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

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    54.  My reservations have the following structure:

    (a)  The 1985 Act expressly provides in s. 31(1) it is subject to s.33 and s. 33(1) expressly provides that: "The following property of the debtor shall not vest in the permanent trustee - ... (b) property held on trust by the debtor for any other person." This provision was new and was included in the 1985 Act on the express recommendation of the Law Commission.

    (b)  It is at least arguable that in the present case the debtor (vendor), at the date of the sequestration, held the part of her heritable estate now in dispute on trust for another person.

    (c)  It follows that, by reason of this express statutory provision, the permanent trustee was not empowered to sequestrate it.

    55.  It was a feature of the present case that leading counsel for the appellants, although he was relying upon such cases as Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43, expressly declined to rely in any way upon s. 33(1) and did not argue the point; consequently leading counsel was able to say that the point was not relied upon against him and therefore he would not address any argument about it. The appeal proceeded solely upon the basis of the appellants' argument that, as a matter of the true construction of s. 31(1), the words "the whole estate of the of the debtor" did not cover the property in dispute, an argument which was, in my opinion, bound to fail. I find this all the more surprising since s. 33(1) was the subject of submissions both before Sheriff Principal D J Risk QC and before the Extra Division. But it is clear that your Lordships' House cannot go behind the express concessions of the appellants' counsel and that what I am about to say will be obiter and without the benefit of having heard argument.

    Section 33(1):

    56.  There is no dispute that s. 33(1) was a deliberate statutory addition to the statutory scheme. There is also no dispute that the relevant time to test the question 'does the debtor hold the property on trust?' is at the time of the making of the sequestration order under s.6. It makes no difference whether the trust did or did not predate the transaction between the vendor and the purchaser, provided that it existed by the time of the sequestration order. It is also clear that the trust has to be what in England would be called an 'express' trust. Scots law does not recognise constructive or remedial trusts or equities such as the equitable ownership arising from a contract enforceable by an order of specific performance. It is also now clear that the "tantum et tale" argument is discredited but it is not the same as, or provide the answer to, the question requiring to be answered in the present case: did the debtor, at the material time, hold the property on trust? The submissions made in the courts below however did include whether a restricted interpretation should be given to the words "held on trust" so as to deprive the introduction of s. 33(1) of any effect. This surprising submission apparently met with a mixed response in the courts below; it does not seem to have carried any weight in this House with Lord Hope and Lord Rodger.

    Was there here a trust?

    57.  This is the nub of the point and requires to be developed. But first I should refer to paragraphs 44 and 51 of the Opinion of Lord Hope that "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". To similar effect is what he said in Sharp v Thomson 1995 SC 455, 468H:

    "But there is no such thing as a real right which is imperfect or incomplete. Until the real right is transferred, the matter rests entirely upon personal obligation."

With great respect this misses the present point. The present point arises upon the basis that the purchaser never acquired the legal (or feudal) title: see Lord Hamilton at 2002 SLT 699, 709I. He never acquired the "real right". If he had, the present point would not have arisen. S. 33(1) proceeds on the basis that the vendor has the legal title and the real right but nevertheless holds it (them) on trust for another. The relevant question is not, as in previous cases, "what if anything has the purchaser acquired?" but "what is the status of the vendor at the material time?" The unbroken tract of authority focuses upon and answers the first question: no one disputes that. But what now needs to be focussed on and answered is the second question which concerns the vendor not the purchaser. The former mind-set must be put to one side. (I will refer later to what was said by Lord President Emslie in Gibson v Hunter Home Designs 1976 SC 23 and by Lord Clyde in Sharp v Thomson 1997 SC (HL) 66 at pp.70-1.)

    58.  Turning now to the facts of this case, the transaction started with the usual missives which included the clause that the contract would cease to be enforceable in so far as fully implemented by [the delivery of the disposition]". The disposition signed by the vendor, dated and delivered 8th November 1990 did fully implement the missives. It acknowledged the payment of the full purchase price. It disponed "heritably and irredeemably" to the purchasers "all and whole" the property sold "with entry and vacant possession as at 9th November 1990". The purchasers did enter into the vacant possession of the property the following day as stated. The earlier contract was therefore fully performed and ceased to have any further force or effect. The warrandice (that is to say the warranty of title) was expressly (re-) granted. This last is, of course, solely a contractual warranty, liable if broken (which there is no suggestion it has ever been) to give rise to a contractual (ie personal) liability of the vendor in the future; it in no way qualifies the completeness of the performance by the vendor of his obligations, indeed its (re-)grant in the disposition confirms that completeness. The vendor had done everything required of her. The only thing left to be done was a unilateral act to be done by the purchaser alone - registering the disposition.

    59.  Do these facts have any capacity to give rise to a trust? So far as formalities are concerned, Scots law does not require any formality or documentary evidence of the making of a trust save in one situation where the trustee unilaterally declares that he holds the property on trust where some document signed by the trustee is required as evidence. The signed disposition delivered in the present case is capable of providing such written evidence. It is only consistent with the debtor holding the property as a bare trustee and so declaring.

    60.  But Lord Hope (paragraph 44) would still say that there is no capacity, citing Lord Reid's speech in Allan's Trustees v Lord Advocate 1971 SC (HL) 45 at pp 53-54. Lord Reid warned that the Scots law of trusts was not of the same origin as in the law of England. He emphasised that "some sort of delivery" was required to complete the trust. He obviously was using these looser words to distinguish what was required from the acts of 'delivery' required to complete a transfer of the legal or feudal title; he was postulating that the legal title remained with the trustee. He said that something "equivalent to delivery" of the property - "equivalent to delivery … of the trust fund" -

    was required to bring the trust into operation. Contractual words alone are not enough though a communicated "intimation" to the beneficiary might be equivalent to delivery of the property. In the present case there was both a communicated intimation and a delivery of the property to the purchaser. In the present case the purchaser as previously demonstrated does not have to invoke any words of contract. So the language of Lord Reid does not provide the permanent trustee with an answer to the relevant question.

    61.  The key inquiry is: what does the evidence support as amounting to a trust? What status of the vendor does it show existed at the material time? The authorities provide the answer: it was the status of a bare trustee. The seminal authority is the dicta in the Heritable Reversionary case. The modern authority is the speeches of Lord Keith, Lord Jauncey and Lord Clyde in Sharp. There is also a useful discussion by Lord President Emslie in Gibson. I accept that both Heritable Reversionary and Sharp are distinguishable and were decided on the construction of the particular security documents (and applicable statutes) in those cases. Lord Hope and Lord Rodger would follow neither. I will be as sparing as possible in my quotations.

    62.  In Heritable Reversionary, Lord Herschell said that confusion must be avoided between the position where "the owner appearing on the register is a bare trustee" and that where the owner has simply "come under some contractual obligation". (p.44) Lord Watson said at p.46: "As between [the debtor and the other person] there can, in my opinion, be no doubt that according to the law of Scotland the one, though possessed of the legal title, and being the apparent owner, is in reality a bare trustee". Per Lord Field at p.54: "if the two interests, the legal on the one hand, and the whole beneficial interest on the other, are vested in different persons, the apparent owner who has the legal title is, as between him and the beneficial owner, the bare trustee": see also at p.55. This House upheld the dissenting judgment of Lord M'Laren in the First Division.

    63.  In Gibson, Lord Emslie rejected the argument that the missives were capable of giving a proprietary right. He affirmed that a contract gives no more than a jus crediti. "Putting the matter in another way the seller of subjects under missives is not, in a question with the purchaser, divested of any part of his right of property in the subjects of sale until, in implement of his contractual obligation to do so, he delivers to the purchaser the appropriate disposition." (p.27) He referred to Heritable Reversionary citing Lord Herschell at p.44. He expressly pointed out that an undelivered disposition, the payment of the price or mere entry on the subjects (referable to the terms of the missives) provide "no evidence whatsoever of the constitution of a trust" "pending delivery of the disposition". (p.28) Lord Emslie's dicta were followed and applied in later cases, but not by Lord Hope who expressly disapproved them. (For those interested, English law applies similar criteria, distinguishing between contracts not yet fully performed and those which have been fully performed: see Jenkins J in Re Rose [1949] Ch 78, 89 and Snell's Equity: Chapter 7.6.)

    64.  Sharp concerned a floating charge over the property of a company which had developed flats on a plot of ground. The company sold one of the flats to the Thomsons and delivered the disposition. Receivers were then appointed and the floating charge crystallised. The Thomsons then recorded the disposition. Lord Keith (as did Lords Browne-Wilkinson and Steyn) expressly agreed with the speeches of Lord Jauncey and Lord Clyde. Lord Jauncey held that after delivery of the disposition the vendor was a bare trustee. (pp.71 and 72); "as between disponer and disponee the transfer of all the former's interest is at once complete upon the delivery of the disposition". (p.73) Lord Clyde affirmed the distinction between a jus in re, a jus ad rem and a jus crediti. (p.84 and p.80) Turning to the case before him, he analysed the position of the debtor company and, treating it for this purpose as if it was a disponer, said that, where a disposition had been delivered, the disponer "had a bare title to the flat, a real right, but a right which was open to defeat as soon as the disponees recorded their disposition". (p.84) Thus, the legal and feudal title remained with the disponer as a bare title but nothing more. He approved Heritable Reversionary on the basis that the bankrupt was a "bare trustee". (p.80)

    65.  I consider that applying s33(1) and the existing judicial authorities, the facts of this case do make out a fully arguable prima facie case that the debtor did at the material time hold the subjects on trust for the disponee as a bare trustee. For those who wish to see a more just result in disposition cases, I suggest that s. 33(1) and the existing authorities provide a fully arguable route to obtaining that goal should the situation arise again (which it possibly never will) and it is unfortunate that it was lost sight of in the present case.

LORD RODGER OF EARLSFERRY

My Lords,

    66.  A, the owner, sells her flat to B and C. B and C pay the price to A and, in return, she delivers the relevant disposition to them. B and C take possession of the flat, but do not record the disposition in the Register of Sasines ("the register"). A is sequestrated and, on the basis that the flat remains part of her estate at the date of sequestration, the trustee in sequestration, who knows of the disposition to B and C, records a notice of title to the flat in the register. B and C then record their disposition. An Extra Division of the Court of Session hold that the trustee's title is to be preferred and that he can evict B and C from the flat without repaying the price. Reduced to algebraic terms, that is the issue that confronts the House in this appeal.

    67.  The decision of the Extra Division is correct. But it shocks. It is important not to play down that sense of shock since admitting that the decision shocks, and identifying why, are the keys to explaining why it is also correct. It shocks because it seems inequitable when judged by the criteria applied in other cases. Suppose that D, a purchaser from A, who was aware that she had previously sold and disponed the flat to B and C, deliberately tried to cut them out by recording his disposition before them. He would be regarded as not being in good faith and would therefore not obtain a valid title. In the case of a purchaser like D, as Lord Justice Clerk Thomson famously remarked in Rodger (Builders) Ltd v Fawdry 1950 SC 483, 501, "offside goals are disallowed". They are disallowed because they are judged to be unfair. By contrast, the trustee in A's sequestration who proceeds to record a notice of title ahead of B and C, despite being well aware of A's previous sale and disposition to B and C and with the intention of cutting them out, is not regarded as being in bad faith and obtains a valid title. The offside rule does not apply and the trustee's goal is allowed - even though, by the standards that apply to a purchaser, it would be judged to be unfair and would not be allowed. In order to maximise the assets available to the creditors, the trustee can deliberately set out to destroy B and C's right to complete their title. The difference in this respect between a purchaser and a trustee in sequestration lies at the heart of this case.

The Facts

    68.  The actual circumstances can be summarised quite shortly. In October 1990 the appellants, Mr and Mrs Grainger, entered into a contract with Mrs Carlene Burnett to buy her flat at 94 Malcolm Road, Peterculter, Aberdeen for £45,000. On 8 November 1990 Mrs Burnett executed a disposition of the property. On the same day her agents delivered the disposition to the Graingers' agents in exchange for the price. The following day the Graingers took possession of the flat. At that stage their agents did not follow the usual course of recording the disposition in the register - apparently because of a possible exchange of garden ground that was in contemplation. At some point Mrs Burnett executed a trust deed in favour of her creditors, the trustee being an accountant, Mr Michael Reid. On 29 May 1991, on a petition at his instance, Mrs Burnett's estate was sequestrated and Mr Reid was appointed interim trustee in the sequestration. On 23 July 1991 the sheriff declared Mr Reid to be the permanent trustee ("the respondent") and, by virtue of the act and warrant of that date, the whole of Mrs Burnett's estate as at 29 May 1991 vested in the respondent as trustee for the benefit of her creditors. Although no proof has been held, it is clear from the respondent's pleadings that, by 25 November 1991 at the latest, he was aware that the appellants still intended to record their title to the flat. On 10 December 1991 the respondent recorded a notice of title in the register giving notice that, as trustee, he had right to the flat. On 27 January 1992 the Graingers' agents recorded the disposition from Mrs Burnett.

    69.  In these proceedings the respondent craves a declarator that the appellants are not entitled to occupy the flat and a further declarator that the property in the flat is meantime, and has been since the date of sequestration, vested in him as the permanent trustee. In addition he craves warrant for the summary ejection of the appellants, their dependants and tenants from the flat. The sheriff granted decree in terms of these three craves. On appeal the sheriff principal allowed the appeal and dismissed the action. An Extra Division (Lord Coulsfield, Lord Maclean and Lord Hamilton) allowed the respondent's appeal and restored the sheriff's order. In this appeal your Lordships are asked to restore the decree of the sheriff principal and to dismiss the action. Counsel informed the House that since the Court of Session hearing the appellants had moved out of the flat and that, by agreement between the parties, steps were being taken to sell it. In these circumstances only the second crave now raises a live issue.

The scheme of the Bankruptcy (Scotland) Act 1985

    70.  Ultimately, the decision in the case turns on the interpretation and effect of section 31(1) of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act").

    71.  Section 5(1) provides that the estate of a debtor may be sequestrated in accordance with the provisions of the Act. A petition is presented to the court and, in a case like the present, the court grants warrant to cite the debtor to appear before it. The date of the grant of the warrant becomes the date of sequestration: section 12(1), (2) and (4)(b). Under section 13(1) the court appoints an interim trustee and the clerk of court must forthwith send a certified copy of the relevant court order to the keeper of the register of inhibitions and adjudications for recording in that register: section 14(1).

    72.  Recording the certificate has the effect, as from the date of sequestration, of an inhibition and of a citation in an adjudication of the debtor's heritable estate at the instance of the creditors who subsequently have claims accepted in the sequestration: section 14(2). By virtue of the inhibition the debtor is prevented from disposing voluntarily of any heritable property. Moreover, under section 37(1) the court order has certain effects in relation to other diligences:

    "The order of the court awarding sequestration shall as from the date of sequestration have the effect, in relation to diligence done (whether before or after the date of sequestration) in respect of any part of the debtor's estate, of -

      (a) a decree of adjudication of the heritable estate of the debtor for payment of his debts which has been duly recorded in the register of inhibitions and adjudications on that date; and

      (b) an arrestment in execution and decree of forthcoming, an arrestment in execution and warrant of sale, and a completed poinding,

    in favour of the creditors according to their respective entitlements."

In the present case it is the effects on heritable property that are of more significance. Under the Diligence Act 1661 and the Adjudication Act 1672 all adjudications for personal debts before, or within a year and a day after, the first effectual adjudication, come in together, as if one adjudication had been obtained for all the sums in question. Since the court order has the effect of a decree of adjudication for payment, the result is that, where the sequestration begins within a year and a day of the first effectual adjudication, the general body of creditors immediately rank pari passu on the proceeds of that first effectual adjudication. In other words any security which the first creditor obtained by adjudging the debtor's heritable property becomes, in effect, a security in favour of the general body of creditors. In addition section 31(8) makes it incompetent on or after the date of sequestration for any creditor to raise or insist in an adjudication against the estate of the debtor.

    73.  In terms of section 21(1) the interim trustee must call a meeting of creditors to be held within 28 days of the date of sequestration, or such longer period as the sheriff may allow on cause shown. At that meeting, if possible, the creditors proceed to elect a permanent trustee: section 24(1). The interim trustee reports this election to the sheriff who, failing any timeous objection, declares the elected person to be the permanent trustee. The sheriff confirms his election and the sheriff clerk issues to him an act and warrant: section 25(1)(a) and (2). This procedure was followed in the present case.

    74.  When the permanent trustee is appointed, the estate of the bankrupt vests in him for the benefit of the creditors. This happens by virtue of section 31 which provides inter alia:

    "(1) 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 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.

    (2) The exercise by the permanent trustee of any power conferred on him by this Act in respect of any heritable estate vested in him by virtue of the act and warrant shall not be challengeable on the ground of any prior inhibition (reserving any effect of such inhibition on ranking).

    (3) Where the debtor has an uncompleted title to any heritable estate in Scotland, the permanent trustee may complete title thereto either in his own name or in the name of the debtor, but completion of title in the name of the debtor shall not validate by accretion any unperfected right in favour of any person other than the permanent trustee.

    (4) Any moveable property, in respect of which but for this subsection -

      (a) delivery or possession; or

      (b) intimation of its assignation,

    would be required in order to complete title to it, shall vest in the permanent trustee by virtue of the act and warrant as if at that date of sequestration the permanent trustee had taken delivery or possession of the property or had made intimation of its assignation to him as the case may be."

I shall have to examine subsection (1) in more detail later. At present it should be noted that the "whole estate of the debtor" which vests in the trustee under subsection (1) is "his whole estate at the date of sequestration, wherever situated": section 31(8). It does not, however, include property that the bankrupt held on trust for anyone else: section 33(1). Similarly, when the estate vests in the permanent trustee, this is without prejudice to the right of any secured creditor that is preferable to the trustee's rights: section 33(3). On the other hand, subject to certain exceptions which are not relevant for present purposes, any dealing of, or with, the debtor relating to the estate vested in the permanent trustee is of no effect in a question with the trustee: section 32(8).

    75.  The permanent trustee must recover, manage and realise the debtor's estate and distribute it among the debtor's creditors, according to their respective entitlements: section 3(1)(a). Under section 39 he is given extensive powers for achieving this and, under section 64(1), the debtor must take any practicable step, including executing any document, which may be necessary to enable the permanent trustee to perform this function. The provisions for calculating the creditors' entitlement are somewhat complex, but the basic rule is that a creditor is entitled to claim the accumulated sum of principal and interest which is due on the debt as at the date of sequestration: sections 22(9) and 48(7) and paragraph 1(1) of schedule 1.

The parties' submissions

    76.  The rival submissions for the parties were, basically, simple and related to the interpretation of the phrase "the whole estate of the debtor" in section 31(1) of the 1985 Act.

    77.  For the appellants Mr Gale QC submitted that these words were not apt to include Mrs Burnett's title to the flat which, before her sequestration, she had sold to the appellants and in respect of which she had granted them a disposition. Having taken these steps, Mrs Burnett could not have sold the flat to anyone else without committing a criminal offence - fraud of some kind. She therefore had no substantial interest in the flat and merely held a bare title to it. Following the general approach adopted by this House in Heritable Reversionary Company Ltd v Millar (1892) 19 R (HL) 43 and Sharp v Thomson 1997 SC (HL) 66, your Lordships should hold that Parliament did not intend that property held by the debtor under this bare title should form part of her "estate" which vested in the respondent as permanent trustee. Rather, on her sequestration the bare title to the flat had remained in Mrs Burnett: the respondent had therefore had no power to deal with it. His purported registration of the notice of title to the flat in the register was void. By registering the disposition in their favour the appellants had accordingly divested Mrs Burnett of the real right to the flat and had vested it in themselves. The appeal should be allowed and the action dismissed.

    78.  For the respondent Mr Hodge QC submitted that the words "the whole estate of the debtor" meant what they said. By his act and warrant the entire estate of the debtor vested in the permanent trustee, except in so far as the 1985 Act provided otherwise. While property held on trust for any other person was excluded by section 33(1), there was no similar exclusion of property in respect of which the debtor had granted a disposition but to which the disponee had not completed title. It followed that the debtor's right in the flat had vested in the permanent trustee. Although Mrs Burnett could not have sold the flat to anyone else without committing a crime, this was due to her obligations to the appellants under the disposition. The real right remained vested in her. If she had in fact (wrongfully) sold and conveyed the flat to a second purchaser, he would have been entitled to rely on the entry in the register showing her as the owner. He would not have been affected by any dealings between Mrs Burnett and the appellants unless he knew of them. On registering his disposition and becoming infeft before the appellants recorded their disposition, the second purchaser would accordingly have obtained a valid title to the flat from Mrs Burnett and could have ejected the appellants. This showed that the obligations under the disposition which affected Mrs Burnett were purely personal and did not qualify her right of property. It was her right of property that had vested in the respondent and he was not affected by any of her personal obligations. He could therefore record a title to the flat and sell it, so that the proceeds would be available for distribution to Mrs Burnett's creditors. This approach to the interpretation of the 1985 Act was consistent with the way that the equivalent provisions in earlier bankruptcy statutes had been applied as part of the scheme of creditors' remedies in Scots law. The decisions in Heritable Reversionary Company Ltd v Millar and Sharp v Thomson were distinguishable. If the latter were not distinguishable, the House should not follow it. The present case was exceptional because of the extreme delay in recording the disposition. In practice no problem would arise provided that dispositions were registered promptly, in accordance with good conveyancing practice. A client who suffered prejudice as a result of the solicitor taking too long to register could recover appropriate damages for professional negligence. If, contrary to counsel's submission, the present case were thought to highlight a genuine weakness in the Scots law of bankruptcy, the legislature was the appropriate body to deal with it.

The significance of the register in this case

 
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