Scottish Court of Session Decisions

Thomas Ellis, iron manufacturer, proprietor of the North British Ironworks, Coatbridge, died in July 1884, survived by a widow and children, and leaving a trust-disposition and settlement, whereby he conveyed his whole estate to trustees, of whom his wife was one. The trustees were directed to pay the whole free income of the residue of the estate to the testator's widow, and subject to this liferent to hold the residue for behoof of his children. The deed further provided—“I hereby authorise and empower my trustees to wind-up or carry on, or concur in winding-up or carrying on, any business or adventure in which I may be engaged either on my own account or in conjunction with partners at the time of my decease, and especially to wind-up or carry on, but during the lifetime of my said wife in the event of her surviving me only with her consent and concurrence and subject to her approval, the business presently carried on by me at the North British Iron works aforesaid, in such way and manner as to my trustees shall seem in their discretion best for the interest of my trust-estate, and to enter into such arrangements as may be most suitable in their opinion for that purpose.”

After the testator's death the trustees, with the widow's consent, carried on the testator's business.

In October 1894 the widow brought an action of count and reckoning against the trustees, her surviving children, and the representatives or issue of deceased children. In the second place she concluded for declarator that “in the said accounting by the first-mentioned defenders, the said trustees, to the pursuer, and in ascertaining the whole free income or annual produce of the residue and remainder of the means and estate of the said deceased Thomas Ellis payable to her, or to which she is entitled as aforesaid, the first-mentioned defenders are not entitled to set-off against the pursuer, as charges against income, any sums by way of depreciation on buildings or plant other than sums actually expended by the said trustees in the reasonable maintenance, repair, and renewal of buildings and plant forming part of the residue of the said estate, and in particular it ought and should be found and declared by decree foresaid that the first-mentioned defenders, the said trustees, as in a question with the pursuer, are not entitled to charge against income the sums already written off by the defenders, the said trustees, in the books of the North British Iron Works, Coatbridge, on account of depreciation on buildings and plant in so far as these do not represent amounts actually expended by the said trustees in the reasonable maintenance, upkeep, and renewal of the buildings and plant under their charge.”

The pursuer averred that the trustees had not only expended large sums out of revenue in repairing the plant and buildings, but had also annually deducted a percentage (amounting to 5 per cent down to 1888, and 7 1 2 per cent. thereafter) from the profits of the business as a depreciation fund. “The total amount so written off and

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deducted as aforesaid during the said period amounts to £23,854, 14s. 11d., out of which, however, has been paid the nett cost of additions, amounting to £8693, 4s. 3d., leaving a balance of £15,161, 10s. 8d., which has been added to capital at the expense of revenue.” The plant and buildings had been kept in a state of thorough repair, and were in a better condition than they had been at the date of the testator's death.

The trustees lodged defences. They admitted that, in addition to charging ordinary trade repairs to income, a sum of £23, 854, 14s. 11d. had been written off for depreciation, and that out of it £8693, 4s. 3d. had been paid for renewal of plant and machinery worn out, but denied that the sum set aside for depreciation was excessive.

The pursuer pleaded—“(3) The first mentioned defenders are not entitled, as in a question with the pursuer, to set off against income any sums on account of depreciation, in respect that in point of fact there has been no depreciation or deterioration chargeable against the income payable to the pursuer.”

The defenders pleaded—“(2) By trust-disposition and settlement the system of accounting to be adopted in the management of the business is a matter entirely within the discretion and judgment of the trustees. (5) In respect that the defenders are, in the just administration of the trust, entitled and bound annually to charge against revenue such sum as they may deem necessary to cover the annual depreciation in value of the buildings, machinery and plant, decree of absolvitor should he pronounced. (6) The trustees are entitled in their discretion to make provision out of revenue for possible losses of capital which may be incurred in the conduct of the business.”

Proof was allowed, the result of the evidence being to show that the plant and buildings were in as good, if not a better condition than at the date of the testator's death.

Mrs Ellis died in February 1895, and upon 21st February her son and executor was sisted in her place as pursuer of the action.

Upon May 16th 1895 the Lord Ordinary ( Moncreiff) assoilzied the defenders from the conclusions of the summons.

“ Opinion.—[ After referring to the settlement and quoting the clause giving power to the trustees to carry on the testator's business]—In virtue of this power and with the express consent of the widow the trustees carried on the business from and after July 1884. In addition to making the necessary repairs upon the plant and machinery, and debiting the cost of such repairs and additions to revenue, the trustees wrote off and charged against revenue a certain percentage of depreciation—5 per cent. up to 31st December 1888, and 7 1 2 per cent. after that date. The pursuer's statement in condescendence 6 is that the total amount so written of and deducted was £23, 854, 14s. 11d., out of which £8693, 4s. 3d. was paid as the nett cost of additions, leaving a balance of £15, 161, 10s. 8d., ‘which has been added to capital at the expense of revenue,’ thus diminishing the widow's income. The complaint made in this action is, that this course was unwarrantable; that the works are now in fully as good a state as they were at the commencement of the trust, having been kept in thorough repair, and large sums having been expended on additions; and the pursuer demands that repayment of the sums thus improperly appropriated should now be made.

The defenders answer that all that was done was done with the express consent of Mrs Ellis; and further, that as under the powers conferred in the deed they were entitled to carry on the works, they were entitled in accordance with the usual rules of good management of such works, and the truster's own practice, to create a depreciation fund, and that the percentages adopted were not excessive.

At the conclusion of the discussion the impression left on my mind was that the pursuer had failed to prove his case, and that impression has been confirmed on fuller consideration.

It will be observed that under the deed the trustees could only carry on the business with the consent and concurrence of Mrs Ellis. If that consent had not been given, the works must have been sold as a going concern, and might have been expected to bring their value as at July 1884. But Mrs Ellis gave her consent, and until her death she derived a substantial income from the works. Her consent having been given, the question must be considered just as if her consent had not been required. Now, power was given to the trustees to carry on the business ‘in such way and manner as to my trustees will seem in their discretion best for the interest of my trust-estate, and to enter into such arrangements as will be most suitable in their opinion for that purpose.' The question is whether, in writing off the sums in question for depreciation, the trustees exceeded the discretionary power thus conferred upon them—a power which was to be exercised not merely in the interests of the liferentrix but also of the fiars. As I have already indicated, the pursuer has failed to satisfy me that the trustees exceeded their powers, or acted otherwise than prudent traders might be expected to act in the conduct of their own business.

It is, perhaps, of itself sufficient for the defence that, in annually writing off a sum for depreciation, the trustees followed the course which was adopted, at least during the later years of the truster's lifetime. Between 1880 and 1884 that practice was followed; and it is to be assumed that in giving his trustees power to carry on the works, the truster expected and intended that the practice should be continued.

But, further, I do not think that the pursuer has succeeded in establishing that, in their mode of carrying on the works, and keeping the books, the defenders acted otherwise than in accordance with the rules and practice of a prudent trader.

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I do not understand the pursuer's witnesses to dispute that, in ordinary circumstances, it is proper and necessary annually to write off a sum for depreciation. The works may, in their present condition, be quite sufficient for their purpose, or they might be made so by repairs. But none the less, through tear and wear, they year by year deteriorate, and will ultimately have to be entirely renewed, in order to bring them up to their original value. The primary object of a depreciation fund is to make good this deterioration or depreciation; and therefore, in works conducted on proper commercial principles, an adequate percentage must be written off before striking and dividing profits.

But depreciation covers a good many other things, such as the likelihood of new inventions, processes, or machines coming into use, which may supersede or render obsolete those whose value are in question, and other losses and contingencies to which such works are subject. This is very candidly admitted by Mr J. A. Robertson in the evidence which he gave for the pursuer.

The pursuer's objection is rather that the trustees have made a double charge against or deduction from income. Mr Robertson states it thus—‘The principle upon which the books have been kept and accounts made up has been to charge under the headings repairs, trade charges, and wages the whole cost, not only of repairs, but also of renewals; it is only anything in the nature of extension or addition or increase that is put against the buildings and plant account. In addition to the £57,000 charged against revenue accounts for renewals and repairs, there has also been written off general depreciation for doing what I maintain has already been done. The purpose of the fund created by general depreciation was to do the thing which was done out of the £57,000. The natural result of that is that, under the head of general depreciation, there is a surplus of £15,000 of unused money, which has all been taken out of income. That, as the accounts are stated, all goes to capital. None of it has been used in the upkeep of the works; it is all there at this moment.’

It is not, however, established to my satisfaction that such a double charge has been made. New machinery has always been charged to capital account. It is true that the charges for new parts of the machinery, such as pistons, cylinders, and portions of steam hammers, have been charged against repairs; but I think that this course is sufficiently justified on the grounds, first, that that was the practice when the trustees took over the works; and secondly, that the propriety of charging the expense of the renewal of such parts of machinery against repairs depends, to some extent, upon the amount that is written off for depreciation; and, if such partial renewals had not been charged against repairs, the percentage of depreciation would have been proportionately higher. No doubt there is considerable conflict of opinion upon this point; but, to state the case for the defenders at its lowest, it is not, in my opinion, established that they exceeded their powers in doing what they did.

It is said that the works are worth as much now as they were in 1884; and that the depreciation fund was not required, and is extant to the extent of £15,000. I do not think that it is proved that the works are as valuable now as in 1884; but even if this had been established, it does not follow that the pursuer might succeed in recovering payment of the sums written off. What Mrs Ellis was entitled to, was the free produce of the works year by year. If in any one year there had been a loss on the business, she would have got nothing that year; but if, in the following year, there had been a profit, she would, I apprehend, have been entitled to it, and the trustees would not have been entitled to deduct from or set against her claim the loss of the previous year— Gow v. Forster, L.R., 26 Ch. Div. 672. It seems to follow that, when, in accordance with practice, a sum was in any one year written off for depreciation, the liferentrix would not subsequently be entitled to demand payment of the sum so set aside, although it might not have been found necessary to expend it at the time. In short, by consenting to the works being carried on, Mrs Ellis impliedly agreed that they should be conducted on the usual footing, her claim for the free produce of each year being year by year satisfied on receiving payment of the free profits which resulted from the trade so carried on.

It is said that Mrs Ellis did not understand that the money written off was in excess of the sum required for repairs and renewals actually made from year to year. I am not satisfied of this. But it is sufficient for my decision in favour of the defenders that, in what they did, they acted in accordance with the previous practice of the truster, and that, to take the most favourable view of the evidence for the pursuer, it is not proved that the defenders acted otherwise than in accordance with the usual practice in the conduct of such works.

With the amount written off I do not think that I can interfere. It may or may not have been advisable and necessary in 1889 to raise the percentage from 5 to 7 1 2 per cent.; but even if I thought that that rise was uncalled for or excessive, I should not feel warranted in interfering with the wide discretion with which the truster invested his trustees.

I shall therefore assoilzie the defenders.”

The pursuer reclaimed, and argued—Under the terms of the trust-deed the widow was entitled to get the whole income arising from the business after the necessary expenses had been paid. Wages and salaries were necessary expenses, so were the repairs to the machinery and the renewal of any machinery that was worn out, but the trustees were not entitled to take a farther sum under the name of a depreciation fund and add it to

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the capital, so depriving the liferentrix every year of part of her income. It was proved that the works were in as good a state in 1894 as they had been previously; that was all the fiars could claim and they had been maintained out of income which would otherwise have gone to the liferentrix. The purpose for which this fund was said to be retained could never arrive, because all repairs were charged at the time under that head, and any renewals were charged to capital. It was proved that the liferentrix never really understood that this fund was being written off yearly so that she could not be held to be barred from now raising the objection. It might be a good thing for a trader to write off a depreciation fund, but that was merely as between himself and his creditors; it did not affect the rights of trustees in such a case as this— Rogers, &c. v. Scott, &c., July 19,1867, 5 Macph. 1078; Goto v. Forster, 1884, L.R., 26 C.D. 072.

The defenders argued—It was true that the trustees were bound to pay over the proceeds of the business yearly to the widow, but that was only the free annual profits after all the necessary expenses had been deducted, and one of the necessary expenses in such a business as this was to make provision for the depreciation which constantly went on in the plant and buildings, and to renew the machinery as new machines were invented— Strain's Trustees v. Strain, July 19, 1893, 20 R. 1025, L.J.-C. 1028. If the trustees had not provided for such depreciation the works would have been worn out at the end of some years, and so the power of producing any income would have been lost; it was therefore really in the interests of the liferentrix that this fund had been accumulated— Dent v. London Tramways Company, November 16, 1830, 16 C.D. 344. As regarded the complaint that the sum set aside had been deducted from the widow's income and added to the capital of the estate, the directors of a company were entitled to say what should be income and what capital—Buckley on the Companies Acts 512. If directors were entitled to act in such a manner with the funds under their charge, much more could trustees decide what was really capital and what income. The whole question was whether trustees in whom the truster had reposed such exuberant trust, and with whom the widow had consented to carry on this business, should or should not be allowed to carry it on in the same way as a prudent business man would carry on his own business. It was admitted that the trustees had merely pursued the same mode of dealing with the depreciation fund as the truster had done during his life, and it was proved that this was the ordinary practice of all prudent business men. The result was that the plant, buildings, &c., had been kept in an efficient state and the value of the works was the same as at the testator's death, viz., some £43,000. The value as it now stood in the books according to the pursuer's own statement was £27,866, and if to that was added the £15,000 claimed as having been put into the depreciation fund the amount was £42,866. (2) The liferentrix by attending the meetings of the trustees and signing the minutes had acquiesced in the trustees acting as they had done, and was barred from now objecting.

At advising—