Scottish Court of Session Decisions

By assignation dated 14th February 1868, Robert Sanders, farmer, Masterton, near Dunfermline, on the narrative that he was desirous of making an absolute and irrevocable provision in his own lifetime for behoof of Janet Sanders, daughter of his son Robert Sanders, assigned to Robert Ebenezer Beveridge and certain other trustees three policies of assurance on his life for £600, £400, and £200 respectively, in trust for the following purposes:— First, The trustees were directed to apply the trust funds, under deduction of expenses, in payment to Miss Sanders during all the days of her life of the free annual interest or proceeds of the same, “for her alimentary use only, and exclusive always of the jus mariti and right of administration of any husband she may marry; and further declaring that the said interest or proceeds shall not be assignable by her, nor shall it be in her power to anticipate the same in any manner of way, nor shall the same be capable of attachment or arrestment by her creditors or the creditors of any husband she may marry.” Second, The whole capital of the trust was directed to be paid to the lawful child or children of Miss Sanders who might survive her and attain majority, and that in the proportions, at the terms, and under the provisions and declarations all therein set forth. The third purpose provided that in the event of Miss Sanders marrying, and of there being no issue or likelihood of issue by her marriage, the trustees should have power to make over to her absolutely one-half of the capital,” provided always that she shall make application therefor, and that my trustees shall in the exercise of their discretion (to which it is entirely left) consider it at the time to be for her real comfort and advantage that they should comply with her request.” The fourth purpose provided that in the event of Miss Sanders' decease without lawful issue the whole trust funds then in their possession should be paid over to the testamentary trustees of the truster, to be disposed of by them as part of the residue of his estate, in conformity with the directions in his mortis causa trust-disposition and settlement.

The assignation further contained this power of investment in favour of the trustees:—“And I hereby provide and declare that my trustees shall have full power to lend out and invest the said whole sums to be recovered as aforesaid, or any part thereof, on heritable or personal security, or in the stock of any chartered bank, or in the preference stock or shares or debentures of any railway or other company, and that without incurring any responsibility on their part.”

The truster died on 7th March 1874, and the trustees accepted the trust and entered upon the possession and management of the trust estate, which amounted to about £1820. Mr John Ross, writer, Dunfermline, and agent for the City of Glasgow Bank there, was appointed agent to the trust.

On the 14th July 1874 the trustees purchased in their names as trustees £170 of stock of the City of Glasgow Bank, at the price, including expenses, of £401, 12s. 3d., and applied part of the trust funds and estate conveyed to them under the assignation in payment of the price. They subsequently sold £55 of this stock in order to pay Government duties.

On the failure and winding-up of the bank the trustees proposed to pay the calls on this stock out of the trust funds, and Miss Sanders thereupon presented this note of suspension and interdict against the trustees using any part of the trust estate in that way.

On 26th December 1878 the Lord Ordinary on the Bills ( Curriehill) passed the note without caution, and continued the interdict which had been already granted. A record was afterwards made up, and along with that process there was conjoined an action of declarator, dealing with the same matter, which had also been brought into Court by Miss Sanders.

She pleaded in the suspension, inter alia—“(1) The investment of part of the trust funds in the purchase of the said stock of the City of Glasgow Bank not being authorised by the trust-assignation libelled, the respondents are not entitled to use any part of the remaining trust funds in payment of the calls made or to be made on them in respect of the said stock. (3) The respondents having purchased the said stock on their own responsibility, and in violation of the express directions in the trust-assignation, are not entitled to relief from the trust-estate for any obligations incurred by them in respect of the said stock, or for any interest, costs, expenses, or other disbursements that may be incurred by them in connection therewith.”

The respondents pleaded, inter alia—“(2) The respondents were justified in their investment by the terms of the trust-deed. (3) The investment having been made with the knowledge and sanction of the complainer, the complainer is not entitled to challenge the same.”

With reference to their third plea the respondents averred as follows in their statement of facts—“(2) The complainer was born on 13th August 1846, and she was therefore about twenty-seven years of age at the death of the truster. She received a copy of the assignation in trust, under which the respondents are trustees, shortly after the truster's death, and she was well acquainted with the powers of investment thereby conferred. The investment in bank stock above mentioned was made by the respondents acting in good faith under their trust powers, and was, as they believed, for the benefit of the complainer in securing her an increased income. (3) The complainer at the time of the said investment in bank stock knew, authorised, and approved of the said investment. She was so much satisfied with the investment, that subsequently, when the original heritable security for £1400 was paid up, she caused to be communicated to the respondents her wish that this sum also should be invested in City of Glasgow Bank stock, offering at the same time her formal approval of the investment. The respondents not thinking it expedient to invest all the trust funds in one way, resolved, conform to minute of 30th November 1875, to invest the said £1400 on a postponed bond, on obtaining the complainer's approval. This resolution was intimated to the complainer by letter from the agent of the trustees, dated 1st December 1875, in which the reasons of the respondents for refusing further investment in bank stock were explained to her. (4) Further, since the date of the said investment in bank stock the complainer has frequently had her attention called to the fact that the trust funds were in part so invested. By both oral and

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written communications, among which are the letter to her from the agent for the trust, dated 16th May 1877, and the annually published lists of bank shareholders, this fact was brought distinctly within the complainer's knowledge. She knowingly drew her income in part from the bank stock held by the respondents as aforesaid, and she has all along homologated and acquiesced in the investment. (5) On the failure of the bank the complainer, in personal communications with the agent for the trust and with some of the respondents, intimated that she in no way blamed the respondents—that the investment in bank stock had been made with her approval—that she had desired the whole funds to be so invested—and that she had prepared herself for the consequences of the trust-estate being exhausted by calls by taking a situation. The agent for the trust, conform to minute of 3d December 1878, intimated his willingness to continue payment of the complainer's income. This offer has been declined, and the complainer has taken up her present position, in violation of her own previous approval of the investment made by the respondents.”

A proof was led in the case, the purport of which will be found in the note of the Lord Ordinary infra and in the opinions of the Court.

The Lord Ordinary (Corriehill) pronounced this interlocutor:—

“ Edinburgh, 6 th March 1879.—The Lord Ordinary having considered the conjoined actions, In the first place, in the action of declarator, Finds, decerns, and declares in terms of the declaratory conclusions of the summons: Decerns and ordains the defenders, on or before the term of Whitsunday next 1879, to lend out and invest the sum of £401, 12s. 3d., under deduction of the sum of £127, 12s. received by them as the price of £55 of the City of Glasgow Bank stock sold by them on or about 10th April 1877, on heritable or personal security, or in the stock of any chartered bank, or in the preference stock or shares or debentures of any railway or other company, in conformity with the powers and directions contained in the trust-assignation libelled; and to exhibit and produce in process, on or before the 5th sederunt day in May next, the bond, stock certificate, debenture, or other security writ that may be obtained by them for the sum to be so lent out and invested by them: In the second place, in the process of suspension and interdict, sustains the reasons of suspension and interdict, suspends the proceedings complained of, interdicts, prohibits, and discharges in terms of the prayer of the note of suspension and interdict, declares the interdict already granted perpetual, and decerns: Reserving to the defenders and respondents all claims of relief which may be competent to them against the pursuer and complainer and her estate other than her liferent interest in the trust-estate held by the defenders and respondents as trustees under the said trust-assignation; and to the pursuer and complainer her answer thereto: Finds the pursuer and complainer entitled to expenses, &c.

Note.—[ After stating the facts]—Three questions arise, viz.— First, Whether the purchase of stock of the City of Glasgow Bank was an investment authorised by the trust-assignation, or within the powers of the respondents and defenders as trustees? Second, Assuming the investment to be ultra vires of the trustees, did Miss Sanders (the complainer and pursuer) sanction or homologate the purchase? And Third, Had she the power so to do?

As to the first question, I have no doubt. The purchase of the stock or shares of a joint-stock banking company by trustees is an application of trust funds which the Court cannot sanction unless it be authorised by the trust-deed. Such a purchase is neither more nor less than trading with the trust funds in a business adventure attended with risk. In the present case it is certainly not authorised by the trust-deed. The powers to invest the trust funds are in the following terms, viz.—[ reads ut supra]. Under these powers of investment, which are undoubtedly extensive, the stock of any ‘chartered bank,’ i.e., of any bank incorporated by royal charter, is authorised. But expressio unius est exclusio alterius, and the use of the word ‘chartered’ excludes all power of investing in the stock of any unchartered bank. The City of Glasgow Bank was not a chartered bank; it was for many years a private joint-stock banking association, although latterly it had been incorporated under the provisions of The Companies Act 1862. A company, however, so incorporated is in no sense of the word a ‘chartered bank,’ and I must therefore hold that the purchase of the bank stock in question was ultra vires of the trustees.

As to the second question, viz., Whether the complainer and pursuer sanctioned or homologated the purchase of the bank stock? I think a negative answer must also be returned. It appears from the proof (in which, I may observe, great candour was exhibited by all the witnesses) that at or about the time when the stock was purchased in July 1874 Miss Sanders was made aware by one or more of the trustees, and by their law agent Mr John Ross, that trust funds to the amount of about £400 had been or were about to be invested in the purchase of City of Glasgow Bank stock, and that she approved of the funds being so applied. It further appears that in 1875, when the sum of £1400 already mentioned was paid up, and was lying in bank until a suitable investment could be procured, Miss Sanders wished the trustees to purchase more bank stock; and I think it may fairly be inferred that if the trustees had yielded to her wishes and invested that sum, or part thereof, in the purchase of City of Glasgow Bank stock, she would have approved of such purchase. They, however, prudently declined to invest more of the funds in bank stock, and they re-invested the £1400 on heritable security. On this branch of the case, then, the proof shows that Miss Sanders was aware of the purchase of the bank stock in 1874; that she approved of it as being a profitable investment of the trust funds; and that until the failure of the bank in 1878 she regularly and knowingly received from the trustees, as part of her income, the dividends periodically paid by the bank upon the stock in question. But it appears to me that in the circumstances of this case mere knowledge and approval on the part of Miss Sanders were not enough to liberate the trustees, as in a question with her, from the responsibility which they incurred by making this unauthorised investment of the trust funds. What they plead is homologation on the part of Miss

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Sanders. Homologation implies the existence of some defect in the transaction which may be obviated by subsequent assent or adoption by the party entitled to object to the defect; but it is obviously of the very essence of homologation that the defect should be known to the party who is alleged to have waived the objection. Now, it is very clear in the present case that Miss Sanders had no knowledge of the all-important fact that the City of Glasgow Bank was not a ‘chartered bank,’ and that an investment in the purchase of its stock was one which the trustees had no power to make. It was the primary duty of the trustees to invest the funds in one or more of the investments authorised by the trust-deed, and when they informed Miss Sanders of the purchase of the bank stock she was entitled to assume that they had satisfied themselves that the investment was within their powers. And if by asking her approval they intended to obtain from her the adoption or approval of an unauthorised investment, it was clearly their duty to make her aware that they were exceeding their powers. But it is certain that no such information was given to Miss Sanders by or on behalf of the trustees. On the other hand, it is proved that the purchase was made by the trustees in the belief, not that it was unauthorised by the trust deed, but that the City of Glasgow Bank was a ‘chartered bank,’ and that the investment was therefore fully within their power. Mr Ross, the law agent of all the parties, expressly says that he was at the time of the purchase under the belief that the term ‘chartered bank,’ as used in the trust-deed, included the City of Glasgow Bank, and the object of the trustees in taking Miss Sanders along with them was that she might be satisfied that as liferentrix of the fund she was obtaining as large an income as could reasonably be expected. Mr Ross, indeed, says that in 1875, although he still believed the investment to be within the powers of the trustees, he had begun to doubt the soundness of that belief, and he says that he communicated that doubt to Miss Sanders. But I think that he is under some misapprehension as to this. Miss Sanders says she heard nothing from Mr Ross or the trustees, or from anyone else, until after the stoppage of the bank, to lead her to doubt the power of the trustees to hold such stock, and the trustees also say that no such doubt was ever suggested to them by Mr Ross or by anyone. It therefore appears to me impossible for the trustees now to maintain that Miss Sanders, knowing the investment to be ultra vires of them, sanctioned and homologated it.

But even assuming Miss Sanders to have been aware of the objection, and to have waived it, the third question still remains, viz., Whether she had power effectually to do so? Her position with reference to the trust funds must be distinctly kept in view. [ The terms of the trust-deed were here referred to].

The pursuer and complainer Janet Sanders is unmarried, but she is only thirty-two years of age, and she may marry and have children. As regards the fee, therefore, of the trust-estate, it is plain that under present circumstances neither she nor the trustees have any power whatever to alienate the same either in whole or in part. Should she marry and have children, the whole capital is destined to these children; and if she should die unmarried, she never can receive one shilling of the capital, the whole being destined to her grandfather's residuary legatees. It may be that she has no title to protect the interest of these legatees, and if I had entertained any doubt (which I do not) as to her right to protect the fee for her unborn children, I should have sisted process and ordered intimation of the dependence of the action to be made to the parties contingently interested in the residue of old Robert Sanders' trust-estate. The pursuer and complainer, however, has in my opinion a good title to protect the fee of the trust-estate for behoof of her children nascituri. This being so, let us see what is the position now maintained by the trustees. They maintain not merely that they are not bound to replace the funds which have been lost by the disappearance of the capital of the bank, but also that they are entitled to apply the £1400 of trust funds still extant in payment of the past and future calls made upon them as shareholders by the liquidators. It appears to me that whatever may be said as to the pursuer's and complainer's own liferent interest, no homologation on her part can possibly deprive her of the right or relieve her of the duty of protecting the fee of the trust-estate for behoof of her unborn children, and that she is entitled to insist on the trustees replacing the capital already lost, and to have them interdicted from applying any part of the capital in payment of calls. As regards her own life-interest, the case is more difficult, but I have come to be of opinion that even as regards that interest her alleged homologation cannot be founded on by the trustees. As regards the £1400 presently invested on heritable security, there can, I think, be no question. Whatever risk Miss Sanders may be supposed to have undertaken as regards the money invested in the City of Glasgow Bank, she certainly cannot be held, by approving of the purchase of that stock, to have undertaken any risk as regards the money invested on heritable security. She may, as regards the bank stock, be held to have contemplated the possibility of it becoming unprofitable and being lost, but in no view can her liability be extended to her income from the other trust funds still extant. And even as to the funds invested in the bank stock, and now to be replaced by the trustees, I think the pursuer will still be entitled to her liferent thereof. I do not think that the trustees are entitled to claim from Miss Sanders relief from their liability to the liquidators out of any part of her liferent interest. That interest is by the trust-deed declared to be an alimentary allowance to her, which she is not to have power to assign or anticipate, and which is not to be attachable for her debts. Had she been herself a shareholder in the bank, the liquidators could not have enforced payment of calls out of her liferent; still less, in my opinion, can the trustees, who were appointed for the very purpose of preventing her from anticipating or assigning her income, or subjecting it to liability for her debts, now claim relief out of that income for their own obligations to the bank.

The result of the whole matter is that in my opinion the purchase of the bank stock must be declared to be ultra vires of the trustees; that the trustees must forthwith invest in good and sufficient security the sum which lately stood in the City of Glasgow Bank stock; and that the trustees must be interdicted from applying any

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part of the trust funds in payment of the past and future calls made by the liquidators of the bank in respect of the said stock. But as Miss Sanders may be possessed of other estate than her liferent interest in the trust funds, and may in one contingency become entitled to one-half of the fee of the trust funds for her own absolute use—as to which, however, I express no opinion—I have inserted in the interlocutor a reservation for the purpose of keeping open all questions as to the right of the trustees to be relieved from any of such sources.

I have felt this to be a very hard case for the trustees, who have unquestionably acted with perfect bona fides in the matter; but the law is in my opinion against them, and I have therefore with great reluctance been constrained to pronounce judgment in terms of the foregoing interlocutor, with expenses.”

The respondents reclaimed, and argued—(1) “Chartered bank” meant “incorporated bank.” The effect of a charter was nothing more than to confer the privilege of incorporation. There was no distinction in the matter of liability, for some chartered banks were unlimited. In so far as the truster's intention was of any value, there was everything to suggest that he had in view the City of Glasgow Bank, in the branch of which at Dunfermline he took a great interest. (2) Admitting that there was an error, it was a venial one. Trustees were bound to take as much care of the trust-estate as prudent men would do of their own, and they had done so here. (3) Miss Sanders was by her actings barred from objecting to the trustees paying the calls out of the trust funds. She knew what they had done—had in fact suggested the investment in the City of Glasgow Bank. (4) At all events, she was bound as regards her life interest.

Authorities—Lands Clauses Act 1845 (8 and 9 Vict. cap. 19), sec. 9; Pupils Protection Act 1849 (12 and 13 Vict. cap. 51), sec. 5; Railway Clauses Act 1845 (8 and 9 Vict. cap. 33), sec. 2; Parliamentary Papers, 1826, vol. 23, p. 1; Fleming on Scotch Banks, Edin., 1877; Edinburgh Review, vol. 43, p. 282; Scott v. Handyside, March 30, 1868, 6 Macph. 753; Ramage v. Baillie, October 27, 1869, 8 Macph. 77; Jones v. Higgins, L.R., 2 Eq. 538; Brice v. Stocks, 2 White and Tudor's Leading Cases, 877; Polloxfen v. Stewart, July 14, 1841, 3 D. 1215; Barns v. Barris Trustees, March 5, 1857, 19 D. 652.

Argued for respondent—(1) If “chartered” meant “incorporated,” then all banks in Scotland were chartered. But “chartered,” according both to usage and its natural meaning, meant a bank having a charter. It might be a question whether in strictness the Bank of Scotland ought so to be designated, but long custom had given it the title. Incorporation under the Companies Act of 1862 was in no sense a means of giving a charter to the company so incorporated. (2) As to the alleged slight nature of the error, the trustees ought to have taken advice. (3) Miss Sanders could not in law, under the terms of the deed, homologate what the trustees did. They were there to prevent her from acting; and in point of fact she did not homologate, for she did not know what the trustees themselves say they did not know, namely, whether the City of Glasgow Bank was a chartered bank.

Authorities—Parliamentary Papers, 1864, vol. 32, p. 165; Smith v. Campbell, May 30, 1873, 11 Macph. 639; White's Trustees v. Whyte, June 1, 1877, 4 R. 786.