the use of a single-branded
letterhead (of Group) was agreed. She confirmed that the agency was on behalf of NatWest
and RBS, as they were the two main subsidiaries and held banking licences. There were
others for whom Group also acted.
[37]       The witness was challenged that her understanding of the General Agency
Agreement, to enable each party to it to act on behalf of another, was incorrect. She clarified
her understanding: so far as she recalled, RBS and NatWest appointed each other as agents
and that both appointed Group to act for them but she would need to check the terms of the
General Agency Agreement. After its provisions were put to her, she confirmed her
understanding (just noted). She accepted that under the General Agency Agreement Group
did not appoint anyone as an agent on its behalf, but she observed that Group was the
parent company of the RBS Group. The General Agency Agreement was, as she put it, an
agreement that “went sideways and upwards”. Group did not appoint any agency
“downwards” under the General Agency Agreement, meaning that it did not appoint
subsidiaries such as RBS or NatWest to act on its behalf.
[38]       The topic of the degree of co-ordination required in settling the many claims was also
explored. She agreed that, given the multiplicity of trading entities, a degree of coordination
by the Group was required to make offers on behalf of others. This would be in terms of
record-keeping and details of loans paid down . Most complaints related to wholly-owned
subsidiaries that “sat within the Group” and the “vast majority of these were RBS loan s.
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When pressed for more details of the written instructions governing this, she explained that
this level of detail was below her level of responsibility. She accepted that there would be
some collation of customer details and that these would most likely be in writing.
[39]       At this point Mr Webster took an objection to the evidence he had just elicited, as
contrary to the “best evidence” rule. In particular, so far as I understood the objection, it
was that the witness had confirmed that there was other documentation specifically,
written instructions within the RBS Group relative to the handling of PPI claims. He
queried whether these documents might provide for Group to act in respect of PPI claims on
behalf of RBS. In the absence of these documents her evidence was, he submitted, secondary
and so fell to be excluded. The reply by Senior Counsel for the pursuer was that this
witness’ evidence was wholly consistent with that of Beverley Crawley and which was
wholly unchallenged that Group settled claims as agent for RBS. All that this witness had
done was to identify the document by which the legal agency was established, namely the
General Agency Agreement. However, there had also already been parole evidence from
this witness that Group acted on behalf of RBS in settlement of PPI claims and that this was
based on the General Agency Agreement. That agreement predated the onset of PPI claims.
The only question was one of interpretation of the General Agency Agreement. It was not a
best evidenceobjection.
[40]       In re-examination, Carol Paton confirmed that PPI was a significant episode for the
RBS Group. However, the genesis of the General Agency Agreement had been RBS’s earlier
acquisition of NatWest and, rather than merge the two entities, it was simpler to have the
General Agency Agreement so that each could act for the other and to facilitate customer
engagement across the brands of the two main banks. She was asked, under objection, to
give an example of the kind of activities that might fall within “management and control” by
Page 24 ⇓
Group on behalf of the subsidiaries. She surmised that this would include contact with the
regulator. (The objection was not maintained in submissions.)
Michael Cooper
[41]       The pursuer’s final witness was Michael Cooper, the pursuer’s Senior Legal Counsel
since 2014. He spoke to the assignation of certain rights to MRL by virtue of the assignation
(Notice of which was provided by the Notice of Assignation, quoted above, at
paragraph [21]) of all protected trust deeds made between 8 November 2001 and 11 October
2006 where RBS were entitled to prove as a creditor. He noted that the debtor’s Trust Deed
did not become a protected trust deed until 24 October 2006. He explained that this issue
had been raised in the context of the payment action in 2016 and he had undertaken
investigations at that time. The package of debt sold to MRL comprised only accounts from
the business of RBS known as “Direct Finance”, which were consumer operations carried
out by Churchill and Lombard Direct. The debtor did not hold any Direct Finance products
and so her debts would not have formed part of the debt package sold to MRL. In any
event, he found no evidence that the assignation had ever been intimated to the debtor or
her agents or trustee. A colleague had also contacted MRL’s solicitors at that time, who
confirmed that there was no evidence that MRL acquired the debtor’s debt and she was not
recorded in their systems. In short, he had found nothing in the investigations in 2016, or
since, to suggest that RBS had sold, assigned or otherwise transferred the debtor’s account to
[42]       In cross-examination, senior counsel explored what the witness had meant by the
word “published” used in conjunction with the assignation. The witness revised his
language to “issued”. He was not sure how this was done. He was not surprised that it was
Page 25 ⇓
a “To Whom it may concern” letter, rather than individually addressed. He was not entirely
sure to whom it would have been issued but, from the language ( eg the references to the
payment of dividends), he surmised it as sent to insolvency practitioners.
The debtor’s proof
[43]       At the close of his proof, Senior Counsel for the pursuer indicat ed that he had no
need to cross-examine the debtor (the first defender). Accordingly, her witness statement
was agreed to be her evidence in chief. The form of her witness statement is a little
unsatisfactory in that it appears that certain questions or passages of documents were put to
her, but these are often not noted. An answer is simply recorded which doesn’t appear to
relate to the preceding or following paragraph. So, for example, the sentence “I don’t know
anything about what is said here” is a free-standing paragraph and, to say the least,
uninformative. Often, she is endeavouring to speak to events years ago (eg loans taken out
more than twenty years ago). Understandably, given the passage of time, the debtor had no
clear recall of the amounts of the loans, the Trust Deed process (except that it went on for a
period of years while she paid a monthly figure of between £200 and £600), or how she
acquired any PPI product. She could not recall ever being told of any agency arrangement
or with whom she contracted. She was aware that Group had declined to pay the balance of
the settlement sum (of c £10,000). She would not be able to repay the amount already paid
to her (of c £1100) as she had spent this.
The first core issue: title to sue
[44]       The debtor’s challenge to the pursuer’s title to sue rested on three discrete bases:
Page 26 ⇓
(1) Whether the debtor’s Trust Deed was transferred to MRL (which I defined as
the assignation issue, at para [4], above);
(2) Whether the RFTS effected the transfer of the debtor’s liability to RBS, to the
pursuer (which I defined as the corporate successor issue, at para [3], above);
(3) Whether the counterparty in the compromise of the debtor’s PPI claim was
Group, not the pursuer (which I have defined as the agency issue, at para
[2(1)(iii)] above).
The first question involves consideration of the meaning of a “protected trust deedin the
context of the Notice of Assignation; the second question involves a consideration of the
RFTS; and the third question involves a consideration of the several documents relied on by
the pursuer to establish that Group entered into the compromise with the debtor as its agent.
Title to sue (1): the assignation issue
The Notice of Assignation
[45]       It must first be noted that the only document produced was the Notice of
Assignation and not the terms of the assignation itself. The Notice of Assignation refers to
the transfer of insolvent accounts. Having regard to the references to “Bankruptcy Order”,
“sequestration”, “Individual Voluntary Arrangements” and “Protected Trust Deeds”, it is
clear that the assignation concerned only those accounts subject to the specified insolvency
procedures, and which correspond with the personal insolvency regimes in England and
Scotland. The question in this case is whether the debtor’s Trust Deed fell within the phrase
“accounts … subject to … a Protected Trust Deed made between 8 November 2001 and
11 October 2006(emphasis added). In considering the interpretation and application of
Page 27 ⇓
those words, it is necessary first to consider trust deeds as a form of personal insolvency in
Scotland, and the creation of a statutory form of trust deed (including a “protected” trust
deed) by Schedule 5 of the 1985 Act.
Common law trust deeds
[46]       Prior to the 1985 Act, trust deeds were a voluntary non-statutory means by which an
insolvent debtor (which could include a partnership) could settle the claims of the debtor’s
creditors. A debtor could do so by granting a trust deed for the behoof of his creditors,
usually in the form of an irrevocable conveyance of his whole estate to his trustee for
realisation and division among his creditors, and in return for which a debtor could expect a
discharge of the creditors who acceded to the trust deed. The advantage was that if the
trustee completed title or took possession of a debtor’s estate this had the practical effect of
excluding certain forms of diligence (eg arrestment was not competent in the hands of the
trustee, because he held the insolvent’s estate as agent for the creditors and for their benefit).
A trust deed was, in effect, a mutual contract. However, as a voluntary deed, the trust deed
only bound those creditors who acceded to it and a creditor who was unwilling to agree to
its terms (a non-acceding creditor) could disregard it and either seek to constitute his claim
in an action against the insolvent or his trustee, or he could sequestrate the insolvent (the
effect of which would be to defeat the whole arrangement). A further disadvantage was that
any discharge of the debtor extended only to the debts owed to the acceding creditors.
Statutory trust deeds and protected trust deeds under the 1985 Act
[47]       The 1985 Act introduced a statutory form of trust deed (provided for in Schedule 5)
which was intended to address the unsatisfactory aspects of common law trust deeds. It did
Page 28 ⇓
so by creating a “protected” trust deed (governed by paras 5 to 10 of Schedule 5), whose
advantages were two-fold: (i) to create a means by which creditors could (absent actual
consent) be deemed to consent to the trust deed, and thereby be bound by it; and (ii) to
restrict the rights of non-acceding creditors (eg by precluding diligence or resort to
sequestration during the currency of the protected trust deed): see paragraphs 6 and 7 of
Schedule 5 to the 1985 Act and paras 24.32 and 24.33 of the 1982 Report on Bankruptcy and
Related Aspects of Insolvency and Liquidation of the Scottish Law Commission (Scot. Law
Comm. No. 68) (“the SLC Report”). (While these paragraphs in Schedule 5 of the 1985 Act
have been repealed or replaced by other provisions consequent on the Bankruptcy and
Diligence etc (Scotland) Act 2007 (“the 2007 Act”), the debtor’s PTD fell within the
provisions as originally enacted.) A trust deed becomes a protected trust deed only if (i) the
trustee has not received written notification of objection from a specified number of
creditors (a majority by number or not less than one-third in value) within five weeks from
the date of publication of the Gazette notice of the grant of the trust deed and (ii) the trustee
complies with the other procedural requirements (see para 5(1)(d) and (e) o f Schedule 5). A
trust deed that complies with paragraphs 6 and 7 of Schedule 5 is referred to as a “protected
trust deed: paragraph 8 of Schedule 5.
[48]       While I have not had the benefit of submissions on the terms of Schedule 5, it is clear
that not all statutory trust deeds acquire the status of being a protectedtrust deed. That
status is acquired only upon satisfaction of the statutory criteria just noted. The acquisition
of the status of a protected trust deed is not a matter of form. It is only upon a trust deed
becoming protected that the rights of non-acceding creditors are constrained. From a
commercial perspective, the effect of a trust deed becoming protectedbrings a significant
degree of certainty that the debtor’s assets will be applied in an orderly fashion toward
Page 29 ⇓
repayment of the debts of creditors and, if the debtor’s assets and liabilities are known, a
reasonable estimate can be made of the likely realisation of the creditor sclaims from the
estate subject to the trust deed.
[49]       There was nothing in the terms of Schedule 5 which applied to the debtor’s Trust
Deed to suggest that the effect of becoming protected was backdated to the date when the
Trust Deed was first granted. The language of the provision suggests that the protective
efforts of a trust deed are prospective: paragraph 6 provides that “[w]here the provisions of
paragraph 5 of this Schedule have been fulfilled, then …” (emphasis added). See the careful
and thorough analysis of the trust deed regime in chapter 22 of Bankruptcy by Donna
McKenzie Skene (2018, Scottish Universities Law Institute Ltd).
[50]       Returning to the language of the Notice (quoted at the end of para [45], above) , the
debtor’s position was in effect that it was enough if the Trust Deed had been granted within
the time-frame in the Notice, whereas the pursuer’s position was that it had not become
protected within that same time-frame. In my view, the debtor’s approach does not respect
the language of the Notice. The Notice of Assignation did not refer to the “grant” of a trust
deed. It may be presumed that the use of the phrase “protected trust deeds” within the
Notice was used as a term of art (ie as created by Schedule 5), and was intended to exclude
any deed which had not acquired that status within the time-frame stipulated in that Notice.
Considering those words in the commercial context, the potential uncertainties associated
with unprotected trust deeds (ie where it was not yet known if, or when, they would become
“protected”) would be an obvious reason to ex clude them from the assignation in favour of
MRL. Applying the foregoing analysis to the language of the Notice of Assignation, a
protected trust deed is “made” when it acquires that status, but not before. On the facts, I
find that the debtor’s PTD was “made” on 24 October 2006 and, for the purposes of the
Page 30 ⇓
Notice of Assignation, the debtor’s PTD fell outwith the indicated time-frame. This
conclusion is sufficient to dispose of the assignation issue.
[51]       For completeness, I note that this conclusion is consistent with the evidence from the
solicitors to the assignee, MRL, that they had nothing in their files to support the contention
that the debtor’s PTD had been assigned to MRL. Finally, even if the Notice of Assignation
had been habile to include the debtor’s PTD, there was no evidence to show that the debtor
had notice of the assignation at the material time. Indeed, Mr Webster’s cross-examination
of Michael Cooper on the point of “publishor issuetended to illustrate the contrary
Title to sue (2): the corporate successor issue and the RFTS
[52]       I have set out the relative terms of the RFTS, above. In submissions, Mr McBrearty
took the Court through these carefully and in detail. Mr Webster made no submission on
the RFTS. Nor did he suggest that Mr McBrearty’s submission was wrong in any respect.
Having considered the operative terms (which are straightforward), as applied to the
interlinking defined terms (which are complex, but not unduly so for a scheme such as this),
and the terms of this Court’s interlocutor, I am satisfied that the RFTS had the effect of
transferring the debtor’s obligations to RBS and RBS’s correlative rights, to the pursuer.
Title to sue (3): the agency issue
[53]       As noted above, the settlement of the debtor’s PPI claim was negotiated ostensibly by
Group (eg from the use of its letter-headed paper). The debtor takes the point that, as any
indebtedness she had was to RBS (and not to Group), there can be no set-off by the pursuer
(even assuming it is the successor to RBS as the debtor’s creditor) because there is no
Page 31 ⇓
concursus crediti et debiti. In seeking to establish that Group acted as agent for RBS when
settling the debtor’s PPI claims, the pursuer relies principally on (i) the General Agency
Agreement and (ii) the Checklist. It referred to other adminicles of evidence supportive of
its position that RBS was the principal (eg the cheques paying the first tranche of the
settlement sums were drawn on RBS, and the reference at the foot of the Checklist that
agency agreements might exist). While I was advised that the agency issue has a long
history, the debtor having first raised it in 2016, that is of no consequence. There has been
no judicial determination of that issue.
The General Agency Agreement
[54]       I consider first the General Agency Agreement, whose terms I have set out above.
The General Agency Agreement is a general agency drawn in the broadest of terms to
facilitate one member of a corporate group to act on behalf of another consistent with its
terms. While in cross-examination of Carol Paton, Mr Webster laid stress on the words
“certain activities” in the preambles, and that he noted this phrase was not otherwise
defined, that phrase was simply a portmanteau phrase to cover those activities, among “all
forms of banking business RBS carries out and which RBS wishes NatWest to perform on its
behalf.”. In relation to the grant of agency by RBS in favour of Group, the scope of the
potential agency Group was to perform on behalf of inter alia RBS and for its account, was
“certain activities relating to the management, control and supervision of their respective
businesses” and which was defined as “the Group Activities”.
[55]       In considering the terms of the General Agency Agreement it is relevant to note, as
stated in Preamble A, that RBS and NatWest are wholly-owned subsidiaries of Group. That
is the context in which to construe the General Agency Agreement, which is to facilitate the
Page 32 ⇓
operations of the RBS Group, including conferring on Group authority to act as RBS’s agent
in respect of “certain activities”. That phrase is qualified only by the stipulation that they
relate “to the management, control and supervision” of RBS’s business. It matters not, in my
view, that the General Agency Agreement subsisted long before PPI claims emerged. In my
view, the General Agency Agreement was sufficiently broad to cover Group’s co-ordination
and settlement of PPI claims across the RBS Group.
[56]       While Mr Webster noted en passant the terms of clause 3.4 (requiring Group to
disclose to customers at all times that it is acting for RBS), he did not develop his assertion
that this was a condition precedent. Having considered the terms of the General Agency
Agreement, there is in my view nothing in its terms to support that contention. There is no
express provision which stipulates that this (or indeed any provision) is a condition
precedent; nor is there any term that stipulates a penalty or a want of power if a specific
provision is breached. Having regard to the terms of the General Agency Agreement, the
Court should, in my view, be slow to read in restrictions that are inimical to the spirit of a
commercial agreement drawn in broad enabling terms, among entities which are part of the
same corporate family. Likewise, while Mr Webster made brief reference to the Company,
Limited Liability Partnership & Business (Names & Trading Disclosures) Regulations 2015
(the 2015 Regulations”), this was a non-point, as it was not suggested that any
non-compliance affected the capacity or power of a corporate entity in breach of the 2015
Regulations of affected the validity of any contract. I am persuaded that the General Agency
Agreement is in sufficiently broad terms to cover the activities of Group in co -ordinating
and resolving the many PPI claims made against the different companies within the RBS
Group (including RBS) and its several brands.
Page 33 ⇓
The best evidence objection
[57]       I next address Mr Webster’s objection that the pursuer has failed to provide other
documentation relative to the PPI claims (see para [39], above). In my view, that objection
does not engage with the witness’ evidence and it is misconceived. Carol Paton, who has
been with RBS as well as other entities within the RBS Group since 1997, was well placed to
speak to the General Agency Agreement. She remembered it being put in place. She had an
intimate knowledge of the structure of the RBS Group and its operation, and, in her many
senior legal positions, she had experience of the operation of the General Agency Agreement
to activities of members of the RBS Group over the years. In relation to the management of
the PPI claims, she spoke to the desire for a co-ordinated response across the RBS Group (the
risk management reasons for which are obvious) as well as the practical necessity to do so
(eg because some brands no longer existed). This evidence, and on which she was not
challenged in chief or in cross, suffices to prove that Group had the authority to, and did act
on behalf of, RBS in the settlement of PPI claims made against RBS. To the extent that she
referred to other documentation which had not been produced, on a fair reading of her
evidence, it was clear that she was referring to more specific protocols or arrangements but
which related to matters below her level of responsibility. It is important to note that by the
time of the objection Carol Paton had already given her evidence that the PPI claims were
coordinated by Group. This evidence was elicited without challenge. So far as I understood
Mr Webster’s objection, it relates to the failure to produce that lower-level documentation.
[58]       Leaving aside the doubts I have about the competency of counsel objecting to
evidence he himself has elicited, and which questioning gave the impression of trying to
generate a best evidencepoint (the questions were directed solely to the existence of
protocols, not as to their scope or terms), this does not , with respect, appear to me raise a
Page 34 ⇓
question of the best evidence. The critical question is whether the pursuer has proved that
RBS appointed Group to coordinate and settle PPI claims against it . The evidence of Carol
Paton and Beverley Crawley to that effect is unchallenged. It is difficult to see the relevance
of more specific protocols carrying out that agency arrangement . More fundamentally, the
pursuer is not seeking to prove the terms of those lower -level protocols. The mere fact that
other documentation may exist does not bring the “best evidence” rule into play in respect
of the anterior matter: namely, the agreement that Group act on behalf of the other entities
within the RBS Group and to which Carol Paton (and Beverley Crawley) spoke. It was
Carol Paton’s understanding that the General Agency Agreement was the basis for that
[59]       In any event, in my view this objection is mis-conceived. The best evidence rule is,
generally, that the best evidence of the terms of a document is the document itself: see Lord
Drummond Young in Peacock Group Plc v Railston Ltd I [2006] CSOH 26; 2007 SC 269 at
paragraph 10, citing Lord President Emslie in Scottish Universal Newspapers Ltd v Ghersons’s
Trustees 1987 SC 27 at p 47. I did not understand it to be any part of the pursuer’s case to
prove the detail or operation of the agency arrangement between Group and RBS at lower
levels of implementation. In those circumstances, the best evidence rule has no operation
and I repel the objection . I do so against the background where the debtor does not attempt
to lead evidence to prove the contrary position. So, for example, there was no challenge to
the fact that the settlement cheques were drawn on an RBS account and which was
consistent with Carol Paton’s (unchallenged) evidence that there was an accounting or
adjustment of such payments across the RBS Group.
Page 35 ⇓
The Checklist
[60]       As I have already determined the agency issue in favour of the pursuer, I need only
observe that had the Checklist been the sole source of evidence of agency I would have been
disinclined to find that this was sufficient- not least because it has not been proved that the
pursuer ever completed such a document and because its terms do not obviously extend to
Group’s coordination of PPI claims. However, the sentence at the foot of the checklist does
reinforce the evidence as to the operation of the General Agency Agreement.
Was Group acting as a disclosed or undisclosed principal of RBS?
[61]       This was addressed principally in submissions, as apart perhaps from the Checklist,
the pursuer did not rely on any other evidence to prove that Group acted as a disclosed
principal in respect of settlement of the debtor’s PPI claim. While I find that Group were
acting as the agent of RBS in the settlement of the debtor’s PPI claim, on the evidence, Group
was acting as an undisclosed principal at the material time.
The debtor’s reliance on the failure to disclose Group was acting as agent
[62]       Even if the pursuer establishes that Group acted as the pursuer’s agent, the debtor
argues that the pursuer’s intention to assert set-off, as an undisclosed principal, is
impermissibly prejudicial to the debtor. Extensive reference was made to authority (not all
of which I need record) to vouch the proposition that the disclosure and acts of a hitherto
undisclosed principal may not prejudice the rights of the third party with whom an agent
has contracted. In particular, in the debtor’s submission:
“where A ostensibly contracts with B as a principal, A ought not to be prejudiced by
B’s subsequent disclosure that it was actually acting as an agent for C, e.g. pleading
Page 36 ⇓
of a set off of a debt owed by A to C as a defence to the enforcement of the rights
which the contract ostensibly gave A against B”.
In this example, A is the debtor and B and C are, respectively, the pursuer (as the successor
to RBS, by virtue the RFTS) and Group. So, for example, the debtor cited Greer v Downs
Supply Co [1927] 2KB 28 for the observation of Bankes LJ (at p 33) that disclosure of the
agency should not defeat the rights of the third party (ie the agent’s counterparty) against
the agent. She quoted Bowstead & Reynolds, Agency, (21st ed) (“Bowstead”) at para 8-069 to
like effect (“a third party cannot be prevented by the intervention of the principal from
exercising his rights against the agent”), and at para 9-012 for the proposition that “nothing
must prejudice the right of the third party to sue the agent if he so wishes”. Under reference
to Montgomerie v United Kingdom Mutual Steamship Association [1891] 1 QB 370, Siu Yin Kwan
v Eastern Insurance Ltd [1994] 2 AC 199 and Bowstead at para 8-098, it was submitted that the
measure of the third party’s rights is the contract made with the agent and which cannot be
subsequently altered or prejudiced by the intervention or disclosure of the principal. Nor
can the interests of the principal, once disclosed, “qualify or cut down” the rights of the third
party: Mooney v William (1906) 3 CLR 1.
[63]       In my view, what the pursuer is proposing to do does not contravene any rule
derived from the cases cited by the debtor. The import of these cases is to protect the third
party’s exercise of a right, whether that be a right to payment (asserted against the agent or
the principal) or a right of set off. In this case, there is no modification or loss of any right the
debtor acquired from her compromise with Group of her PPI claim. She is not asserting a
right of set off, but a right to payment. However, she has not been prevented from asserting
her claim for payment against the agent (ie Group). Indeed, she has already asserted that
claim against Group in the payment action. If the assertion of her right to payment of the
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compensation were a sword, the debtor has wielded that sword. All that the pursuer seeks
to do is to use set off as a shield to meet that claim. In my view, that is permissible. None of
the cases the debtor cited precludes the exercise of a right of set off by the agent (here,
Group) or by the principal (here, the pursuer), once its existence is disclosed, against a claim
asserted by the third party (here, the debtor). This is also consistent with the very full and
careful treatment of the subject by Prof Mcgregor in chapter 12 of The Law of Agency in
Scotland, especially at paragraph 12-25.
The second core issue: The grounds for reduction
[64]       It is common ground that the trustee was unaware of the debtor’s PPI claim at the
time she granted the debtor’s discharge. I shall refer to this as “the trustee’s mistake”. (I
consider below whether that constitutes an “error” in a relevant sense.) In those
circumstances, the pursuer advanced two grounds for reduction:
1) the trustee’s payment of the final dividend and grant of the discharge in
ignorance of the existence of the debtor’s PPI claims, which discharge is said to
be gratuitous, was a unilateral error (which failing, a mutual error), and,
2) separately, the trustee’s mistake fell within the English rule in Hastings-Bass
and which the Court should assimilate as part of the law of Scotland.
Ground of reduction based on error: unilateral or mutual error
[65]       The pursuer’s primary position was that the trustee’s mistake was an error and that
the discharge was a gratuitous deed. Under reference to the observations of Lord Reid and
Lord Keith of Avonholm in Hunter v Bradford Property Trust Limited 1970 SLT 173 (“Hunter”),
at pages 186 and 191 respectively, the pursuer submitted that a gratuitous obligation entered
Page 38 ⇓
into in error on the part of the granter was itself sufficient to found reduction. While
Mr McBrearty acknowledged that there was a difference between the grant of a gratuitous
deed and the exercise of a power by a trustee, he submitted that the fiduciary nature of
trustee’s exercise of power simply strengthened the case for interference by the Court in the
event of error.
[66]       In the pursuer’s submission, the trustee’s mistake was a relevant error: the trustee
had performed a voluntary act when deciding to pay a final dividend and, having done so,
when granting the debtor’s discharge. At that point in time the trustee had not appreciated
that there was a further asset in the form of the debtor’s PPI claim. Mr McBrearty
acknowledged that, given that the trust deed was granted in the expectation that there
would be a discharge (the relative term is quoted above, at para [16]), one would not
normally characterise as “gratuitous” the grant of a discharge of a debtor under a trust deed.
However, in the present case, the trustee’s decision to pay a final dividend and to discharge
the debtor was made in ignorance of the debtor’s PPI claim, which was substantial.
Accordingly, he argued, the effect of granting a discharge in these circumstances was to
grant the debtor a valuable asset which she would not otherwise have obtained, in return for
no consideration. In short, the trustee’s mistake was a gratuitous error in the relevant sense.
[67]       The debtor’s position is that the pursuer has failed to plead or prove a relevant case
of error, not least because the pursuer does not aver that any error was essential, induced by
the debtor, to have been known or taken advantage of by the debtor or impetrated by fraud.
Nor did the pursuer aver that the trustee had acted ultra vires or in breach of fiduciary duty.
She submitted that bare error, which was all that the pursuer contended for, did not suffice.
[68]       Separately, the debtor argued that the grounds for reduction of a discharge granted
in the context of an insolvency process were extremely limited and exceptionally rare, the
Page 39 ⇓
most recent precedent being Baillie v Young (1837) 15 S 893 (report of the jury trial) (“Baillie”)
and (1837) 16 S 294 (the court’s application of the jury’s verdict) (“Baillie No 2”).
[69]       The debtor focused on the character of the trust deed as a form of contract . This itself
was uncontroversial: see Dooneen para 42, and Lord Trayner in Kinmond Luke, & Co v James
Finlay & Co, (1904) 6 F 564, quoted with approval by the Inner House and Supreme Court in
Dooneen Ltd v Mond at, respectively, [2016] CSIH 59, at para 18 and [2018] UKSC 54, per Lord
Reed at para 10. She submitted that error as a ground of reduction generally arose in the
creation of the contract. There was no such error in the formation of the Trust Deed alleged
here and, in any event, a contract is not voidable on the ground of an error by one party
which was not known to or taken advantage of by the other: Scott v Craig (1897) 24 R. 462
(“Craig”); Angus v Bryden 1992 S.L.T. 884 (“Angus”). Angus was authority for the proposition
that even if there were an essential error in intention, this cannot found an action of
reduction if not induced by the other party (per Lord Cameron at 437A-D, approving Gloag
on Contract at p 440). Here, only the debtor could be the other party and it was submitted
that there was no question of the trustee’s error having been induced by the debtor. She
submitted that necessary conditions for reduction should not be lower, if th e error arises in
the performance of a contract, rather than its formation.
[70]       The debtor rejected the pursuer’s fall-back characterisation of the error as “mutual”:
the discharge was not a mutual deed of the debtor and the trustee. It was the unilateral
deed of the trustee. In any event, there has been no “error” of the debtor that could have
rendered this a mutual error. The debtor had no rôle or involvement in the granting of the
discharge and she played no part in the timing or decision to grant it. The debtor was not
asked whether or when or in what terms, or by reference to what considerations, the
discharge should be granted. It follows that the deed is not the result of any error by the
Page 40 ⇓
debtor. Further, the discharge could not be vitiated by any error of a person who was not a
party to it. It mattered not that the debtor benefitted from the trustee’s mistake; others did
too, to the extent that they could count on the certainty the discharge affor ded. Finally, the
debtor rejected the pursuer’s characterisation of the trustee’s mistake as “going to the root
and destroying the contract”, or as akin to a “mistake as to the identity of the subject sold”,
as hyperbole.
[71]       The debtor also challenged the pursuer’s characterisation of the discharge as
gratuitous”. This was a “gross error”. She submitted that the pursuer’s reliance on Hunter
was misconceived and, being a case that concerned a unilateral error in the formation of a
contract, was readily distinguishable. Nor was the discharge voluntary, as the pursuer
had submitted. The trustee acted in fulfilment of a fiduciary duty. Under reference to the
observations of the Scottish Law Commission (“the SLC”) in their Report (No 239) on Trust
Law (“SLC Report on Trust Law”), at paras 19.23 and 19.24, the debtor submitted that the
trustee’s grant of a discharge was not the same as the grant of a unilateral deed. The trustee
acts in fulfilment of a fiduciary duty or power granted by a third party (the truster). The
debtor infers from the SLC’s recommen dation that there should be a statutory innovation,
that there was at present no common law basis for challenging the deeds of trustees.
Further, the discharge was part and parcel of the trust. The trust deed was granted in
expectation of a discharge and in exchange for which the debtor had transferred her whole
[72]       The debtor also noted that in respect of an intra vires transactions of a trustee, the
minimum required for reduction of the same was proof of breach of trust such as a proof of
breach of fiduciary duty: In re Beloved Wilkes’s Charity, (1851) 3 Mac & G 440, per Lord Truro
Page 41 ⇓
LC at 448; Dundee General Hospitals, per Lord Normand at pp 85 and 87-88; Pitt v Holt (2013)
2 AC 108, per Lord Walker at paras 73, 88 and 93. Error itself is not a ground of challenge.
[73]       The debtor advances a further line of defence, arising from the peculiarity of an
insolvency trust. In short, it was submitted that even if the pursuer could make out grounds
of challenge that might be relevant in the context oftrust law generally(which the debtor
disputed), thereis no justification in either precedent, principle or policy for then seeking to
transpose such an approach to insolvency law and insolvency trusts. She referred to
Goudy’s enumeration of relevant grounds ofchallengeto insolvency trustee’s deliverances.
Discussion of error as a ground of reduction
[74]       The circumstances of this case appear unusual or are such as not frequently to occur
in the reported cases. In this case, the pursuer seeks reduction of the debtor’s discharge, the
existence of the which otherwise precludes the pursuer’s claim (Whyte v Knox (1858) 20 D
970; Dooneen, cit supra). It does so in order to set off the unpaid balance of the debtor’s PPI
claim against the unpaid balance of its own claim which it had submitted in the debtor’s
Trust Deed process. The kind of error at issue in this case does not fall within the categories
identified by Prof McBryde (see para 15-01, The Law of Contract in Scotland, 3rd ed (“McBryde
on Contract”)). The pursuer does not argue that it was taken advantage of or that the error
was induced by any party; nor does it rely on any misrepresentation or fraud. It does not
argue that the error arose in the formation of a contract. It is not suggested that the discharge
was ultra vires the trustee. The debtor’s criticisms of the pursuer’s failure to invoke one or
more of these grounds is therefore without force. The pursuer’s case is that the discharge
was a gratuitous deed which is reducible on the grounds of error on the part of the granter.
Page 42 ⇓
The most authoritative and recent case the pursuer cited to the Court in support of its
position was Hunter.
Error in relation to a gratuitous deed
[75]       In Hunter the House of Lords affirmed the proposition that a gratuitous deed is
reducible on the grounds of essential error on the part of the granter (per Lord Reid at p 186).
Under reference to McCaig’s Trustees v the University Court of the University of Glasgow (1904)
6 F 918, Lord Reid regarded it as reasonable and in accordance with Scots law that “a person
should not be entitled to retain a gratuitous benefit given under essential error on the part of
the person conferring the benefit” (ibid). Lord Keith also regarded that proposition as settled
law and he figured as examples “essential error as to the nature of the obligation
undertaken” and a “material error with regard to some extrinsic deed or circumstance” (ibid
at p 191). Fairly construed, that passage does not suggest that those examples were
exhaustive of the particular kinds of essential or material errors that might found a
reduction; nor does it suggest any particular form of wording was required to plead such a
Exclusion of compromises as a class from gratuitous error as a ground of reduction
[76]       In considering whether a case falls within the class of cases governed by Hunter it is
necessary, in my view, to consider (i) the quality or nature of the error, and (ii) whether the
deed was gratuitous. Given the debtor’s reliance on Scott v Craig (1897) 24 R 462 (“Scott”), it
is also appropriate to consider the nature of the deed under reduction. I begin with this
latter factor. This is because, leaving aside potential grounds of reduction generally, the
courts have consistently set their face against challenges which seek to open up
Page 43 ⇓
compromises or settlements of claims (see McBryde on Contract at para 15-24 and his
reference to the policy considerations for this rule, at footnote 49), even in the case of
unilateral or mutual error (per Gloag On Contract at 456) or fraud (ibid at 479-480). It
respectfully seems to me that the case of Scott, cited by the debtor, falls within that class of
case. In any event, the discussion of error in that case was obiter, as the ground of that
decision was the want of title to sue by a single trustee. There was no suggestion in that the
discharge under challenge in this case was of the character of a compromise. In my view,
that is correct. Accordingly, cases relating to compromises, such as Scott, are of no
Consideration of the nature of the error
[77]       I next consider the nature of the trustee’s mistake. The debtor takes the point that the
pursuer has not averred that the error was “essential”. Beyond that observation, I did not
have the benefit of submissions on the necessity of pleading “essential error” or what that
phrase might encompass. I am bound to note that the meaning of “essential error” has been
described in one of the leading text books as “one of the most complex, and confusing, areas
of Scots common law(per McBryde on Contract at para 15-04). In the next passage of that
text, Professor McBryde regrets the uncertainty created by the use of phrases such as
“essential error”, “error in the essentials” or “substantial” error. He offered the view that, at
least among the institutional writers,
“the meaning of ‘essential error’ was not settled, but it was probably no more than an
attempt to distinguish between substantial and insubstantial errors. No amount of
semantic discussion will enable a definite line to be drawn between those two types
of errors.” (Emphasis added.)
Page 44 ⇓
I also note that Gloag considered that a discharge was reducible on the ground of mutual
error and “taken under a material error as to the nature or extent of the right in question”
(emphasis added): On Contract at p 454. I bear those comments in mind in my consideration
of this issue. The starting point to note is that, if the debtor’s PPI claim had been realised
during the currency of the Trust Deed process, it would have increased the debtor’s assets
available for distribution by a third and would have yielded a similar uplift in the return to
the pursuer as the debtor’s sole creditor. In my view, the omission to ingather this asset may
be described as a “substantial” or “material” error. On any view, it was not an insubstantial
one in its effect.
[78]       It is here convenient to deal with the debtor’s argument that the absence of evidence
from the trustee is fatal to the pursuer’s case. I do not accept that submission. The trustee
under the debtor’s Trust Deed was under a fiduciary duty to ingather the debtor’s estate.
Given that, on the evidence, the debtor’s PPI claim was a significant asset with low
realisation costs, and given the relatively short timescale within which the pursuer received
and compromised the debtor’s PPI claims, it is difficult to envisage a scenario in which the
trustee, had she known of the potential for PPI claims, would have declined to ingather this.
Rather, those circumstances support the inference that, had the trustee known of the PPI
claims she would have pursued them for the benefit of the debtor’s creditors. In my view,
the trustee’s failure to ingather the PPI claims may be described as a “material” error, it is
one capable of founding an action of reduction. Testing this another way, had the trustee
known of the PPI claim, it is inconceivable that she would have granted the debtor’s
discharge until that claim was realised as an asset for the benefit of the debtor’s creditors.
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Was the discharge gratuitous?
[79]       The next matter to consider is whether the grant of the discharge was “gratuitous”.
It is of course correct, as the debtor notes, that the grant of the Trust Deed is made in
contemplation that at the conclusion of that process the debtor will be granted her discharge
and, further, that it may be said that the trustee is under a “duty” to grant the discharge (as
the debtor argued). However, in my view, those features do not determine whether the
discharge was gratuitous, particularly if it transpires that t he discharge was granted in error
or at a material undervalue, as is the case here. Three cases were cited to me in which the
Inner House considered whether a discharge was “gratuitous”: Ross v Mackenzie (1842) 5 D
151 (“Ross”) (Second Division), Dickson v Halbert (1854) 16 D 586 (“Dickson”) ( First Division)
and Macandrew v Gilhooley 1911 SC 448 (Second Division).
[80]       In Ross, the pursuer sought reduction of a discharge granted by the trustee under a
trust deed granted by her husband for the behoof of his creditors, and which purported to
discharge any claim for legitim she had against her brother (Thomas Mackenzie) as the
executor of their father’s estate. The deceased had granted a trust settlement which settled
£3000 on each of his sons and settled £500 on the pursuer, in each case declaring that these
provisions were in full payment and satisfaction of his children’s claims for legitim. Upon
their father’s death the pursuer’s two brothers accepted the testamentary provisions in their
favour. The pursuer’s husband became insolvent. In the belief that the pursuer was only
entitled to one-half of the fund and that her brother, the executor, was entitled to the other
one-half in satisfaction of their respective claims for legitim, the trustee granted the ex ecutor
a discharge. However, having accepted the testamentary provision in his favour, the
executor was not in fact entitled to retain one-half of the sum concerned. The pursuer
rejected the testamentary provision in her favour and advanced a claim for legitim. She
Page 46 ⇓
sought reduction of the discharge of the trustee, on the footing that it was obtained by
fraudulent misrepresentation or it had been executed under error in substantialibus, and an
accounting from the executor, her brother, Thomas.
[81]       Leaving aside the separate provision of £500 payable to the pursuer under her
parents’ marriage contract (and which the court held did not constitute a payment in respect
of legitim), the court found that the executor was not entitled to the one-half sum he retained
as legitim (pursuant to the settlement and discharge). The Lord Ordinary, Lord Moncrieff,
found that the discharge had been granted on the footing that the pursuer had been entitled
to only one-half of the sum, but that this was erroneous and she was en titled to the whole
sum representing legitim. In analysing the nature of the error, he considered and rejected the
application of the doctrine of condictio indebiti (the executor had not paid any sum in error;
he had simply not paid enough). In his interlocutor, he recorded that the trustee who had
granted the discharge (being the trustee of the pursuer’s husband, on whom power of
disposal of her property had devolved)
“had not power, as trustee, to grant a discharge of any lawful and subsisting debt of
the truster’s [ie the pursuer’s father, as administered by his executor, her brother],
either without value or on payment of half the sum due by law; and that, in the
circumstances of the case, the discharge so granted, while it professed to proceed not
on any compromise of a doubtful claim, but for the full amount of the debt due, was,
to the extent of one-half of the debt, granted without any value whatever, and was
therefore, to that extent, altogether null and ineffectual.” (Emphasis added).
Although Lord Moncrieff did not use the phrase, it is clear from the terms of his interlocutor
that in his view the trustee’s discharge had been granted sine causa in respect of the
executor’s purported retention of one-half of the sum to which, in law, the pursuer was
[82]       In the case of Dickson, decided 12 years later, the Court again considered the grant of
a discharge by a beneficiary under a testamentary provision “in full satisfaction of all sums
Page 47 ⇓
due or claims competent to me [under the testamentary provision]” but which, in truth, had
been granted in error, without value and while the granter of the discharge was in ignorance
of her rights. In terms of a mutual disposition and settlement between spouses, the siblings
of the wife would in certain circumstances become entitled (collectively) to a sum equal to
one-half of the sums received from the estate of the uncle of the wife and her siblings which
(included the purser). Those circumstances came to pass. Notwithstanding that the pursuer
was entitled to a one-half share from her uncle’s estate, the pursuer called upon her brother-
in-law, the survivor under the mutual disposition and settlement, to pay her a sum
representing only a one-quarter share. He did so and she granted a discharge “in full
satisfaction of all sums due”. The pursuer’s request at that time was based on a certain
interpretation of the mutual disposition and settlement, but which was erroneous. On a
proper interpretation, the pursuer was entitled to a further £600.
[83]       Several years later, and after taking a different view as to the terms of the mutual
disposition, the pursuer sued her brother-in-law for payment. He resisted that action and
founded on the discharge she had granted. The pursuer thereafter raised an action for
reduction of the discharge. While the Lord Ordinary found in her favour as to the proper
interpretation of the mutual disposition (with the effect that she was due a further £600), he
refused to grant reduction. He did so, essentially on the basis that the error was one of law
and, as the law then stood, an error of law did not support the condictio indebiti. The First
Division allowed the pursuer’s reclaiming motion. In a careful and (for those times) full
opinion, the Lord President, Lord McNeil, considered th e cases, including those of the
House of Lords which were said to preclude the condictio indebiti in cases arising from an
error of law. Having reviewed the House of Lords cases referred to in the opinion of the
Lord Ordinary and “searching our own authorities, so far as we have authority on the
Page 48 ⇓
subject” (at p 594), Lord President McNeil was not able to find it “finally decided, that in no
case, and under no circumstances can an error in point of law be held as ground for a
condictio indebiti”. He continued: “But with these opinions on record, I should not certainly
be disposed to counter them, if that had been the point here” (emphasis added). He
explicitly declined to extend that tract of authority to the facts of the case before him:
“But then I do not feel that I am at all bound to carry the doctrine any farther, and to
hold that it excluded redress in the case of a party who has given a discharge, as if
he had full satisfaction of all that in law he was entitled to, when it is admitted that
he had not obtained satisfaction, and when his not obtaining it was not a mere error
of law. I am not for pushing the doctrine so far. I can conceive cases in which error in
law would not entitle the party to repetition. There are some errors in law that you
cannot listen to a party pleading ignorance of, but there are other matters of a totally
different kind. In our institutional writers I find that the doctrine laid down is, that
if a discharge be granted in ignorance of the legal rights of a party, it may be
opened up. It is a principle with us, that if a discharge be granted sine causa, it
may be reduced; and however the reasoning may be extended, so as to embrace
many views of the doctrine, yet it would be strong to make it a strict rule that a party
cannot get redress against a discharge granted sine causa. I do not find any case in
which the doctrine has been carried so far, and it cannot be; and it would not do to
press as abstract law the doctrine laid down in the House of Lords, on a point which
was not truly in the case then for decision.” (Emphasis added.)
In the next passage, Lord President McNeil distinguished between a party making a
payment and a party receiving payment that discharges a claim (see foot of p 595). In the
latter instance, a part payment does not discharge the whole claim otherwise there would be
no consideration quoad the element of the claim which was not paid.
[84]       Lord President McNeil also drew a distinction with payments constituting a
transaction, using that term in the sense of wh at would now be described as a
“Wherever there is a transaction, it is for settlement of a dispute for quiet and rest,
and the prevention of farther question, and is final; and even in English law, where
they are so strict about condictio indebiti, that doctrine is clearly admitted”: at p 596.
Page 49 ⇓
Having again adverted to the position in English law (“When a party pays in ignorance of
the law, he has no redress; but he will, if the other party receiving payment knew the law,
and he did not”), Lord President McNeil observed (at p 596):
“… it is better to see whether, under the circumstances in which a party seeks
redress, on the allegation of error of law, she had discharged her rights sine causa.
There is no abstract rule laid down in our law, therefore I do not enquire whether the
other party knew or not. I presume he did not… It only comes to this: there is an
error in accounting substantially; and therefore, in reviewing all these matters, I am
very strongly impressed with the notion that it would be a very hazardous thing,
and for which we have no authority, to enlist into the class of cases of discharge sine
causa all of those views and considerations thrown out by the Lord Chancellor in
these cases of condictio indebiti that have been referred to. And if there be no
absolute rule barring the party from redress, it is clear that every principle must
lead to her obtaining it”. (Emphasis added.)
The other judges in the majority, Lord Ivory and Lord Rutherfurd agreed with the Lord
President and also concurred in the conclusion that the pursuer was not meaning to
comprise her future claim. Lord Ivory observed that the
“discharge was not granted as the result of any communing between the parties as
to their rights. It was on the understanding that on ‘a fair accounting that was the
balance due to her….’” (at p 597).
Lord Rutherfurd also stated that the discharge was not given as part of a compromise; it
was not, as he put it (at 599), a “transactio litis”.
[85]       It should be noted that there was no suggestion of fraud, misrepresentation or any
sort of circumvention on the part of the defender in that case. Indeed, the Lord Ordinary
affirmed that there was no responsibility on the part of the defender to have ascertained the
pursuer’s rights. He had paid what she had requested and in return for which he received
the discharge.
[86]       I note that the discharges under reduction in Ross and Dickson were both granted by
an executor or testamentary trustee. By contrast, in the third case, of "Macandrew v Gilhooley
1911 SC 448 (“Macandrew”), the document under reduction was a receipt and discharge
Page 50 ⇓
granted by a workman for compensation payments he had received from his employer, the
defender. On the facts, the pursuer, described by the Court as illiterate, had received
periodic payments but in due course he signed a receipt for sums received and which
incorporated a discharge that purported to relieve the defender of all future liability in
respect of the pursuer. The case is cited as an example of a gratuitous discharge. The Court
noted that the receipt covered all past payments and that there had been no payment in
respect of any future liability. It had no hesitation in concluding that the discharge was
gratuitous. Lord Ardwall observed that there was “no consideration at all and that the
discharge was purely gratuitous…. the discharge was given for no consideration
whatsoever it is entirely sine causa….” (p 453) (emphasis added).
[87]       These authorities, which are binding on me, establish that a gratuitous deed may be
reduced on the ground of an uninduced error which was causative of, or material to, the
decision to grant the deed under challenge. This conclusion is also consistent with the
statement in Menzies’ The Law of Scotland affecting Trustees ( 3rd ed 1913) (“Menzies”) at p 578,
that a discharge of a trustee granted sine causa was reducible, and that on the ground of
“mere error”. I have no hesitation in holding that the discharge was gratuitous to the extent
it purported to discharge the debtor in respect of the PPI claim she had against RBS. In the
language of Dickson and Macandrew, the discharge was granted sine causa. Subject to the
debtor’s arguments regarding the special character of the granter as a trustee in an
insolvency process, I find that the pursuer has established reduction on the ground of a
substantial error in the grant of the discharge which was, quoad the debtor’s PPI claim,
granted sine causa.
Page 51 ⇓
Are deeds granted by trustees in a special category?
[88]       Is the fact that the discharge in this case was granted by a trustee or one acting in the
context of an insolvency regime relevant, or does it dictate a different result? The debtor
argues that decisions of trustees, and particularly those involved in the administration of
insolvent estates, enjoy a special deference and that, absent a want of due care or a breach of
fiduciary duty, a trustee’s decision was unchallengeable. In my view, this overstates the
degree of circumspection the courts afford to the decisions of trustees. If this were correct,
then the decisions in Ross and Dickson, in which the challenges to the discharges of the
trustees were successful, would have been decided differently.
[89]       It is of course correct that a trustee is a fiduciary and is subject to certain duties in
that capacity. However, in my view, the characterisation of a trustee as a fiduciary is not
conclusive of the grounds of review of a trustees decisions. The scope, purpose and powers
under which a trustee acts are likely to be relevant to this question. The cases disclose a
degree of restraint by the Court to intervene, and the relatively limited grounds on which it
will do so, where the trustee’s decision involves the exercise of a discretion or the
interpretation of a testator’s intentions. In Dickson, the fact that the trust deed conferred on
the trustees a “sole and absolute” discretion necessarily informed the limits of the Court’s
review in that case (on which, see Lord Normand at p 87 and Lord Reid at p 91). That case is
not authority for a more general proposition that the grounds of review of a trustee’s
decision were limited to those canvassed in that case. It is in my view important to
distinguish between distinct kinds of decisions and to which different approaches apply.
On the cases cited, the courts generally adopt a degree of restraint in respect of challenges to
discretionary decisions of trustees, as is illustrated by Dundee General Hospital, and to which,
in England the rule said to derive from Hastings-Bass may apply. None of the authorities
Page 52 ⇓
cited to me would support so restricted an approach being applied to what are purely
administrative or executory decisions of trustees, even if taken pursuant to a fiduciary duty.
Accordingly, it is necessary to consider the nature of the discharge granted by the trustee.
Was the grant of the discharge a discretionary decision?
[90]       In the event that there is no relevant ground of reduction available in Scots law, the
pursuer’s fall-back position is to rely on the English law rule of Hastings Bass, which enables
courts to correct certain erroneous decisions of trustees. The debtor resists this, as an alien
intrusion into Scots law. As noted above, the debtor contended for a very restricted scope
for review by the Court, regardless of the character of the decision under challenge. In my
view, the debtor’s approach involves a conflation of discretionary and administrative
decisions of trustees. The trustee’s decision to grant the discharge did not involve any
qualitative judgement or weighing of alternatives. Once she had ingathered the estate and
had accepted the claim of the single creditor (RBS), she was involved in an essentially
straightforward calculation of the dividend to be paid to that creditor. Having done so, she
was bound to grant the debtor’s discharge and to seek her own. These are in the nature of
executory or administrative decisions, not evaluative ones in the exercise of a discretion.
The grounds for reduction of such decisions are not restricted (as they are for discretionary
decisions), but are those generally available in the common law. This conclusion means that
in this case there is no need or basis to consider the application of Hastings-Bass. It follows
that, interesting though parties’ submissions were as to the possible incorporation of that
rule into Scots law, that issue does not arise in this case, even if I had found against the
pursuer on its primary ground of reduction.
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The fourth core issue: exercise of the Court’s discretion in consideration of the remedy of
[91]       The pursuer has succeeded on all the grounds necessary to enable partial reduction
of the discharge to be granted. In general, it would follow that the remedy sought would be
granted as a matter of course. However, this is an action of reduction. Both parties
proceeded on the basis that, notwithstanding success on the merits, there remained as a
discrete step the exercise by the Court of its discretion to grant or refuse the remedy of
reduction. Both parties appealed to the Court’s discretion. I record in the next two
paragraphs the factors each party founded on as justifying the exercise of the Court’s
discretion in its or her favour, before turning to consider the scope of the discretion available
to the Court and how it should be exercised in this case.
The factors the pursuer invokes
[92]       The pursuer relied on the following factors as justifying the grant of reduction.
1. The pursuer noted that the relationship as between the debtor and RBS was
one of debtor and creditor. Following the conclusion of the debtor’s
insolvency the unpaid balance remained.
2. After her discharge, the debtor sought compensation for her PPI claims.
RBS settled these claims and agreed to the settlement sum. Part of that was
paid; the remainder has been withheld.
3. Had the trustee known about the debtor’s PPI claim, she would have had
regard to it and its value would have been set off against RBS ‘s claim in the
insolvency (the pursuer asserts that the trustee would have been obliged by
law to do so).
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4. The debtor can never have been under the impression that RBS did not
intend to challenge the debtor’s entitlement to be paid the outstanding
settlement sum, for the purpose of set off, because (a) it was never paid and
(b) that is the basis on which the sheriff court action was defended. Any
obligation to pay the debtor’s PPI claim compounded the loss RBS incurred
from the inability to recover the unpaid balance in the debtor’s Trust Deed
5. This action simply seeks to place the parties in the position they would h ave
been in had the trust been administered without error. The pursuer’s case
puts parties in such a position. The pursuer submits that had the debtor’s
PPI claim been known during the course of the insolvency, the debtor would
have had no arguable claim to it.
6. The debtor‘s stance results in the debtor having the benefit of the discharge
but also retaining a “windfallpayment from the very party to whom she
was unable to repay the sums that she borrowed.
7. The pursuer’s case results in a manifestly fair outcome: the debtor remains
discharged and the creditor is repaid to the extent that would have been
possible if the trustee had not made an error (although still not repaid in
8. The debtor’s case results in a manifestly unfair outcome: the debtor is
discharged from repaying her loan to the creditor but the creditor is
required nonetheless to make over further sums just shy of £11,000 to the
9. There is a manifest inequity in the case proffered by the debtor. Equitable
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remedies such as reduction are available to the court in order to reach
equitable outcomes. Lord Reed’s postscript in Dooneen makes it clear that
the result in that case was scarcely satisfactory. The pursuer has shown that
it is open to the Court to find an effective remedy to rectify such an unfair
10. The debtor suggests that a relevant consideration is that RBS did not bring
the PPI claim to the attention of the trustee. The pursuer relied on the
evidence elicited from its witnesses to show that there was no obligation to
search for such claims proactively. In any event, that suggestion does not
change the equitable consideration that the debtor’s stance results in a
windfall payment to her.
11. The debtor also suggests that there is potentially a claim against the trustee.
On the evidence before the Court, no such claim has been established. In
any event, a claim against the trustee may very well result in a subrogated
action by the trustee’s indemnity insurer against the debtor to recover the
12. In all the circumstances, reduction should be granted. Refusing to grant
reduction would, in these circumstances, result in a significantly more
material inequity than would be the case if reduction were to be granted.
The factors the debtor invokes
[93]       For her part, the debtor invoked the following factors as relevant to the exercise of
the Court’s discretion:
1. When the discharge was granted, of the three parties (the pursuer’s author,
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the debtor and the trustee), the debtor had no knowledge of the PPI claims.
She had no duty to investigate matters. She has done nothing wrong. Yet
reduction, if granted, will, on the pursuer’s case, deprive her of that which
she is entitled in law to receive but for the reduction, namely payment of the
outstanding settlement sum following the compromise of her PPI claim.
2. In contrast, the pursuer’s author had acceded to the appointment of the
trustee as a professional trustee to pursue and protect its interests. In
implement of the trustee’s fiduciary duties to do so, she either made relevant
enquiries but did not act on them, or she made no relevant enquiries. The
pursuer has an available remedy against the trustee.
3. When the discharge was granted, among the debtor, the trustee and the
pursuer’s author, only the latter had means of knowing that, subject only to a
claim being made, it was liable to compensate the debtor for mis-selling PPI.
It knew or ought to have known that it could protect its interests to draw to
the attention of either insolvency trustees of the possibility of PPI claims, thus
permitting the set off it now pursues, and so avoiding the result which its
successor now seeks to characterise as inequitable: namely an insolvent
customer having right to compensation against which set off cannot be pled.
The pursuer accepts that at the material time, neither the debtor nor the
trustee had any relevant knowledge. In contrast the pursuer’s author had
relevant knowledge. By its silence about the issue during the currency of the
trust over the 7 years from 2006 to 2013, the pursuer’s author is the author of
the pursuer’s claimed misfortune. It would be inequitable to visit a remedy
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for that self-inflicted injury on a party whom the pursuer concedes was both
legitimately ignorant and in good faith.
4. The debtor’s plea to the irrelevance of Group’s sole defence to the payment
action in Glasgow Sheriff Commercial Court has been sustained. If PTA to
the Supreme Court is granted and that is reversed, then this action will be
superfluous. If instead PTA is refused - or is granted but the appeal is
refused - then decree for payment must follow, unless Group is granted leave
to amend its currently irrelevant defences. The only basis on which it could
amend would be decree of reduction in this action, where the sole averred
purpose of this action is to allow set off to be pled, which standing the
judicially-declared irrelevance of those defences could only happen were
Group permitted to amend. Group have had since December 2013 to
challenge the discharge and have known since August 2014 that it was relied
on by the first defender for her action against it. In these circumstances, there
is no real prospect of Group not being held by the court seized of the
payment action to have waived any right to challenge the reduction, long
before this action was raised in February 2019 - having by then engaged in
years’ of litigation about the effect of the discharge while failing to state
any challenge to its validity - which (if good) would have rendered those
years of litigation unnecessary. Secondly, in any event, on established
principles in commercial litigation there is no prospect of Group being
granted leave to amend to plead a new basis for its defence after 6 years - as
the Inner House acknowledged by refusing to sist the payment action
pending this action. Thirdly, in its closing submissions the pursuer in this
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action has expressly disavowed any need and hence intention to amend its
irrelevant defences in the payment action, so decree against it in that action is
inevitable. It is inequitable to grant a remedy for a purpose which must fail.
5. The pursuer submits that it seeks decree for purposes that are limited in
terms which nevertheless are not stated in its conclusions. The pursuer has
not made a fourth motion to amend its conclusions. In term of its
conclusions, reduction would return the debtor to insolvency, and if
reduction of the trustee’s discharge were also granted, it would necessitate
the re-appointment of the second defender or the appointment of another
person as her trustee. The consequence for the debtor would be to expose her
to the prejudice of insolvency, sequestration of her assets including
acquirenda, the need for remuneration of a trustee, and the right of such a
trustee to proceed against her assets for such remuneration, or repetition of
the compensation which has been paid, or any other emergent creditors’
claims. For 6½ years the debtor has reasonably relied in good faith on her
discharge from her insolvency, and all persons dealing with her having been
entitled also to do so. It would be inequitable to negate that reliance.
6. The pursuer concedes that absent concursus debiti et crediti, the sole purpose of
this action could only be to allow the PPI compensation to be in-gathered
from Group. That could only be done by a re-awakened insolvency trust,
with onward distribution by way of a dividend to the pursuer. That would
necessitate the return of the first defender to insolvency with the practical and
inequitable consequences stated in the previous paragraph.
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7. Reduction of the debtor’s discharge for reasons (for which she bears no
responsibility) does not justify the consequential loss of finality, and thus
public certainty, that resides in a debtor’s discharge under the law of
insolvency. The trust deed is in standard terms, eg, identical to those in
Dooneen. The pursuer’s argument is that omission to in-gather or deal with
any material asset, combined with absence of any evidence from the trustee,
justifies the inference that there are relevant grounds for reduction: if that
were correct, then the result for all trust deeds in materially similar terms
would be that the validity of the debtor’s discharge would be clouded by the
same uncertainties the importance of avoiding which was identified by
Lord Reed in Dooneen at paragraphs 13-14 as the ratio for the Supreme
Court’s judgment.
Consideration of the discretion available to the Court
[94]       Parties were agreed that reduction is an equitable remedy. Given that
characterisation, I understand them to acknowledge that the Court may have regard to other
factors, apart from its determination of the factual and legal merits of the case presented. I
was not referred to authorities describing the range of factors to which the Court may have
regard or otherwise defining the scope of its discretion. It is appropriate that I consider the
scope of the Court’s discretion in the exercise of its ordinary jurisdiction in a case of
reduction, before considering how to exercise that discretion in the circumstances of this
[95]       Reduction is a form of corrective remedy. Among the institutional writers, Erskine,
who described it as a “recissory” action, classified it as one of the “principal actions, which
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subsist by themselves”: An Institute of the Law of Scotland, IV.1.18. (The other three principal
actions were declaratory, petitory and possessory actions.) Recissory actions are “those
which our law established for voiding of deeds, services, decree, or other writings…” Stair,
described actions of reduction as a means to declare legal rights “by reducing and annulling
any pretended right”: Institutions, IV.20.2. More modern treatment of the remedy of
reduction distinguishes between reduction as a mode of review (ie of decrees) invoking the
Court’s supervisory jurisdiction, and reduction (eg of a deed) where only the ordinary
jurisdiction of the Court is invoked: see, eg, “Judicial and Other Remedies”, Stair Memorial
Encyclopaedia, Vol 13 at paragraph 44 (examining the Court’s ordinary jurisdiction) and
paragraph 45 (examining the Court’s supervisory jurisdiction). (That distinction was
maintained in the Re-issue of this title (sub. nom. “Remedies”).) A reduction invoking the
Court’s supervisory jurisdiction remains part of the Court of Session’s exclusive jurisdiction,
notwithstanding the extension by section 38 of th e Courts Reform (Scotland) Act 2014 (asp
18) of the sheriff court’s jurisdiction to include reduction. It is typically this first kind of
reduction, invoking the supervisory jurisdiction, which has been described as an
“exceptional” remedy: “it is a remedy which does not exist of right” but “must be most
carefully applied” (per Viscount Dunedin in Adair v David Colville & Sons Ltd 1926 SC(HL) 51
at 55-56; cited with approval by the First Division in Arthur v SMT Sales & Services Co Ltd (no
2) 1999 SLT 783 (“Arthur”) at 787A to B, per Lord Macfadyen giving the opinion of the
[96]       In this case, it is the Court’s ordinary jurisdiction which is invoked. Even in the
exercise of its ordinary jurisdiction, however, it would appear that the Court is vested with a
degree of discretion. The best-known statement of the equitable discretion vested in the
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Court is found in the speech of Lord Watson in Grahame v Magistrates of Kirkcaldy (1882) 9
R(HL) 91 (“Grahame”) (at pp. 91 to 92):
“It appears to me that a superior court, having equitable jurisdiction, must also have
a discretion, in certain exceptional cases, to withhold from parties applying for it that
remedy to which, in ordinary circumstances, they would be entitled to as a matter of
course. In order to justify the exercise of such a discretionary power there must be
some very cogent reason for depriving litigants of the ordinary means of enforcing
their legal rights. There are, so far as I know, only three decided cases, in which the
Court of Session, there being no facts sufficient to raise a plea in bar of the action,
nevertheless denied to the pursuer the remedy to which, in strict law, he as entitled.
These authorities seem to establish, if that were necessary, the proposition that the
court has the power of declining, upon equitable grounds, to enforce an admittedly
legal right; but they also shew that the power has been rarely exercised.
Lord President Rodger (as he then was) cited this passage with approval in Highland and
Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297 (“Highland and Universal”) (at
299A-B), one of the “keep open” cases which affirmed the competency of a decree ad factum
praestandum to compel a commercial tenant to adhere to its contractual obligation to keep the
let premises open and trading during normal business hours. Lord Rodger observed:
“These passages affirm the existence of a discretion in the court, in exceptional cases
to deny to a party the remedy to which the party would otherwise be entitled. It is
important to note, however, that the power is plainly regarded as being wholly
exceptional and is to be invoked only where there is some ‘very cogent reason’ for
doing so. Secondly, the very cogent reason must be one which would make it
‘inconvenient and unjust’ to grant specific implement. Finally, the power is analysed
as being of the nature of a discretion. It must therefore be a discretion which the
court exercises in order to prevent the party from whom performance would be
required from suffering inconvenience and injustice. Since the exercise of the power
is a matter of discretion, this court will be able to interfere with the Lord Ordinary’s
decision to grant or withhold specific implement only where he has erred in law or
reached a decision which no reasonable Lord Ordinary could reach. Cf Benson at pp
781 H-782 A per Hefer JA.”
In a case decided a year later, William Grant & Sons Ltd v Glen Catrine Ltd 2001 SC 901
(“William Grant”), concerning the grant of interdict in a case of passing off, Lord Rodger
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again cited Lord Watson in Grahame to affirm the Court’s discretion, observing (at 930D)
that he
“…did not attach any significance to the fact that the discretion to refuse the remedy
to which the pursuer was entitle din strict law has been exercised only very rarely. A
court will be called upon to exercise that discretion wherever the circumstances make
it appropriate to do so, irrespective of whether such circumstances occur frequently
or infrequently.
While William Grant and Grahame both concerned the remedy of interdict, and Highland and
Universal concerned the remedy of specific implement, I can see no reason in principle why
the observations in these cases do not apply to the remedy of reduction sought in the
exercise of the Court’s ordinary jurisdiction. Indeed, the first of the three cases discussed
Grahame was a case in which reduction was refused “having regard to the great
inconvenience that would result” if reduction were granted (Lord Watson’s gloss in Grahame
on the earlier case of Macnair v Cathcart, M. 12,832, at p 92). In Arthur, which concerned the
withholding of the remedy of reduction to reduce an award of sequestration, and so in the
exercise of the Court’s supervisory jurisdiction, Lord Macfadyen, delivering the opinion of
the First Division, observed (at p 787E-F) that “It is clearly established by the authorities ….
that reduction is not a remedy to which a pursuer is entitled as of right on proof of some
invalidity in the deed or decree under challenge” (emphasis added). The phrase “the deed
or decree under challenge” is habile to cover both the ordinary and supervisory jurisdictions
of reduction.
[97]       It follows from the foregoing, that even if a party establishes a ground of reduction,
that is not determinative of whether or not the remedy of reduction will be granted. On the
authorities reviewed, a court’s decision to withhold the remedy is wholly exceptional, and is
to be done only where there is some “very cogent reason” for doing so (per Lord Rodger in
Highland and Universal, cit. supra). Secondly, the very cogent reason must be one which
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would make it ”inconvenient and unjust” to grant reduction (ibid). Finally, the power is
analysed as being of the nature of a discretion. It must therefore be a discretion which the
Court exercises in order to prevent the party from whom performance would be required
from suffering inconvenience and injustice” (ibid).
Consideration of the factors informing the Court’s discretion to grant or refuse reduction
[98]       I have noted above the variety of factors parties relied on and said to inform the
discretion available to the Court to grant or refuse the remedy of reduction. I propose to
consider these under three broad categories, namely: (i) the conduct and responsibility of
the parties for the omission of the debtor’s PPI claim from the Trust Deed process and the
availability of any alternative avenue of redress against the trustee, (ii) the history of the
dealings and actions of the parties (or the pursuer’s predecessor in title) in respect of the
outstanding settlement sum, and (iii) the consequences for the parties if partial reduction of
the discharge is granted.
(i) The conduct and responsibility of the parties
[99]       In considering the equities in any case, the culpability or responsibility of one or
other party for the state of affairs the Court is being asked to reverse is likely to be a relevant
consideration. It is in this context that the debtor contends that the pursuer (or its
predecessor in title as creditor of the debtor) is the author of its own misfortune. This is
premised on the argument that RBS could have pro-actively investigated whether an
insolvent customer might have any nascent PPI claim, which could then be set off in any
ongoing insolvency process. In light of the evidence I have heard from the pursuer’s
witnesses, I accept that that was not a realistic or reasonable step RBS was required to take. I
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decline to infer any fault on the part of RBS, as the debtor urged me to do. In relation to any
responsibility on the part of the debtor, it is accepted that the debtor was in good faith and
that at the time of her discharge she was unaware of the possibility of making a PPI claim
against RBS. It follows that neither party is responsible for the omission of the trustee to
realise the debtor’s PPI claim as an asset in the Trust Deed process. While the debtor also
suggests that the pursuer has an alternative avenue of redress in the form of an action
against the trustee, I am not persuaded that grounds for recovery would be established. At
the very least, as some of the arguments in this case disclose, the grounds of any action
against the trustee may be problematic. In any event, on the evidence, the trustee was n o
more or less at fault than the debtor or RBS. Accordingly, in respect of the first factor, I find
that neither the debtor nor RBS was responsible for the trustee’s mistake; both acted in good
faith. Their respective conduct is therefore a neutral factor.
[100]       I turn to consider the history. There is a protracted course of dealing between the
parties, or, more accurately, between the debtor and the pursuer’s predecessor in title (and
Group as its agent). Prior to the raising of this action, the debtor went through the Trust
Deed process. This commenced in 2006. The debtor was only discharged from that process
in December 2013. Her PPI claim was made in early 2014. Within a few months thereafter a
compromise was reached and the amount of the settlement sum agreed. A small part of this
was paid. However, the outstanding settlement sum has been withheld since that time. In
order to secure payment of the outstanding settlement sum, the debtor was obliged to raise
the payment action, which she did against Group in August 2014. I have set out the
procedural history above (at paras [8] and [9]), but the pursuer succeeded at first instance in
the payment action and at each level of appeal.
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[101]       A few days before this case was to be advised, the Court was informed that Group’s
PTA to the Supreme Court in the payment action had been refused. While the pursuer had
expressed the hope that this case would have an impact on the payment action in the
Supreme Court, the interrelationship between the payment action and the outcome of this
case remains less than straightforward. For the reasons the pursuer explained, it raised the
present action in 2020. With commendable frankness, the pursuer’s senior counsel
acknowledged that it was only relatively lately appreciated that the proper counterparty to
the debtor’s PPI claim was the pursuer, as the successor to RBS and, further, that Group
acted as the undisclosed agent of RBS at the material time. Accordingly, even if reduction of
the discharge were granted in this action, the pursuer would require to amend the payment
action in order to reflect the position, first adopted in these proceedings, that the correct
counterparty to the debtor is the pursuer (and not Group, the defender in the payment
action). While the pursuer assumes that amendment would readily be granted in the
payment action, I share the debtor’s doubts as to whether the court seized of that issue
would so readily grant that amendment, given the protracted procedure in the payment
action and the impact of such an amendment at what can only be described as an
exceptionally late stage in that case. Nor would I presume to trespass on the discretion
available to the judge in the payment action in respect of any amendment.
(ii) The consequence of reduction for the parties
[102]       In relation to the consequences for the parties if reduction is granted, in my view this
is the most problematic factor for the pursuer. The pursuer made it clear that it would not
seek to recover from the debtor any sum already paid toward her PPI claim. It restricts any
set off it seeks to exercise against the outstanding settlement sum. In light of the pursuer’s
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stance, issues of reliance, prejudice, unjustified enrichment or repetition do not arise.
However, the pursuer’s approach seeks to elide the real practical and procedural difficulties
that would arise as a consequence of partial reduction of the debtor’s discharge. The
pursuer has focused only on the effect of reduction on it. It underestimates the impact on the
debtor. However, there are, in my view, two principal difficulties for the pursuer, even if
partial reduction were granted. These concern the manner by which any balancing of
accounts in bankruptcy is to be effected, and the impact of a partial discharge on the debtor.
In relation to the balancing of accounts in bankruptcy, the pursuer’s position appears to be
premised on this being mandatory (see para [92(3)]), above) or without any formal
mechanism to effect it. I turn to consider the correctness of that proposition.
(a) Compensation, set off, and balancing of accounts in bankruptcy
[103]       In parties’ submissions, the terms “compensation”, “set off” and “balancing of
accounts in bankruptcy” appeared, at times, to be used interchangeably. Care must be
taken, however, as these terms embody distinct legal concepts. Compensation ” is
statutory, governed by the Compensation Act of 1592 (“the 1592 Act”), and involves
extinction of the debt set off (or compensated”). The rules of balancing of accounts in
bankruptcy” (as Bell termed it in his Commentaries on the Law of Scotland and on the Principles
of Mercantile Jurisprudence, 7th McLaren ed, 1871, vol 2, p 118) are derived from the common
law and represent, in effect, a permissible relaxation by the Court of the strict requirements of
the 1592 Act in the exercise of an equitable discretion according to the circumstance of the
case (see eg Ross v Ross (1895) 22 R 461 at 464-465 per Lord McLaren). In current practice, it is
sometimes referred to as “insolvency set off”. However described, it is “an equitable
adjustment of mutual debts and credits, to avoid manifest injustice”: per Lord Hope in
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Heritable Bank plc v Landsbanki Islands HF [2013] UKSC 13; 2013 SC(HL) 201 at paragraph 39.
“Set off” is not a term of art in Scots law (though it is in England, with its own rules), but
appears to be used by the parties as shorthand covering both compensation and balancing
accounts in bankruptcy. Reference should also made be to Lord Rodger’s typically erudite
and illuminating discussion of retention and retention for the purposes of compensation
(“retention-compensation), albeit that discussion was in a non-insolvency context: see per
Lord Rodger in Inveresk plc v Tullis Russell Paperwork Ltd [2010] UKSC 19; 2010 SC(UKSC)
1056 at paragraphs 70 to 107. In that discussion, Lord Rodger distinguished between
retention (as the withholding of performance) and retention-compensation (ie retention or
withholding of payment with a view to preserving compensation or set off in order to
extinguish the sum set off): see ibid at paragraph 78 and Goudy, Law of Bankruptcy, at
pp 550-551. What the pursuer seeks to do is akin to the latter: to withhold payment of the
outstanding settlement sum to enable this to be set off against (and thereby extinguish pro
tanto) the unpaid balance, once the debtor’s discharge from that liability is reduced and once
the requisite amendment is made in the payment action .
[104]       The pursuer’s position was that the requirement “to plead” compensation was a
requirement only when one was litigating directly about the two claims to be set off. It
submitted that in this context, “pleading” a balancing of accounts in bankruptcy should be
regarded as no more than a requirement that it activelybe requested by the pursuer
because it will not operate automatically. The pursuer submitted that in a standard
insolvency setting there was no need to lodge formal “pleadings” with the insolvency
practitioner but rather bring to his or her attention that there is a mutuality of debts and that
set off ought to be applied. Here, the pursuer had sought a balancing of accounts since the
discovery of the debtor’s PPI claim.
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[105]       In relation to the alternative forum of the Trust Deed process, the pursuer accepted it
was possible for a trustee to be appointed formally to carry out the setting off, but it is
submitted that this is not required in this case. It submitted that there is no calculation to be
carried out. The practical effect (indeed, it submitted the total effect) of the proposed set off
would be to prevent the pursuer’s losses, caused by the debtor’s insolvency, from being
compounded by requiring the pursuer to pay over further sums to the debtor by way of the
outstanding settlement sum. The imposition of a trustee would serve only to increase the
administration costs the trustee would need to be paid and thus would further reduce
the sum that could be offset by the pursuer against its losses. The pursuer’s intention is that
the order to be granted by the Court will have the effect of reducing the discharge of the
debtor to the extent necessary and bringing about a balancing of accounts. The pursuer’s
position was that nothing further is required.
(b) The consequences flowing from the requirement that compensation as a set off must be pleaded?
[106]       I do not accept the pursuer’s submissions on this point. It is a recognised feature of
compensation, and appears implicit in the balancing of accounts in bankruptcy, that the plea
of compensation (or the equivalent for a balancing of accounts) must be pled before it can be
given effect to: see the discussion of compensation in Gloag, On Contract at p 644 under the
rubric “Does not Operate ipso jure”. That this is a requirement is at least implicit in the
discussion of balancing of accounts in bankruptcy, and flows from the Court’s equitable
control over its application (on which, see per Lord Hodge in Integrated Building Services
Engineering Limited (t/a Operon) v Pihl UK Ltd [2010] CSOH 80 at para 25). The Court
exercises its control, either by sustaining plea of compensation (with the effect of
extinguishing that liability) or permitting the balancing of the accounts in bankruptcy (and
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for which the Court may permit a party to retain a liquid sum for that purpose, as it did in
Ross, ibid). This is to be contrasted with the position in English law, where set off operates de
jure. That is not the position in Scots law. If it is correct that any balancing of accounts must
be pled, then there must be an extant forum in which it is possible to do so . In the
circumstances of this case, this could either be in the payment action (assuming amendment
is allowed to substitute the pursuer for Group as the defender and to include relative
averments and a plea), or by a trustee in an insolvency process giving effect to this in
adjudicating on a creditor’s claim (including the creditor’s assertion of a balancing of
accounts). In respect of the debtor, that insolvency process is the Trust Deed process.
[107]       While the pursuer’s desire is to avoid further procedure, I do not accept that that is
correct or competent as a matter of procedure to effect, or to enable the giving of effect, of
the desired balancing of accounts simply by the pursuer “actively requesting” it. At the very
least, RBS (or the pursuer, as the successor to RBS) would require to reformulate its claim in
the Trust Deed process (ie by reducing it, after deduction of the outstanding settlement sum
from the unpaid balance) or the outstanding settlement sum would form part of the assets in
the Trust Deed process and which the trustee would apply in part-satisfaction of RBS’s
claim. On either scenario, the trustee would require to adjudicate on any reformulated claim
by RBS (including its assertion of set off) or by setting off the unpaid balance (for which the
debtor would have been rendered liable anew as a consequence of the partial reduction of
the discharge) against RBS’s original claim.
[108]       However, in my view, a more fundamental difficulty presents itself. The pursuer has
failed fully to address the con sequences of even a partial reduction of the discharge on the
debtor. It would place the debtor in a highly irregular position from which it would be
difficult for her to extricate herself. While reduction of the discharge would not render the
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debtor apparently insolvent (which would arise on the granting of a trust deed), she would
nonetheless be returned to a state of insolvency as the undischarged granter of the Trust
Deed. This may entail possible adverse consequences for her crediting rating and other
financial commitments. Furthermore, as the effect of the partial reduction of discharge
rendered her liable for the unpaid balance (as this is a necessary antecedent to any balancing
of accounts), she would remain liable for the lesser amount of the unpaid balance remaining
after set off of the outstanding settlement sum. This is because a discharge only relieves the
debtor of liability; it does not extinguish the underlying debt. Even if the pursuer effected a
balancing of accounts, meaning that it could apply the outstanding settlement sum to reduce
the unpaid balance by a like amount, the debtor would remain undischarged in respect of
the lesser amount of the unpaid balance. That liability is not insubstantial (being in excess of
£15,000). Strictly speaking, any asset the debtor acquired after the grant of the Trust Deed
could be applied as acquirenda to satisfy that sum. Critically, and in contrast with the
position of a debtor in a sequestration, the debtor would not be able to rely on any automatic
discharge. In the absence of reduction of the trustee’s discharge, and the Trust Deed process
being revived in some way, there would be no trustee appointed in respect of the debtor’s
estate who could grant her a discharge of new in respect of that part of the unpaid balance
for which (as a consequence of the partial reduction) she remains liable.
[109]       I have no doubt that, if the case merited it, a means could be found to overcome the
procedural issues just noted. (Indeed, the pursuer might itself discharge the debtor from the
lesser amount of the unpaid balance, after it was reduced (ie extinguished) pro tanto by the
set off of the outstanding settlement sum.) The cases in which the Court has considered how
to achieve restitutio in integrum, which is often a condition of the grant of reduction, are
redolent of the Court exercising its discretion pragmatically and flexibly to fashion a remedy
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to achieve a sufficiently restorative state of affairs: see, eg, cases such as Spence v Crawford
1969 SC (HL) 52, discussed in Somerville v 1051 GWR Limited [2019] CSOH 61 at paragraphs
33 to 37. However, in my view, this is not the case in which to do so.
[110]       I stress that I do not determine this case as a question of competency. I do not accept
the debtor’s characterisation that what the pursuer seeks to do involves an impermissible
refashioning of an insolvency regime. My decision in this case should not be construed as
necessarily precluding the prospect in other cases, that it would be appropriate to reverse a
debtor’s discharge, even if there are other creditors. In other words, I do not believe that in
circumstances such as have occurred in this case that “the law is powerless to grant a
remedy” (per Lord Reed in Dooneen, quoted at para [11], above). In my view, there is
nothing inherently incompetent in seeking reduction of a debtor’s discharge in an
insolvency process, so long as the discharge was given effect in a procedurally competent
manner, was not prejudicial to the bona fide rights of third parties, that the parity of
treatment of creditors in was preserved and the other rules governing reduction and retitutio
(where it arose) could be applied.
[111]       That said, I note that it has long been a feature of personal insolvency procedures in
Scotland to discharge a debtor of her pre-insolvency debts and thereby enable her to rebuild
her life free of them. (The history of that salutary development is traced in “Insolvency” by
Prof Gibb in “The Introduction to Scottish Legal History”, The Stair Society, volume 20.) I
return to the question of the impact on the debtor if partial reduction is granted. The
pursuer’s contention is that partial reduction of the discharge would put the parties in the
position they would have been but for the trustee’s mistake (see para [92(3)], above). While
on a superficial level that is correct, it fails to take into account the passage of time and the
disruption to a settled state of affairs. A very considerable amount of time has passed since
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the debtor was discharged, more than six years ago, from an insolvency procedure
commenced 14 years ago, in respect of debts incurred more than 20 years ago. For most of
the last 7 years she has been embroiled in the payment action which has been through two
successive levels of appeal and in which the Supreme Court has recently refused to entertain
it as a third-level appeal. If the pursuer succeeds in this action, further amendment in the
payment action is proposed. The debtor’s witness statement was eloquent of the misery
caused by the effect of prolonged litigation has had on her. The pursuer’s rationale in
running this case was that it was a test case to obtain a ruling on the issue raised in Lord
Reed’s coda to Dooneen. It has achieved an answer to the issues it wished to litigate. The
amount of the outstanding settlement sum is paltry from the pursuer’s perspective and in
proportion to the legal fees likely to have been incurred. This is not an insignificant sum for
the debtor. There will be clear adverse impacts on her, and, on the pursuer’s approach, no
obvious means to alleviate them. Collectively, these factors provide cogent reasonsto
refuse the reduction sought. I would regard it as bearing unduly harshly on the debtor , or it
being “unjust and inconvenient” in this case, to grant a partial reduction of her discharge. In
the whole circumstances, and in the exercise of my discretion, I refuse the remedy sought.
The third core issue: Waiver, personal bar, and mora, taciturnity and acquiescence
[112]       In light of my decision on the fourth core issue, I do not need to consider various
pleas in bar invoked by the debtor. They were not pressed with any vigour. (The debtor did
not maintain the plea of personal bar in submissions.) In any event, the debtor advanced
these pleas by focusing on the absen ce of a challenge to the discharge until 2020. That may
be so, but that is to ignore that the reduction of the discharge is simply a means to the
pursuer’s end, which is to withhold payment of the outstanding settlement sum in order to
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set that off against the unpaid balance. The pursuer (and Group) have been unwavering in
that purpose. Looking at those circumstances in the round, it cannot be said that the
pursuer (or Group) have waived any right to do so (even if they have changed tack about
the means to do so) or have been taciturn in its intention to do so. On the materials I have
considered, I would not have found any of these pleas established.
[113]       I advised parties of my decision at the By Order on 5 December. I was invited to
reserve the question of expenses as well as question of the precise terms of the interlocutor.

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