Scottish Court of Session Decisions

William Noble, a butcher in Aberdeen, died on 23rd April 1875, leaving a trust-disposition and settlement dated 9th April 1875, by which he appointed James Noble, master mariner, Aberdeen, Thomas Park, merchant, Fraserburgh, Alexander Watson, bank agent, first at Fraserburgh and then at Invergordon, and Andrew Ritchie, fisherman, Inverallochie, his trustees for the purposes therein mentioned. The whole of the trustees accepted office, and entered into possession of the trust-estate. Under the trust-deed Mrs Noble, the widow of the truster, was to get the whole income of the residue of the trust-estate on certain conditions, and for five years after the death of the truster this was paid to her. In 1880 Mrs Noble claimed her legal rights and these were paid.

In December 1894 two beneficiaries under the trust-deed, viz., Alexander Melville and William Noble Melville, whose shares, though vested in them prior to 1880, had remained unpaid and uncalled for in the hands of the trustees, raised an action of count, reckoning, and payment against

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Park, Watson, and Ritchie as accepting and surviving trustees. The defenders admitted liability to account, and lodged accounts of their intromissions and relative vouchers.

The pursuers lodged objections to these accounts in which they, inter alia, stated—“During the whole course of the trust the trustees have had large sums of money in hand, but they have never made any investments therewith. They have allowed the money to remain on deposit-receipt or in current account with the North of Scotland Bank's branches at Fraserburgh and Invergordon, of which one of the trustees, Mr Alexander Watson, was successively agent. The sums credited in the various accounts produced for interest on deposit-receipts are as follows:—

1. In the account from 23rd April 1875 (the date of the truster's death) to 13th February 1880	£406	13	4
2. In the account to 18th January 1884	449	5	9
3. In the account to 11th February 1886	161	15	4
4. In the account to 28th February 1891	193	11	3
5. In the account to 20th January 1894	43	19	1
	£1255	4	9

It was the duty of the trustees to have invested the trust funds, and if they had done so on good heritable securities, interest at the average rate at the least of 4 per cent. per annum could have been realised.”

The pursuers further averred that if the funds had been properly invested the interest during the first account would have been £633, 8s. 1d., during the second £700, during the third £327, during the fourth £356, 9s. 2d., and during the fifth £148, 15s. 5d., so that deducting the sums credited by the trustees for deposit-receipt interest, they fell to charge themselves with a further sum of £930, 7s. 11d under-credited for interest on the trust funds, which the trustees were liable to make good.

To this objection of the pursuers the defenders answered—“Denied. The trustees have accounted for all the money received by them. There is no direction given in the deed of settlement to invest the funds. The beneficiaries knew of the sums lodged in bank, and never made any objection thereto.… At first, and until the widow declared her option between the provisions of the settlement and claiming her legal rights, the trustees could not do otherwise than have the money deposited in bank. Mrs Noble approved of that course. Thereafter it was convenient to have it in bank to be ready for making payments to the beneficiaries. Futher, the law-agents of the trustees informed them that they could not get any suitable investment for the money. The claim for a difference of interest beyond what the trustees received is not relevant. In any case, the trust-deed expressly provides that the trustees ‘shall no ways be liable for any omissions in management nor for the omissions and neglects of their factors, agents, or cashiers, … but that they shall be bound to act honourably, and shall nowise be liable singuli in solidum, or for one another, but each for himself only, and for his own personal intromissions and wilful default, and no farther.”

A proof was led which disclosed the following facts:—The trustees never met to consider as to the question of investing the trust funds, they left the entire management in the hands of Watson. He gave evidence that he considered a deposit-receipt a proper investment for the trust funds. The highest amount in bank on deposit-receipt during the period of the first account was £4500, of the second £4400, of the third £3900, of the fourth £2450, and of the fifth £1300. The average rate of interest which had accrued on the capital sums during the nineteen years in which they had lain in bank on deposit-receipt was 2 per cent. The average rate of interest on money invested in Consols during the same period was about 2 4 5 per cent. Mr J. A. Robertson, C.A., and Mr R. C. Millar, C.A., gave evidence on behalf of the pursuers that there would have been no difficulty in investing the trust funds on heritable security at at least 4 per cent.

On 23rd July 1896 the Lord Ordinary ( Kincairney) pronounced the following interlocutor:—“Finds (1) that it was the duty of the trustees to invest the funds of the estate, where practicable, in safe investments profitable to the estate; (2) that there was no difficulty in so investing the said funds; (3) that the trustees failed in so investing the said funds; (4) that they thereby lost to the estate the sum of £881, 0s. Id.; (5) that the said trustees are bound to make good the said sum to the estate as at 1st January 1894.”

Opinion.—“The principal question discussed at last debate was that raised on Objection 7 to the trustees' accounts by the pursuers Alexander Melville and William Gordon Melville, sons of Sarah Noble or Melville, a daughter of the truster William Noble. The objection is that the trustees were-bound to have invested the trust-estate so as to have produced an adequate return in the form of interest, and were not entitled to keep the money in bank on deposit-receipt as they had done, and were bound to debit themselves with the difference between such interest as might have been obtained from a prudent and safe investment and the interest which they have obtained from the bank. The pursuers are not said to be in any way barred or precluded from stating this objection. It is admitted that the funds were not invested, but the trustees explain on record that until the widow declared her option to claim her legal rights they could not do otherwise than have the money deposited in bank; that it was afterwards convenient to have it in bank, that they might be ready to make payments to the beneficiaries, and that the law-agents of the trustees informed them that they could not get any suitable investment. These reasons or excuses are, however, wholly unsupported by the proof,

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and they were hardly maintained in the argument. I think it is clearly proved that there was no exceptional difficulty about investing, and that the greater part of the trust funds might have been invested safely at 4 per cent.; and the witness Mr Robertson, C.A., has prepared a state purporting to show that if the funds had been duly invested, leaving sufficient sums on deposit to meet occasional requirements, there would have been on 26th January 1894 a return of interest of £881, 0s. 1d. more than the trustees had actually drawn on the bank deposits at that date. That is to say, that that amount would have been gained to the estate. The correctness of that state has not been challenged, and it, with the evidence of Mr Robertson and Mr Millar, affords the only proof before me on the point. There appear to be no reported cases as to the liability of trustees who have simply lodged their money in bank to account for interest at the rates procurable on proper trust investments. There have been cases where trustees have been held liable for money allowed to remain in bank and lost through the failure of the bank— Cann v. Cann, 33 Weekly Reports, p. 40; Lewin on Trusts, 9th ed., 315. Such cases stand on a different principle. It is, however, a settled rule that trustees who fail to invest the trust-estate shall be charged with interest at a rate not below 4 per cent.— Jones v. Foxall, 1852, 15 Beav. 388; Williams v. Powell, 1852, 15 Beav. 461; Lewin on Trusts, pp. 315, 326; M'Laren on Wills, sec. 2254. I think this rule equally applicable where the trustees have without good reason allowed the trust funds to remain on deposit-receipt. The rule as to the duties of trustees is that they are bound to manage the trust-estate with the care and prudence with which reasonable men manage their own affairs; and certainly no one managing his affairs with ordinary prudence would allow his capital to lie in bank on deposit-receipt. I think that the rule applicable to funds which have not been invested at all is applicable in principle to the case of trust funds left without excuse permanently in bank. The defenders appeal to the clause of indemnity, which is no doubt wide and liberal, but still does not differ materially from the usual clause of indemnity in trust-deeds. But I think they are not in a position to avail themselves of that clause. Their neglect of the trust appears proved. There seems to have been no meeting of the trustees at all after 1880. It does not appear that they ever considered the question of investments. They left the management entirely in the hands of their factor and co-trustee, who paid no more attention to this question than they did. In these circumstances, I think that they cannot be protected by the clause of indemnity. It is, of course, always to be much regretted when gratuitous trustees are made to answer for the mismanagement of the estate, but in this case the result seems unavoidable, and I am of opinion that on this point the pursuers must succeed.” …

The defenders reclaimed, and argued—(1) The question as to whether the defenders were liable for not investing the trust funds properly could not be competently decided in the present action. It was in effect a mere action of accounting, not an action involving personal liability of the individual trustees. The defenders had been called in their collective capacity as trustees and not in their individual capacity. A question of personal liability for negligence could not be raised in a summons of simple accounting against trustees called in a body and not as individuals— Pearson v. Houstoun's Trustees, Jan. 29, 1868, 6 Macph. 286. The defenders were not even called conjunctly and severally, so no decree could be pronounced against them making them liable as individuals— Carruthers v. Hall, Nov. 25, 1830, 9 S. 66. This showed that the action was one solely of accounting in which a claim for damages for breach of trust could not be appropriately settled. The trustees had produced vouchers accounting for the whole of the-trust funds. If it was said that they had invested the money improperly, an action of damages could be brought against them. In such an action the trustees should be called as individuals as well as in their joint capacity, for their individual defences might conceivably vary from their joint defence as trustees. (2) The deposit of money in bank was a good investment. It was a loan to the bank, with a written obligation on the part of the latter to pay the principal with interest. It was in many respects a highly desirable investment of trust funds, as there was no risk attached to it, and the capital could be produced at any moment. (3) Even if a deposit in bank was held not to be an investment, the trustees escaped liability under the indemnity clause in the trust deed. They had omitted to invest money so as to obtain a certain rate of interest, and in terms of the deed they were not to be liable for omissions. The cases quoted by the other side in which it was held that the trustees were not exculpated by the indemnity clause were all cases in which part of the trust capital had been lost. There were four categories under which trustees had been held liable—(1) For bad investments, (2) for neglect of supervision of their agent, (3) for keeping the trust funds in their own pockets, and (4) for making no investment at all, as by putting the funds into current account. But there was no case where trustees who had invested the money and accounted for both capital and interest were held liable for the difference between the interest received upon the investment made and the interest which might have been received from another investment. The cases quoted on the other side were cases where culpa lata or gross negligence on the part of the trustees had been proved. In the case of Carruthers v. Carruthers' Trustees, July 13, 1896, 33 8.L.R. 809, the trustees had committed a breach of an express direction of the truster, while in Seton v. Dawson, Dec. 18, 1841, 4 D. 310, and Rae v. Meek, July 19, 1888, 15 R. 1033, the trustees were found guilty of gross negligence. It could

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hardly be suggested here that the defenders had been guilty of any culpa lata, and it was ridiculous to accuse them of gross negligence where they produced the whole of the capital and interest at 2 3 8 per cent., it not being suggested on the other side that they could have been found fault with if they had invested in Consols which would have yielded 2 4 5 per cent. In such circumstances it was vain to allege that the trustees had never met to consider about investments; they had left the matter in the hands of the person among them best qualified to judge of these matters, and the result showed that they had acted prudently in doing so. (4) In any event the rate of interest (4 per cent.) found by the Lord Ordinary was too high. If the money had been invested in Consols the interest would have averaged 2 4 5 per cent., and in estimating the difference to be paid by the trustees the Court must take the lowest rate of interest yielded by recognised trust investment. In Heritable Securities Investment Association, Ltd. v. Miller's Trustees, Dec. 17, 1892, 20 R. 675, the rate of interest for which trustees were held liable was 3 per cent., and in that case part of the trust funds had been improperly paid away. (5) Whatever the decision might be, the interlocutor of the Lord Ordinary should be restricted so as to apply only to the present pursuers.

Argued for the pursuers—(1) The trustees were called in that character because they were only liable to the pursuers in their capacity as trustees. The liability for interest on the trust funds arose quite properly in an action of accounting. The action was brought to determine what was the proper amount of the estate due by the trustees to the beneficiaries. When trust funds had been in the hands of trustees for a number of years, interest upon them was necessarily a part of the estate for which the trustees required to account— Donaldson v. Findlay, Bannatyne & Co., Mar. 3, 1860, 22 D. 937. Where trustees produce accounts, even although these accounts may be correct, the trustees will not get their discharge until they show that they have dealt with the trust funds properly— Forman v. Burns, Feb. 2, 1853, 15 D. 362. In an action of accounting the trustees did not require to be called as individuals in order to make them personally liable— Cochrane v. Black, Feb. 1, 1855, 17 D. 321. (2) The placing of money on deposit-receipt was not a proper investment of the money at all. Money might be placed on deposit-receipt temporarily till a good investment was secured, but a deposit-receipt could not in any view be called a permanent investment. The bank might alter or terminate the rate of interest on its deposits at any time. No prudent man acting on his own behalf would be satisfied with deposit-receipt interest. If an investment in any sense of the word, it was one on personal security, and as such not an investment under the Trust Acts. (3) The indemnity clause did not protect the trustees from liability. The Lord Ordinary had found that the trustees had never honestly applied their minds to the question of the investment of the funds. They had thus not acted in a prudent manner, but committed a breach of duty. The construction put by the decisions on a clause of indemnity of this kind was, that although it might confer on trustees immunity for small errors, it did not protect trustees who stood by and did nothing to carry out their duties— Seton v. Dawson, supra, Rae v. Meek, supra, Knox v. Mackinnon, Aug. 7, 1888, 15 R. (H.L.) 83; Carruthers v. Carruthers' Trustees, supra. The evidence showed that the trustees neglected to perform their duties, and the money was left on deposit-receipt simply because they would not take the trouble to find a proper investment. (4) Where trustees had acted in violation of their duty, the Court would not allow the lowest rate of interest obtainable on a first-class trust security, but would make the trustees pay a fair rate on the money—the amount which could have been earned on a prudent investment. The proof showed that 4 per cent. could have been got on good heritable security, and the Lord Ordinary was right in fixing the rate at 4 per cent. It was the duty of trustees to see that trust funds were profitably invested, and 4 per cent. had been held to be the rate which money could earn under prudent administration— Ross v. Ross, June 16, 1896, 23 R. 802. Where trustees allow money to lie in bank uninvested they are liable at the rate of 4 per cent.— Jones v. Foxall, 1852, 15 Beavan, opinion of M.R. Romilly, p. 392. If the money had been invested in Consols there would have been a rise in value in the capital which would have accrued to the estate. The case of The Heritable Securities Investment Association, Limited v. Miller's Trustees, supra, was a very exceptional case.

At advising—