When Is a Bankrupt Estate Finally Distributed? – Supreme Court Ruling

When can a bankrupt’s estate be said to have been finally distributed? The Supreme Court has decisively answered that question, at least under Scottish law, in enabling a former bankrupt to retain the majority of the £56,000 compensation he received after being mis-sold payment protection insurance (PPI).

Pursuant to the Bankruptcy (Scotland) Act 1985, the debtor had entered into a trust deed for the benefit of his creditors. The deed provided that it would be terminated on the occurrence of certain events, including a final distribution of the debtor’s estate. His trustee in due course paid a first and final dividend to creditors, representing 22.41 pence in the pound.

Some years later, however, the debtor received compensation in respect of PPI that had been mis-sold to him prior to him signing the deed. When he paid the dividend, the trustee had been unaware of the mis-selling or that the debtor might be entitled to compensation.

In those circumstances, an issue arose as to whether the money should pass to the trustee, for the benefit of creditors, or to the debtor and a company that had acted as his agent in claiming the compensation. The debtor had assigned to the company 30 per cent of any compensation he received.

The issue hinged on whether the debtor’s estate had been finally distributed on payment of the dividend. In a decision that was subsequently upheld by the Inner House, the Lord Ordinary found in favour of the bankrupt and the company, enabling them to divide the compensation between them.

In dismissing the trustee’s challenge to that ruling, the Court rejected arguments that a final distribution can only occur when all of a bankrupt’s assets are distributed, or all creditors are paid in full. Such a construction would have consequences that had not been envisaged by the bankrupt when he signed the deed.

The Court noted that, if the trustee’s arguments were correct, one could never be certain whether any distribution was in fact final. The duration of the deed would be potentially without limit and it would be impossible for the debtor, or anyone wishing to do business with him, to be certain that he had been finally discharged from bankruptcy.