PPI claims survive completion of IVA for creditors (Green v Wright)

The Court of Appeal has determined issues surrounding the completion of individual voluntary arrangements (IVAs) and the impact of such completion on the recovery of the proceeds of a debtor’s payment protection insurance mis-selling claim which was unrecovered (and unknown) prior to the completion. Paul French of Paul.French.Insolvency, who acted for the IVA supervisor, reviews the Court of Appeal’s decision.

Before it’s here, it’s on Lexis®PSL. Click here to take a free trial.

Original news

James Green (former Supervisor) v James Wright [2017] EWCA (Civ) 111, [2017] All ER (D) 13 (Mar)

The Court of Appeal has overruled the decision of HHJ Hodge QC (sitting as a judge of the High Court) ([2015] EWHC 993 (Ch), [2015] BPIR 806) which affirmed the decision of Deputy District Judge Langley sitting in the County Court at Burnley that the proceeds should be made available to the debtor, rather than his creditors in accordance with the terms of the IVA as approved. The Court of Appeal determined that the completion of the IVA, and the issue of a certificate of completion, had no effect upon the availability of the proceeds to the creditors bound by the IVA.

What is the background to this case?

On 31 August 2007, the debtor proposed an IVA incorporating the R3 standard conditions (version 2) (the standard conditions). On 9 October 2007, the proposal was approved, with 30 modifications. The debtor complied with his obligations under the terms of the IVA, in so far as he paid over the proceeds of an ISA and made the promised monthly contributions, as varied downwards during the course of the IVA. On 17 January 2013, the former supervisor reported to the creditors that the debtor had fully complied with his obligations under the terms of the IVA and issued a certificate of due completion (the completion certificate).

After completion of the IVA, the debtor sought to recover compensation for mis-sold PPI policies, from both RBS and Barclays. Consequently, towards the end of 2013, the former supervisor received a payment from Barclays (£17,556.74) and RBS (£6,950.12) in respect of that compensation.

As between the former supervisor and the debtor it could not be agreed whether these proceeds should be paid into the IVA—and thus made available to the debtor’s creditors in accordance with the terms of the IVA—or be made available to the debtor. On 25 July 2014, the former supervisor issued an application for directions as to whether the proceeds be paid into the IVA or paid to the debtor.

By an order made on 10 October 2014 Deputy District Judge Langley ordered that the sums be paid to the debtor, relying upon the fact that the completion certificate had been served to conclude that, pursuant to paragraphs 9(2) and 27(3) of the standard conditions (as modified), all debts owed by the debtor had been extinguished, so that there was nothing left for the former supervisor to do.

On appeal, HHJ Hodge QC dismissed the former supervisor’s appeal, holding:

  • the decision in In re NT Gallagher & Son Limited [2002] EWCA Civ 404, [2002] All ER (D) 396 (Mar), where the Court of Appeal analysed what should happen to the trusts of assets held in an IVA when it was terminated by the bankruptcy of the debtor was of no assistance, as it applied only to the ending of an IVA by bankruptcy, not by the issue of a completion certificate
  • paragraph 9(2) of the standard conditions had a wide meaning, to the effect that once a completion certificate was issued, the debtor’s debts were released for all purposes, so that thereafter there were no longer any debts of the debtor, no creditors and therefore no purposes of the IVA for which the supervisor could realise the unrealised asset or the purposes of distributing a further dividend
  • while paragraph 27(3) of the standard conditions (as modified) was of no direct application, it was suggestive of the construction of paragraph 9(2) in such terms as outlined above

HHJ Hodge QC ordered that the funds be paid to the debtor. The supervisor appealed. Lewison LJ, when granting permission to appeal on paper (which was required for the second appeal) also, on the supervisor’s application, made an order staying the effect of HHJ Hodge QC’s order; the supervisor did not want to have to pay over the funds, only to find that the debtor had spent them in the event of a successful appeal.

For further reading on the decision of HHJ Hodge QC, see blog post: Setting a precedent for IVAs and PPI refunds.

What were the legal issues that the Court of Appeal had to decide?

The issue was whether the trust in favour of creditors constituted by the IVA survived the issue of the completion certificate, so that property of the debtor—that was subject to the trust but was discovered only after the issue of the certificate—remained subject to the trust once it was discovered. Resolution of this issue turned on the proper construction of the terms of the IVA, in the context of its factual background, the relevant statutory regime and applicable legal principles.

Notably, it was agreed between the parties that this being an ‘all assets‘ IVA, rather than a ‘defined assets‘ IVA the funds representing the proceeds of the PPI mis-selling claim, although not mentioned in the proposal, were, in the absence of anything else, arrangement assets, whether they were known or unknown—the issue was the effect of the completion certificate.

What were the main legal arguments put forward?

The starting point for the supervisor was the decision in Gallagher, which determined:

  • where an IVA provided for moneys or other assets to be paid to or transferred or held for the benefit of IVA creditors, that would create a trust of those moneys or assets for those creditors
  • the effect of the bankruptcy of the debtor on a trust created by the IVA would depend on the relevant provisions of the IVA
  • if the IVA provided what was to happen on bankruptcy (or the failure of the IVA), effect had to be given thereto
  • if the IVA did not so provide, the trust would continue notwithstanding the bankruptcy or failure and had to take effect according to its terms, and
  • the IVA creditors could prove in the bankruptcy for so much of their debt as remained after payment of what had been or would be recovered under the trust

Therefore, since on its terms there was no termination of the trust of the arrangement assets on the issue of a completion certificate, the trusts of the arrangement assets continued post-completion, so that the PPI mis-selling claim proceeds should be paid into the IVA.

The debtor’s argument was the position as held by HHJ Hodge QC, namely that the effect of the release of the debtor from his debts as a result of the service of the completion certificate meant that his debts were extinguished, and, since there would then be no creditors, there could not be any beneficiaries of the construing trust, which meant that there could have been no continuing trust after completion in accordance with the position in Gallagher.

What did the Court of Appeal decide and why?

David Richards LJ concentrated on the underlying purpose of the IVA in this case. In return for a moratorium on the enforcement by creditors of their claims, including by way of bankruptcy proceedings against the debtor, and in return for being able to retain his matrimonial home and car, the debtor had agreed to make available to the creditors all the other property that would have fallen into his bankruptcy estate on a bankruptcy commencing on the same date as the IVA and to make contributions from income over a period of five years. The mis-selling claims, although unknown to the supervisor and creditors and maybe also to the debtor, were capable of being made at that date and were therefore in principle available to creditors. If the debtor had become bankrupt, they would have remained part of his bankruptcy estate until realised and distributed among creditors or until disposed of by the trustee in bankruptcy. This would not be affected by the debtor’s discharge from bankruptcy.

His lordship did derive assistance from Gallagher—if a fully constituted trust was to terminate, there had to be provisions requiring it to do so and specifying what was to happen to the trust assets.

The terms of the IVA that did provide for the trust to terminate only applied where there had been a certificate of termination, a bankruptcy order or upon the death of the debtor. None of these applied. There was no comparable provision that the trust was to cease on the issue of the completion certificate.

Upon the issue of the completion certificate, as in bankruptcy, the debts of the debtor, owed to the creditors as at the commencement of the IVA, did not disappear—creditors were defined by reference to whether there was a debt or liability, or other obligation, owed to them as at the commencement of the IVA. The effect of the release of the debtor upon the issue of the completion certificate was not the same as the extinction or discharge of the debt, particularly in a bankruptcy context. The release of the debtor meant that he ceased to be under any liability in respect of the debt and neither he nor his property could be proceeded against in respect of it. The position was directly analogous to the position in a bankruptcy, and deliberately so, given that an IVA was an alternative to bankruptcy; the release of a bankrupt from his debts upon his discharge had no effect on the trustee’s functions and the bankruptcy debts continued to exist for the purposes of proof in the bankruptcy and payment out of the realisation proceeds of the assets subject to the bankruptcy. The effect of the provisions of the IVA was the same.

It is notable that David Richards LJ specifically stated that, in his conclusions, he derived no assistance from the:

  • guidance note on PPI mis-selling claims issued in April 2013, and revised in February 2014, or
  • Scottish decisions in Donnelly v Royal Bank of Scotland [2106] SC GLA 13, [2016] BPIR 606 (the appeal in which, Donnelly v Royal Bank of Scotland [2017] SAC (Civ) 1, was handed down after the hearing in Green v Wright) and Dooneen Ltd v Mond [2016] CSOH 23

To what extent is this judgment helpful in clarifying the law in this area?

The judgment is determinative on two principal issues.

First, there are a huge number of historic IVAs prepared on an ‘all assets‘ basis where a PPI mis-selling claim was unknown at the outset of the arrangement. This case confirms that not only is the claim an arrangement asset, but more importantly that—in the absence of anything else—it remains so even if discovered after the arrangement has come to an end upon the issue of a competition certificate.

Essentially, in money terms, it means that an asset that a debtor has, perhaps unknowingly, promised to his or her creditors, should be made available to his or her creditors through the arrangement even if it is discovered after the completion of the IVA, when the debtor may have thought that they had done everything required by the terms of the arrangement. Bluntly, there is no windfall for debtors, and, rather importantly, the effect of the judgment means that there can be no encouragement to debtors to ensure that unknown arrangement assets that are discovered during the term of the arrangement remain hidden.

Second, the effect of the judgment is that, while on the facts, it relates to an unknown PPI mis-selling claim, the principles apply in relation to any other kind of asset.

Now that the law is clarified on this area, the numerous IVAs that have been held open can be completed and closed. Since the decision of HHJ Hodge QC, many IVAs have been kept open by supervisors for fear that, if a completion certificate were served, the right to recover any unrealised arrangement assets might be lost. The position now is that these IVAs can proceed to completion.

What practical lessons can those advising in this area take away from the case?

There are lessons to be learned by both supervisors and debtors.

The first is that, as in every case, the particular terms of the IVA have to be considered in detail. It is not necessarily the case that the result in Green v Wright will necessarily automatically apply in every IVA. Despite the adoption of industry standard conditions, whether the R3 standard conditions or the protocol standard conditions, there are many bespoke IVAs prepared on different terms. And, in many cases, there are modifications which deal with when an IVA is to be terminated and what should occur upon such termination, in particular promulgated by HM Revenue & Customs.

There are also ‘defined asset’ cases where the debtor has only promised that particular assets should be made available as arrangement assets, such as excess monthly income and a portion of the equity in the matrimonial home. While on the surface a PPI mis-selling claim would not then be an arrangement asset (unless specifically included) the proceeds of it might sensibly be used as the basis of a full and final settlement payment, bringing an early end to the IVA by way of a variation.

Second, debtors have to appreciate that the express terms of the IVA have to be complied with. If an asset has been promised to the creditors under the terms of the IVA, the service of a completion certificate on the basis that all other obligations have been complied with does not relieve the debtor of the obligation to contribute an unrealised arrangement asset after completion. However harsh this might be for a debtor, it should be noted that, in the absence of anything else, a supervisor will not commonly have the power to waive collection of an asset which has been agreed as an arrangement asset—usually that will have to be dealt with by way of a variation of the terms of the IVA.

However, as regards PPI mis-selling claims in particular, one issue which did not arise in Green v Wright was set-off, and the extent to which the debtor’s claim against the bank might be set off against the bank’s claim in the IVA, so that there might not be any actual proceeds of the PPI mis-selling claim to be realised. While this has been considered in Scotland in the context of a trust deed, rather than an IVA (see Donnelly, referred to above), this has yet to be considered by the court in this jurisdiction, whether on the R3 standard conditions, the protocol standard conditions or more generally. It is commonly thought that set-off does apply, but some take the view that it does not. As with many issues involving IVAs, first recourse has to be to its express terms. That issue will have to be determined when it arises in another case.

Finally, supervisors should remain vigilant in identifying the assets of the debtor, especially in ‘all asset‘ cases. In many cases the supervisor only becomes aware of the fact of the PPI mis-selling claim when the proceeds are realised and paid to the supervisor, sometimes during the duration of the IVA but commonly after completion. Supervisors should ensure that debtors are frequently asked to update their ongoing asset position during the life of the IVA.

Case details

  • Court: Court of Appeal, Civil Division
  • Judges: David Richards and Irwin LJJ
  • Date of judgment: 1 March 2017

Paul French is an independent barrister specialising in personal insolvency. He represented the supervisor in Green v Wright in the High Court and in the Court of Appeal. He is the general editor of Lawson on Individual Voluntary Arrangements (Jordans) and an editor of the Bankruptcy and Personal Insolvency Reports (Jordans). He can be contacted at paul.french.insolvency@gmail.com or via Twitter.

Interviewed by Stephen Leslie.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a Lexis®PSL subscriber, click the link below for further information:

How does a debtor enter into an individual voluntary arrangement (IVA)?

What effect does a bankruptcy order have on an individual voluntary arrangement, its assets and its creditors?

Not a subscriber? Find out more about how Lexis®PSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency. First published on Lexis®PSL Restructuring and Insolvency.

Relevant Articles
Area of Interest