PART 5
DECEMBER 2012
RIGHT OF SET-OFF
31.9A.78 Right of set off - overview
There is an automatic right to set-off any compensation in relation to mis-sold PPI against any provable debt held by the lender at the date of a bankruptcy order [note 1]. This is particularly relevant to an outstanding unsecured debt but will also apply to any shortfall in respect of secured debts (see paragraphs 31.9A.85 to 86).
31.9A.79 Right of set-off is automatic
Set-off should be automatically applied where at the date of the bankruptcy order, the financial institution liable to pay compensation also holds a provable debt in the bankruptcy proceedings.
By way of example, if the financial institution is liable to pay compensation of £2,000 but holds a provable debt of £5,000, the institution’s claim is reduced by means of set-off to £3,000 (£5,000 - £2,000).
31.9A.80 Compensation received, set-off not applied (amended August 2013)
Where a financial institution has paid out or is offering compensation in relation to PPI sold in relation to an unsecured debt, without first having acknowledged their right to apply set-off [note 1], the official receiver should write to the financial institution concerned seeking to confirm that they wish to waive their statutory right of set-off, see paragraph 31.9A.79. Any letter should stipulate that where no reply is received within 28 days this will be interpreted as an agreement that set-off is waived.
OR Business Delivery, Operations have attempted to ascertain each lenders position regarding the right of set-off, and a list of the replies is available on the PPI guidance section of the Technical Section intranet site here. A list of financial institutions PPI departments can also be found on the Technical Section intranet site.
31.9A.81 Lenders advised by Financial Ombudsman
The Financial Ombudsman has generally advised lenders to compensate consumers to put them back into the position they would have been in had the mis-selling of a PPI policy not occurred. This means that in a non-insolvency position, financial institutions are not applying set-off with compensation against any outstanding debts.
31.9A.82 Action where cheques in respect of PPI compensation received by official receiver (amended August 2013)
Where the official receiver receives unsolicited cheques (or an offer of compensation) from a financial institution in relation to PPI, held by a bankrupt, then the official receiver should first consult the list of financial institution’s responses as to whether or not they intend to apply set-off, which can be accessed here.
If the financial institution is not listed, an enquiry letter should be sent (see paragraph 31.9A.80). If the financial institution replies that they will not be applying set-off, then the cheque may be banked in full. That response may also be applied to future cheques from that same financial institution.
Where there is no outstanding debt or mutual dealings at the date of the bankruptcy order, then there is no right of set-off, and any further enquiries will not be necessary, for example if the debt has been repaid prior to bankruptcy, or if the debt has been sold on to a third party (see paragraph 31.9A.83).
31.9A.83 Loan sold on by financial institution
If the lender sells or assigns the debt to a third party prior to the date of the bankruptcy order, this ends the right of set-off as there is no mutuality at the date of the bankruptcy order. This is because once the debt is assigned or sold, the debt is outstanding to a different party (the assignee) to that owing compensation (the lender).
31.9A.84 Benefit to the estate to be considered when making PPI mis-selling complaint on unsecured loan
Where a compensation payment is set off against part of an unsecured provable bankruptcy debt, this will result in the creditor having a reduced claim in the bankruptcy proceedings. Where a bankruptcy estate has other assets and a dividend payout is possible, the official receiver should consider pursuing the mis-sold PPI complaint as an increased dividend will result from the reduction of the total provable debts.
31.9A.85 Right of set-off in relation to secured debt
Where the financial institution has a secured debt, the statutory right of set-off applies only to the portion of that debt which is provable in the bankruptcy proceedings, i.e. the unsecured shortfall.
When a PPI complaint is upheld the secured loan will be rearranged by writing off all amounts that remain outstanding in relation to the borrowing for the PPI premium, including any interest and charges, so that in future the number and level of outstanding repayments against the loan (and any charges and fees) are the same as if bankrupt taken the original loan sum without the PPI cover.
Additionally, where a PPI complaint is upheld, instead of paying the amount due in compensation in respect of PPI payments already paid and interest on those payments to the official receiver as trustee, the secured creditor may elect to apply statutory set-off by adjusting the outstanding loan balance to account for the compensation payable. The official receiver as trustee maybe able to object to the application of set-off if there is no provable debt (shortfall), to set-off against.
The official receiver should consider carrying out a further income and expenditure assessment of the bankrupt as it is possible that the bankrupt’s monthly payments on the secured loan may have decreased as a consequence of the successful PPI complaint, and therefore a new income payments agreement may be appropriate or it may be possible to increase the payments made by the bankrupt on a current one.
Additionally, as a result of the adjustment of the secured loan, the value of the bankrupt’s interest in the property will be increased and where appropriate should be considered for realisation by the official receiver in his/her capacity as trustee of the bankrupt’s estate.
31.9A.86 Adjusting a secured debt to account for PPI compensation
Where a secured creditor elects to adjust the outstanding loan balance instead of paying compensation for PPI mis-selling (see paragraph 31.9A.85), the loan would be readjusted by:
(a) Writing off all amounts outstanding in relation to the PPI borrowing, including interest and charges.
(b) Calculating the amount already paid in relation to the PPI borrowing, including interest charged (less any premium refunded to the bankrupt or estate when the policy was cancelled).
(c) Adding interest to the amount at (b) from the point that payments were made to the firm by the bankrupt to the point that the firm settled the complaint.
(d) The amounts at (b) and (c) will then be deducted from the loan balance going forward; as they were previously paid and credited to a mis-sold PPI policy which has since been cancelled.
31.9A.87 PPI policy - sold through a broker or agent
Where a PPI policy has been sold through a broker at the same time as a loan was obtained (whether secured or unsecured), it is possible that the complaint for mis-selling will be against the broker rather than the loan provider. If this is the case, then the right of set-off will not apply, unless the broker also has a provable debt in the bankruptcy proceedings.
Where a secured loan has been taken out, the bankrupt will probably continue to repay the loan granted to purchase the PPI as well as the main loan obtained (see paragraph 31.9A.5). No allowance from the PPI compensation should be made by the official receiver for any loan repayments made by the bankrupt after the date of the bankruptcy order.
31.9A.88 Where subsequent loans taken out through a broker
If a bankrupt has obtained a loan and PPI, and that loan was subsequently repaid by a later loan with the same financial institute, but obtained through a broker, then it is likely that mutuality still exists sufficiently for set-off to apply [note 1].
31.9A.89 Set off still applies when loans are consolidated
Where a loan has been taken out and PPI purchased and that first loan is consolidated, the right of set-off will still apply if the same loan company is a creditor at the date of bankruptcy order [note 1].
31.9A.90 Set off still applies where a break in mutual dealings
Mutuality in dealings between a bankrupt and a financial institution is likely to exist throughout any banking related dealings, even if some time goes by without the bankrupt owing the financial institution, e.g. if a loan is repaid over time then a further loan is obtained several months later. The PPI policy does not need to have been purchased in relation to a particular loan outstanding at the date of the bankruptcy order.
[Back to Part 4 – Unsecured creditors] [On to Annex B]