Well, I figured if you couldn't get it to work in my scene, then neither could I.
So I picked up another sword, imported it into a clean project, and started again. Now they react really violently to eachother. Unless key the position of the Sheath.

The first 2 frames look good"ish", but then the collision seems to stop working, any idea?

file can be found here:
https://www.mediafire.com/?y03bz4ersov73gc