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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Freer's Trustees v. Freer [1897] ScotLR 34_323_1 (28 January 1897)
URL: http://www.bailii.org/scot/cases/ScotCS/1897/34SLR0323_1.html
Cite as: [1897] SLR 34_323_1, [1897] ScotLR 34_323_1
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SCOTTISH_SLR_Court_of_Session
Page: 323↓
Court of Session Inner House First Division.
v.
Facts:
A truster directed his trustees that his widow should have during her widowhood the free liferent use and enjoyment of the residue and remainder of his whole means and estate. By a codicil the truster—who was a solicitor, at that time practising alone—authorised his trustees to make arrangements for carrying on his business till one of his sons should be ready to take it up. Before his death the truster entered into a partnership, which was to last fourteen years, with power to either party to terminate it at the end of seven. One of the conditions was, that in the case of the death of the truster
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during the currency of the partnership, a certain proportion of the future profits of the business should thereafter belong to the remaining partner, and the remainder to the representatives of the truster. Held that in a question with the liferentrix, the share of profits accruing to the truster's representatives fell to be treated as capital, and not as income. Strain's Trustees v. Strain, July 19, 1893, 20 R. 1025, distinguished.
Mr John Freer, solicitor, Melrose, died on 2nd February 1893, leaving a trust-disposition and settlement dated 16th October 1891, with two codicils annexed, both dated 13th October 1892.
By the trust-deed he disponed his whole estate to trustees, and he directed them— “Fourth, With regard to the residue and remainder of my whole means and estate, I direct that the said Harriette Beatrice M'Ewen or Freer shall enjoy the free liferent use and enjoyment thereof during her viduity, subject to the maintenance and education of my children, and upon her death or second marriage, that the same shall be conveyed and made over to my said children equally, share and share alike.”
By the first codicil Mr Freer provided—“I, John Freer, before designed, do hereby authorise my said trustees, as they shall think best, either first, to dispose of my business in Melrose at any time, or, second, to make arrangements for carrying on the same until one or other of my sons, if they elect to follow out the profession, is ready to take it up for himself or in partnership; and in so carrying on said business I authorise my said trustees to allow any sum not exceeding two thousand five hundred pounds to remain as capital in said business on such terms as they may arrange.”
The truster for many years carried on business as a solicitor and bank-agent in Melrose, at first in partnership with his father, but after the death of his father in 1881, until a few weeks before his own death, he carried on business alone.
Shortly before his death the truster assumed as a partner Mr Thomas Muir, S.S.C., the business being thenceforward carried on under the name of Freer & Muir. By the contract of copartnery, dated 31st December 1892, and 2nd January 1893, the copartnership was to endure to 31st December 1906, but with power to either party to put an end to it at 31st December 1899.
It was provided, inter alia—“ Eighth, In the case of the death of the said John Freer during the currency of this contract, two-thirds of the future profits of the business shall thereafter belong to the said Thomas Temple Muir, and one-third thereof to the representatives of the said John Freer during the remaining period fixed for the endurance of the copartnership.” … “Ninth, In the event of the death of the said John Freer during the currency of this contract, his representatives shall be entitled to require the said Thomas Temple Muir, at any time during its currency, or at the end of the period fixed for the endurance of the copartnership, to assume as a partner one of the said John Freer's sons, and that for a period of seven years after the date of the expiry of this contract, and to give to the son so assumed” a certain proportion of the profits, “and that on terms and conditions similar to those contained in this contract; and on such assumption taking place, the right and interest of the said John Freer's representatives in the profits of the said business shall thenceforth cease; or otherwise in lieu of such assumption it shall be in the option of the representatives of the said John Freer to require the said Thomas Temple Muir to pay to them the sum of £ per annum out of the profits of the said business for a period of five years after the date of the expiry of this contract.”
The powers referred to in the ninth article have not yet been exercised.
A special case was raised by, first, Mr Freer's trustees, and, second, his widow, as to how the share of the profits of the business to which Mr Freer's representatives were entitled were to be treated in a question with the second party as liferentrix. The first parties contended that this share was of the nature of an annual payment out of the profits in respect of goodwill, and was intended by the testator to form part of the capital of his estate, as being merely a temporary source of income.
The second party contended that it was intended by her husband that his whole annual income should go to her, and that this share of profits formed part of the annual income, and was not a payment for goodwill of the nature of capital.
The question submitted by the parties was—“Is this share of the profits to which Mr Freer's representatives are entitled to be treated as capital or income by his trustees ?”
Argued for first parties—The power given to the trustees by the codicil had been superseded by the contract of copartnery executed after it. Accordingly, the goodwill was no longer part of the residue, but had passed to the surviving partner. All that the trustees had in respect of the business was a jus crediti—a right to demand their proportion of the profits. The profits did not represent income accruing from residue in the hands of the trustees; nor were they profits of a business belonging to and administered by the trustees. They were merely income which the trustees by virtue of their jus crediti and the contract of copartnery had a right to in-gather as it accrued. When profits arose from a going business which the trustees were carrying on, they were to be treated as income. But unless they were the produce of means and estate held and administered by the trustees, they could not be considered the revenue of the capital which was held by them under the will— Strain's Trustees v. Strain, July 19, 1893, 20 R. 1025, as contrasted with Ferguson v. Ferguson's Trustees, February 23,
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1877, 4 R. 532; Campbell v. Wardlaw, July 6, 1883, 10 R. (H. of L.) 65. Argued for the second party—The truster was the sole partner when he made his disposition, and his clear intention as expressed there, and in the codicil, was that the whole annual proceeds of his “residue,” including the business, was to go to his widow. Though the application of the codicil was altered by the partnership deed the intention was not. The trustees had come in the truster's place in relation to the partnership to the extent of one-third. There was an annual payment coming in for a number of years, and that, coupled with the obvious intention of the testator, showed it should be treated as income. There was no such thing as “goodwill” with reference to a solicitor's business— Bain v. Munro, January 10, 1878, 5 R. 416. The case of Ferguson had been overruled by Strain, which governed this case.
The question before us is whether the one-third of the profits payable by Mr Muir to Mr Freer's trustees, which will be payable alternately till the year 1899 or 1906, is capital or income.
My view is that these payments are part of the residue of the estate, and that accordingly Mrs Freer is only entitled to the enjoyment of the interest on them. So far as we have seen from the contract, Mr Muir became the sole partner on Mr Freer's death. The trustees are not partners, and are not entitled to interfere with the management of the business, and accordingly Mr Muir is entitled to uplift the whole profits, and only then does the claim of the trustees to one-third come in. It appears to me that that is only a debt due by Mr Muir to the trustees, which they can enforce against him every year, and that it is like any other debt, as if he had bound himself under a bond to make such payment to the trustees. It is part of the residue, and it follows that the provisions of the codicil apply to a state of affairs which has ceased to exist. There might have been a different question if the trustees had carried on the business in accordance with the terms of the codicil, and had allowed certain capital to remain in the business, and in that case the profits might have gone to Mrs Freer. But that consideration does not apply now, and accordingly the case must be determined in accordance with the terms of the settlement and of the obligations in the contract. Construing the two together, I come to the conclusion that the share of the profits falls into the residue, and that Mrs Freer is only entitled to the income therefrom.
The right of Mr Freer's representatives under the contract of copartnery is a right to receive a share of profits, and it is to last for seven years in any event, and possibly for fourteen years. Part of that time has expired, but we have to consider the case as at the testator's death. The right of the trustees at the present time is to receive one-third of the profits of the business carried on by the partner of the deceased Mr Freer, and the question is, whether this annual payment is to be made over to Mrs Freer as “liferent of residue,” or whether it is to be considered residue, so that the lady shall only enjoy the annual return from this sum treated as capital or residue.
There have been, as counsel stated, decisions upon questions which are nearly related to this, but I think, in common with Lord Adam, that the questions are not identical.
A testator who wishes to give the income or interest of his estate to his widow or child may express his intention to do so in different ways. He may give a share of the income of the trust, or he may give a provision in the form of the liferent or annual return from the capital of the estate. At first sight it may seem that there is not much difference between these, but when one comes to deal with a terminable interest the distinction arises very sharply between the two forms of expression, because according to the latest decision, if the testator gives the income it would include everything coming in within the year, whether of the nature of annual return or capital payment.
Of course there is no absolute rule, but according to Strain's case the presumption seems to be that recurrent payments fall under income. But if the annual interest which is given to the widow or child is clearly marked as the return on the capital of the estate I cannot see how such a provision could be construed so as to include capital sums coming to the trust in the shape of annual instalments.
We are not favoured with a complete copy of the contract of copartnery, and I
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The
Lord President and
The Court affirmed the first alternative of the question.
Counsel for the First Parties— A. S. D. Thomson. Agent— Andrew Tosh, S.S.C.
Counsel for the Second Party— Sym. Agent— James Skinner, S.S.C.