Dooneen Ltd (t/a McGinness Associates) and another v Mond

Under a protected trust deed providing for discharge by composition, the trustee determines when a distribution is final, subject to fiduciary duty. That determination is definitive even if an asset belonging to the trust estate was unknown and consequently omitted. The final distribution terminates the trust, discharges the debtor and reinvests the debtor in any unrealised estate.

A statutory rule preserving sequestration for the distribution of unknown assets does not govern a voluntary trust deed whose terms provide for discharge by composition. A definitive determination may remain subject to reduction for mistake, but the court did not decide the availability or conditions of that remedy.

A debtor granted a protected trust deed conveying his estate to a trustee for his creditors. The deed provided that the trust would terminate upon the final distribution of the estate. The trustee paid what he described as the first and final dividend, obtained his discharge and registered the distribution.

Several years later, compensation became payable for payment protection insurance mis-sold before the trust deed. The parties accepted that the right to compensation had originally formed part of the trust estate. The debtor and his agent sought declarator and payment on the basis that the trust had ended before the compensation was discovered.

The Lord Ordinary found for the debtor and agent in [2016] CSOH 23. The Inner House affirmed that decision in [2016] CSIH 59. The central issue was whether a distribution declared final by the trustee remained final despite the omission of an unknown trust asset.

1. The appeal was dismissed unanimously. Lord Reed, with whom Lord Kerr, Lord Hodge, Lady Black and Lord Briggs agreed, held that the distribution declared final by the trustee terminated the trust. The debtor was discharged and the former trustee had no entitlement to the subsequently discovered compensation.

2. The trust deed effected a composition between the debtor and the acceding creditors. The composition was conditional upon final distribution, subject to the contingencies stated in the deed. Acting in accordance with his fiduciary duty to the creditors, the trustee was responsible for deciding when that distribution should occur.

3. “Final distribution” did not mean a distribution of every asset which had in fact vested, including assets unknown to the trustee. That construction could leave the trust of indeterminate duration. It would also create continuing uncertainty about the debtor’s discharge, the status of transactions conducted after apparent discharge and the reliability of the public Register of Insolvencies.

4. The deed’s incorporation of section 32 of the Bankruptcy (Scotland) Act 1985 to define the trust estate did not incorporate section 54 as a rule fixing discharge three years after commencement. The deed itself governed discharge and termination. Its provisions allowed both to occur more than three years after commencement.

5. Whyte v Northern Heritable Securities Investment Co Ltd was distinguished. It concerned statutory sequestration under materially different provisions of the Bankruptcy (Scotland) Act 1856. Those provisions vested property absolutely and irredeemably and required distribution until all funds had been divided. The present deed contained no comparable provisions and discharged the debtor through what was, in effect, a composition. Lord Watson’s use of “final distribution” in Whyte explained his terminology rather than defining a term of art.

6. The trustee’s determination was therefore definitive, subject to the possibility that it might be reduced. The court identified a possible issue concerning reduction for a determination made in ignorance of a critical consideration. As the parties declined to address that issue, the court did not decide whether reduction was available or upon what terms.

1. United Kingdom Supreme Court: In [2018] UKSC 54, unanimously dismissed the trustee’s appeal and affirmed that the trust ended upon the distribution declared final.
2. Inner House of the Court of Session: In [2016] CSIH 59, reported at [2017] SCLR 199 and [2017] BPIR 380, upheld the Lord Ordinary’s decision. It held that a distribution declared final by the trustee terminated the trust despite an unknown asset.
3. Outer House of the Court of Session: In [2016] CSOH 23, the Lord Ordinary found in favour of the debtor and his agent.