Judgments - Burnett's Trustee (Respondent) v Grainger and another (Appellants)

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    27.  The protection which the letter of obligation provides flies off after the expiry of the period for the recording of the disposition which it specifies. From then on a disponee who delays or omits to record the disposition does so at his own risk. As Bell, Commentaries, vol i, 21, note 1,explains, with reference to the case of Bell of Blackwoodhouse v Gartshore, 1737 M 2848:

    "any doubts which were entertained before the above decision are now held to be settled; and according to the doctrine in this case of Bell, the law is laid down by Erskine, that no conveyance of a personal right to lands can so divest the disponer as to prevent him from granting a posterior deed that may, by prior sasine, be made the preferable. Ersk ii, 7,26."

A bona fide purchaser is protected by the principle of good faith against any subsequent purchaser of the land who, in the knowledge of the prior sale, wins the race to the register: Rodger (Builders) Ltd v Fawdry, 1950 SC 483. On the same principle, he is protected against an attempt by the seller to grant a subsequent standard security over the lands which he has purchased to a creditor who accepts the security in bad faith. But the general rule is that third parties are entitled to deal with a person who holds himself out as the owner of lands on the faith of the register. This rule applies not only to those who may wish to enter into voluntary transactions with the seller, but also - and here is the greater risk - to his creditors. The only way in which the disponee can be sure of preventing a third party, such as an adjudging creditor, from acquiring a real right to the lands which will prevail against his right is by registration: Young v Leith (1847) 9 D 932, 937.

Bankruptcy

    28.  The ultimate remedy for the creditors, if their debts are not paid, is to petition for the debtor's estate to be sequestrated. Section 31(1) of the 1985 Act provides:

    "Subject to section 33 of this Act and section 91(3) of the Pensions Act 1995, the whole estate of the debtor shall vest as at the date of sequestration in the permanent trustee for the benefit of all the creditors; and -

    (a)  the estate shall so vest by virtue of the act and warrant issued on confirmation of the permanent trustee's appointment; and

    (b)  the act and warrant shall, in respect of the heritable estate in Scotland of the debtor, have the same effect as if a decree of adjudication in implement of sale, as well as a decree of adjudication for payment and in security of debt, subject to no legal reversion, had been pronounced in favour of the permanent trustee."

    29.  What does section 31(1) of the 1985 Act mean when it says that the act and warrant shall have same effect as if a decree of adjudication in implement of sale, as well as a decree of adjudication for payment and in security of debt, subject to no legal reversion, had been pronounced in favour of the permanent trustee? Adjudication is the ordinary form of diligence for attaching heritable property: Goudie, p 531. It may be either for debt or in implement of an obligation. The purpose of the adjudication is to transfer a right of property in the subject adjudged to the creditor. The act and warrant is a statutory adjudication. It is equivalent to a conveyance of the lands to the trustee, to which he may complete title by registration of the act and warrant as if it were a conveyance or by using it as an assignation of an unrecorded conveyance if the debtor's title was uncompleted: section 31(3).

    30.  A decree of adjudication for payment and in security of debt is the penultimate step in the execution of diligence against heritable property. The final step is the presentation of the decree for recording or registration in the appropriate register. The rule is that the creditor attaches the estate of the debtor by an adjudication tantum et tale as it stands vested in him, and subject to all the conditions and qualities legally attaching to it: Graham Stewart, pp 128 (arrestment) and 606 (adjudication). But this does not mean that the creditor is liable for any personal obligations of the debtor relating to the property which has been attached. What it means is that he takes the heritable estate in which the debtor was infeft, subject to no limitation or burden which does not appear on the face of the records, and his moveable estate under such conditions only as qualify his real right, but free from all his personal liabilities: Mansfield v Walker's Trustees (1833) 11 S 813, 822-823 in the opinion prepared for the majority by Lord Corehouse.

    31.  Bell, Commentaries, i, 299, describes the rule more fully in this way:

    "The only general doctrine which appears to be safe is, that in all competitions the right of the general body of creditors, or of an individual claiming a preference, is to be regulated strictly according to the criterion by which real right is contradistinguished from personal, unless it can be stated either,

    1.  That there is a radical defect in the title by which the bankrupt holds, and on which the right of the general creditors must rest; or,

    2.  That his right is radically qualified or conditional, not absolute; or

    3.  That the acquisition of the property on the part of the bankrupt was accomplished by fraud, of which creditors cannot, without participating, take advantage."

    32.  As Bell, Commentaries, i 301, explains, the public registers have the effect of protecting both creditors and purchasers against such burdens and qualifications of the real right of a proprietor infeft as are not of the nature of a radical defect in the title. Personal qualifications which do not appear in the record are unavailing as real burdens on the property and are of no effect against third parties:

    "The question, however, must always return to this, What was truly the extent of real right in the debtor? And although he may be under a relative personal obligation, the real right legally constituted is that only which his sasine bears, and of which it gives assurance to the public; and accordingly, it has at last been held that such personal exceptions have no effect against creditors": Wylie v Duncan, 1803, M 10269.

    33.  Accordingly, it is no answer to a claim by a creditor who adjudges heritable property from his debtor that the debtor is subject to a personal obligation under an agreement entered into by him to convey that property to a third party acting in good faith and for full value. So long as the real right remains with the debtor, it is at risk of adjudication for payment and in security of debt at the instance of his creditors. Nor is the adjudging creditor bound by the debtor's personal obligation not to derogate from his grant. Erskine, II, i, 1 defines the real right as "the right of using and disposing of a subject as our own, except in so far as we are restrained by law or paction." At III, i, 2 he says that a real right "entitles the person vested in it to possess the subject as his own; or, if it be possessed by another, to demand it from the possessor, in consequence of the right he hath in the subject itself." The restraints that are binding on the debtor by paction, which prevent him from demanding the subjects back from the purchaser, are of no effect in a question with the debtor's creditors. If, after the disposition has been delivered but before it is registered, the estate of the seller is sequestrated and the trustee gets to the register first, the subjects will vest in the trustee as part of the seller's estate for the purposes of his bankruptcy: Burns, English and Scottish Bankruptcies (1913) 96 LQR 460, 463.

The tantum et tale rule

    34.  In Heritable Reversionary Company Ltd v Millar (1892) 18 R 1166, a decision of the Court of Session which was later to be reversed by this House, Lord McLaren delivered a powerful dissenting opinion. He said at p 1173 that, in the case of a bankrupt trustee whose estate was to be divided among his creditors, the property available for distribution would be the property which he held in his own right and that on proof that any property vested in him was trust estate it ought to be struck out of the sequestration. This, he explained, was the rule expressed in the maxim that creditors and adjudgers take the debtor's estate tantum et tale as it stands in his person. He distinguished the case of Wylie v Duncan 1803 M 10,269, where the bankrupt was under an obligation to reconvey the property to the seller on demand, on the ground that that was not a case of a trust qualifying the title of the trustee but was a case where the bankrupt had purchased the estate "out-and-out" and that the obligation to reconvey was purely personal.

    35.  When the case reached the House of Lords, Lord Watson observed that the doctrine of tantum et tale was of very secondary importance in a case where the question was whether the subjects in question were the property of the bankrupt at all within the meaning of section 102 of the Bankruptcy (Scotland) Act 1856: (1893) 19 R (HL) 43, 49. The appellants had not recorded the back-bond or declaration of trust which they had received in respect of their loan of part of the purchase price, and the disposition which they had granted to the bankrupt was absolute and unqualified. So the trust was latent, as it did not appear on the register. Nevertheless Lord Watson said that there was no doubt that the holder of the legal title was in reality a bare trustee, and that the person whom the whole beneficial interest belonged was the true owner: pp 46-47. The effect of the trust was that the apparent title did not, in the ordinary or any true legal sense, make the land the property of the person who held the title: p 49.

    36.  But Lord Watson's observation at p 48 that the doctrine of tantum et tale had no application to cases where the competition related, not to estate held by the bankrupt under a bare trust, but to estate of which he was the beneficial proprietor has to be read in its context. He was careful on the same page to distinguish the cases of Mitchells v Fergusson, 1781 M 10,296, Wylie v Duncan, 1803 M 10, 269 and Mansfield v Walker's Trustees (1833) 11 S 813, on the ground that they were cases where the creditors who had completed a feudal title by adjudication to lands of which their debtor was the beneficial owner and were in competition with others who had prior but merely personal rights to demand a conveyance from him. At p 51 he said:

    "I have already stated what I believe to have been the import of the judgment in Wylie v Duncan and similar cases, and I have only to remark further, that a personal obligation to convey heritable estate, undertaken by one who is the beneficial as well as the feudal owner, does not, according to the law of Scotland, denude him of his beneficial interest, or confer upon the person to whom it was contracted either the character or the rights of a trust beneficiary."

    37.  In Wylie v Duncan, 1803 M 10, 269 the claim against the trustee was based on a missive letter by which the bankrupt had bound himself to reconvey the subjects to Wylie. The personal obligation to which Lord McLaren in the Inner House (1892) 18 R 1166, 1173 and Lord Watson in the House of Lords (1893) 19 R (HL) 43, 48 referred was the obligation to reconvey. In Mansfield v Walker's Trustees (1833) 11 S 813 the bankrupt had undertaken to grant a bond in security of a loan over lands of which he was the proprietor. The description of the lands in the bond was of a part of the lands only, with the result that the security was inadequate. The question was whether the trustee was bound by the unfulfilled, and latent, obligation to grant a bond over the remainder. Here too the obligation was an obligation to convey.

    38.  In Mitchells v Fergusson, 1781 M 10,296, on the other hand, the argument proceeded on the assumption that this obligation had been performed as the disposition had been delivered to Fergusson: see the report of the case in Ross's Leading Cases, vol 3, 120, 122, where the argument for the Mitchells (the adjudger) was that the nature of feudal rights was such that they could not be affected, qualified or burdened by any personal deed and that a conveyance, so long as it continued personal, did not divest the disponee. The judges accepted this argument. Lord Braxfield in particular is reported at p 125 as saying that the reason why dispositions were not ordered to be recorded by the Act of 1661 was that they were "mere personal deeds". In the report of the case in Hailes' Decisions p 879, 880 the words attributed to him in this passage of his opinion are "Dispositions are not mentioned in the statute, for they do not affect the feudal right."

    39.  According to the same report at p 880 Lord Gardenston said:

    "I know no safety to the feudal law, unless you prefer infeftments; for otherwise an imperfect right would be better than a complete one. There is great danger in departing from this feudal principle, but none in adhering to it. The disponee is safe, unless he is supinely negligent; for an adjudication cannot be taken on a sudden, and without the knowledge of many."

In other words, if I may paraphrase these observations, safety lies in infeftment. It is up to the disponee, if he seeks safety, to present the deed for recording or registration in the appropriate register as soon as possible. It does not require more than ordinary diligence on his part for this to be achieved. Your Lordships were not referred to any case since that opinion was delivered which shows that Lord Gardenston's assessment of the position was inaccurate. In any event, as Bell, Commentaries, vol ii, 308 observes, any doubts that were cast on the soundness of that decision in Smith v Taylor, 18 December 1795, were removed by the opinions delivered in Buchan v Farqhuarson, 1797, M 2905, in which Smith was disapproved. It is a striking feature of the present case that there was a delay of some fourteen months before this step was taken on the appellants' behalf by their solicitors. Their counsel, Mr Gale QC, accepted that the delay in this case was exceptional.

    40.  As I read Lord Watson's speech in Heritable Reversionary Company Ltd v Millar (1893) 19 R(HL) 43, he was seeking to maintain the general rule laid down in Young v Leith that an obligation which is merely personal to the debtor and would not bind his creditors is not binding on the permanent trustee. He referred to the obligation to convey. But it is the character of the obligation, not its content, that determines whether it binds the creditors. The common thread that runs through all the authorities is that the right of the disponee remains a personal right until his title enters the register. Certainty is preferred to uncertainty. The statutes, including the Bankruptcy Acts, have all been framed on the assumption that this is how the law of Scotland seeks to achieve a fair balance between the various competing interests that may arise where transactions are entered into relating to heritable property.

    41.  In Forbes's Trustees v Macleod (1898) 25 R 1012 the second party was the trustee in the sequestration of a Mr Carrick, to whom a bond and disposition in security granted by a third party had been assigned in security of an advance which he had made to the trustees. Mr Carrick's title to the subjects appeared from the record to be unqualified, as the assignation to him was ex facie absolute. But he acknowledged in a back letter that the assignation had been made to him in security of the advance, and he undertook to reconvey the bond when the debt had been repaid. The rule that the creditors of the ex facie absolute proprietor could take no higher right than he himself possessed was applied. As soon as the debt was paid, Mr Carrick ceased to have any pecuniary interest in the subjects. So there was nothing left for his creditors to attach. His title was, as Lord McLaren put it at p 1015, merely nominal.

    42.  In Colquhouns' Trustee v Campbell's Trustees (1902) 4 F 739 a firm of law agents had failed to record two bonds and dispositions granted by the owner of a property in Glasgow in security of loans which their clients had made to him. They then obtained and recorded an ex facie absolute disposition of the same subjects in their own name as security for debts owed by the owner to the firm. This was a fraudulent breach of trust. Lord Kinnear said at p 744 that the decision in Heritable Reversionary Company v Millar (1893) 19 R (HL) 43 showed that the estate must honestly belong to the bankrupt, and that the creditors cannot enlarge the estate for distribution by adopting a fraud on the part of the bankrupt or doing something which would have been a fraud if it had been done by him when he was solvent.

    43.  These two cases, together with the Heritable Reversionary case, demonstrate how liberally, as Lord McLaren put it in Forbes's Trustees v Macleod at p 1015, the principle that creditors take the estate tantum et tale is applied in favour of the true owner against the creditors of a trustee or other person having a qualified title. But the situations with which they were dealing do not apply here, and Mr Gale did not seek to rely on them.

    Was the property nevertheless held on trust?

    44.  There is no doubt that Mrs Burnett was the beneficial owner of the property when she contracted to sell to the appellants. Mr Gale accepted that the act of delivering the disposition to the appellants in exchange for the purchase price did not have the effect in Scots law of creating a trust over Mrs Burnett's title to the property in favour of the appellants as trust beneficiaries. I think that he was right to concede this point. In Gibson v Hunter Home Designs Limited, 1976 SC 23, the disposition had been executed but not delivered. It was held that entry to the subjects and payment of the price, referable to the terms of the missives, did not instruct the existence of a trust pending delivery of the disposition to the purchaser. Lord President Emslie said at p 28 that there was no evidence whatsoever in that case of the constitution of a trust and that it was impossible to entertain the suggestion that as a result of the purchaser's entry to the subjects and payment of the price a trust in his favour had come into existence. I also think that Mr Gale was right not to attempt to draw any analogies from English law. In Allan's Trustees v Lord Advocate, 1971 SC (HL) 45, 53-54, Lord Reid explained that it is not possible to seek enlightenment on this matter from England, as the origin of trusts in Scotland is very different. He said that it is possible to accept the position that a person can make himself a trustee of his own property provided he does something equivalent to delivery or transfer of the trust fund. But for the reasons that I have already given there is an unbroken tract of authority to the effect that the mere act of delivering the disposition, which is a personal deed, does not affect the title to the property.

    45.  Had it not been for the views which my noble and learned friend Lord Hobhouse has expressed on this point I would not have wished to say anything more about it, as no arguments were addressed to this matter on either side. But I do need to say something in reply to the concern which he has, quite understandably, expressed that there was here a fully arguable route to a solution in the appellants' favour which was not and should have been taken.

    46.  The first and most important point that has to be made is that according to the law of Scotland a trust, in the present context, has to be created expressly. Scots law does not accept that a constructive or remedial trust can arise from a contract of sale, nor does it recognise the concept of equitable ownership: see the discussion in Sharp v Thomson, 1995 SC 455, 479-481. So a person has to do two things if he wishes to establish a trust of his own property in favour of a third party, such as a purchaser. He must first make a declaration that the property is to be held in trust for the third party. He must then effect delivery of the trust property to a trustee or, if he himself is to be the sole trustee, he must do something which is the equivalent of delivery. As Lord Cameron pointed out in Gibson v Hunter Home Designs Limited, 1976 SC 23, 31, it is no longer open to doubt since Allan's Trustees v Lord Advocate, 1971 SC (HL) 45, that a truster can put his own funds into a trust of which he may himself be the sole trustee. But there must, as he went on to say, be some identifiable declaration of trust and there must then be intimation of the fact of the trust and its tenor or delivery of the trust deed. A mere declaration of intent is not sufficient, as there must be a clear and identifiable declaration of trust - an express declaration, as Lord Kinnear said in Bank of Scotland v Hutchison Main (in liquidation) 1914 SC (HL) 1, 8.

    47.  The key to a proper understanding of the decision on this point in Gibson lies in the fact that there was no language in either the missives or the disposition which could be construed as having this effect. In Allan's Trustees, on the other hand, it was clear that the words which Miss Allan used in her letter to the insurance company were sufficient to create a trust. They contained an express declaration that the policy was from the moment of its commencement to be held in trust for named beneficiaries. The problem which Lord Reid was considering in that case was the problem of delivery.

    48.  In the present case there is no problem of delivery, as the disposition was delivered to the purchasers. The problem is that the disposition lacked any words which could be said to amount to an express declaration that until it was recorded the property was being held in trust for the purchasers. This problem could have been cured by inserting words into the disposition which had this effect, as my noble and learned friend Lord Hoffmann is right to point out. An express declaration of trust in a separate deed would have been just as good, provided it was sufficiently clear to enable the trust property, the beneficiaries and the purpose of the trust to be identified and provided too that deed was delivered or at least intimated to the purchasers. There was, to adopt Lord Hobhouse's words, a communicated intimation. But the document which was intimated - the disposition - did not contain any provision which could be construed as setting up a trust. In the absence of any such provision there could be no trust, however strong the evidence was about delivery.

    49.  The second point that needs to be made is simply by way of clarification, lest there be any doubt as to the position which I was adopting on this matter in the Inner House in Sharp v Thomson, 1995 SC 455. It should be understood that the argument that was presented that a trust had been created in Gibson v Hunter Home Designs Limited, 1976 SC 23 was, as Lord President Emslie noted at p 27, an alternative argument to the first argument. The first argument was that the property in the subjects had passed by virtue of the missives, payment of the price and actual entry to the subjects by the purchaser. This had nothing to do with the argument about the creation of a trust. The reservations which I expressed in Sharp at p 469 about the Lord President's analysis of the three stages of the transfer of land to the purchaser were confined to that part of his opinion only. Nothing I said in Sharp was intended to cast any doubt on the soundness of his opinion on the trust argument, with which Lord Cameron too was in full agreement. As I said in Sharp at p 479, no one in that case suggested that the decision that no trust was created in Gibson was unsound in any respect. It was in this context that Lord President Emslie referred to Lord Herschell's speech in Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43, 44. There is nothing in that passage, or in the Lord President's treatment of it, with which I disagree.

Conclusion

    50.  Mr Gale did not seek to argue that some kind of intermediate right of property in the subjects, the effect of which was to diminish the extent of Mrs Burnett's real right in them, was transferred to the appellants when the disposition was delivered to them in settlement of the transaction which they had entered into. His case was that the subjects nevertheless did not form part of her "whole estate" as at the date of her sequestration within the meaning of section 31(1) of the 1985 Act.

    51.  In my opinion the context in which the words "the whole estate of the debtor" appear in the statute shows that they must be given a meaning which gives effect to the rights which creditors are able to exercise against the debtor's property to secure payment of their debts. The permanent trustee in his turn is obliged by the statute to exercise on behalf of the general body of creditors all the rights which the creditors would each have been able to exercise against the bankrupt's estate had they been acting as individuals. The real right in the property of which Mrs Burnett was the beneficial owner remained vested in her at the date when the permanent trustee's notice of title was recorded in the Sasine Register. The only qualifications on that right were of a personal character. They bound Mrs Burnett. But they were of no effect in a question with her creditors or with the permanent trustee.

LORD HOBHOUSE OF WOODBOROUGH

My Lords,

    52.  I agree that this appeal should be dismissed. I also agree that this should be for substantially the reasons given by my noble and learned friend Lord Hope of Craighead, both in this House and in his earlier judgments delivered in the Court of Session (eg, the first part of his judgment delivered in the First Division in Sharp v Thomson 1995 SC 455), and by my noble and learned friend Lord Rodger of Earlsferry. I pay tribute to the depth and intimacy of their knowledge of the Scots system of conveyancing, its history, law and practice, and its application in relation to the Scots insolvency statutes.

    53.  I have however, like my noble and learned friend Lord Hoffmann, certain reservations which I will explain. But I should say at once that I am not shocked as a commercial lawyer by the scheme and consequences of a sequestration under s. 31 of the Bankruptcy (Scotland) Act 1985. The law of England has very similar consequences which from time to time give rise to complaints by merchants that they have been harshly treated. But the English law is and has been for several centuries that merchants must always be on guard against dealing with persons whose solvency is not assured and structure their transactions accordingly, particularly in international trade. The trustee in bankruptcy has powers beyond those possessed by the bankrupt. There is a fundamental distinction between property rights or secured rights, on the one hand, which must be respected by the trustee and, on the other, contractual rights which can only give rise to a claim provable in the liquidation and the payment of a pro rata dividend (if any). But what does surprise me is that Scotland, now a highly developed economy, should have a land law which is still based on the judicial development, albeit sophisticated, of the laws of Rome and the mediaeval Feudal system. I recognise that by the Infeftment Act 1845 (and following statutes) the formalities involved in acquiring the legal and feudal title have been replaced by a requirement for the registration of the new transaction in the General Register of Sasines (seisin), a deeds register, or in the Land Register, a titles register, and that following Scottish Law Commission Reports, Nos. 68, 183 and 114, and some academic criticism, more radical reforms sweeping away the feudal system are now being introduced under the Abolition of Feudal Tenure (Scotland) Act 2000: see paragraphs 13 and 14 of Lord Hope's Opinion.

 
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