Scottish Court of Session Decisions

Mrs Agnes Rutherford or Warren died on 26th March 1879, leaving a trust-disposition and settlement dated 21st August 1878, by which she conveyed her whole means and estate, heritable and moveable, to trustees for the purposes therein specified. The trust deed contained the following clause:—“And I hereby confer on my said trustees all the powers and privileges conferred or to be conferred by statute or at common law on gratuitous trustees in Scotland, and over and above these powers, power to sell the trust estate, either by public roup or private bargain, to allow the trust estate, or any part thereof, to remain on the obligations and securities upon which the same may stand at the time of my death, and to lend out the trust funds to persons or corporations on any form of obligation or kind of security they deem fit, or to invest the same in the purchase of preference or debenture stocks of any established railways in the United Kingdom, or in the stocks or shares of any Scotch banks or gas or water companies in Scotland, or place the same on deposit with hankers in Great Britain or with established Indian or Colonial banks, and to alter or vary the loans and investments from time to time; declaring that my said trustees shall not be liable for the sufficiency of the investments or the securities upon which the trust funds may be lent or laid out.”

In June 1899 Andrew Rutherford Warren, who was then the sole surviving trustee foresaid, invested £3000 of the trust funds in £3000 4 1 4 per cent. first mortgage debenture stock of the Credit Foncier of Mauritius, Limited. The said company was a limited company registered under the Companies Acts, and carrying on business in London. Among the objects specified by the memorandum of association of the said company there was, inter alia, “the raising of money by share capital and by the issue or sale of bonds, debentures, or other obligations.” By its articles of association the following regulations applied to the borrowing of money—“ Borrowing Powers.—42. The company may issue debenture stock, bonds, debentures, or other obligations at any time and in any form or manner and for any amount which the board may from time to time determine, subject to the following condition:—The total amount of such debenture stock, bonds, debentures, or obligations for the time being shall not exceed the amount of the subscribed nominal capital of the company for the time being. 42a. The borrowing powers of the company shall be subject to the restrictions imposed by the trust-deed executed or intended to be executed in or about April 1899 upon the creation of £400,000 debenture stock, so long as any of that debenture stock remains outstanding, and the company shall not meanwhile, save as therein appears, issue any debentures or debenture stock ranking in priority thereto or pari passu therewith.” In June 1899 the company made an issue to the public of £300,000 first mortgage debenture stock bearing interest at 4 1 4 per cent., part of a total amount limited to £400,000. The said debenture stock was, together with the debentures of the company, secured by a trust-deed, whereby the company charged, in favour of trustees for behoof of its debenture and debenture stockholders, its whole undertaking, capital, assets, and rights, both present and future, other than its uncalled capital for the time being. Article 3 of the said trust-deed was in the following terms:—“The debenture stock shall be represented by certificates in the form already prepared and set out in the second schedule hereto, and shall be subject to the conditions and provisions already prepared and set out in the third and fourth schedules hereto, which conditions and provisions shall be endorsed on each certificate, and shall be binding on the company and on the trustees and on the holders of debenture stock, and on all persons claiming through them respectively.” The said fourth schedule contained the following provision:—“12. Upon due notice given a general meeting of the debenture stockholders shall have the following powers exerciseable by extraordinary resolution, namely:—… (2) To release any property charged to the trustees, and to accept any other securities or shares in

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substitution for the debenture stock.” The said trust-deed, inter alia, provided that (1) the amount of the debenture stock to be issued from time to time should in no case, when added to the amount of debentures for the time being outstanding and the debenture stock then already issued, exceed £400,000 in all; (2) the said debenture stock should be paid off at par on 1st January 1940, but should be redeemable on or after 1st January 1915 at £105 per £100 if the company should elect so to do; and (3) the security constituted by the trust-deed should become enforceable in the event of default in the payment of interest; if an execution or distress was levied for a sum exceeding £500, unless paid out or got rid of in one week; if the company committed any breach of any of the obligations in the trust-deed, and for three calendar months after it was required by the trustees to make good the same failed to comply therewith; if an order was made or a resolution passed for the winding-up of the company; and if the total borrowings of the company, other than on debenture or debenture stock, exceeded at any one time £100,000. The sum of £3000 invested in the foresaid first mortgage debenture stock by the said Andrew Rutherford Warren was so invested on application made by him in the ordinary way, in terms of the prospectus issued to the public.

Andrew Rutherfurd Warren died on 18th July 1902 and on 18th August James Alexander Robertson Durham, C.A., Edinburgh, was appointed judicial factor on the trust estate.

Thereafter various questions arose in relation to the trust-estate, and inter alia, a question between the judicial factor and Mrs Sarah Lucy Rhind or Warren, the executrix of Andrew Rutherfurd Warren, as to the right of Andrew Rutherfurd Warren to invest £3000 of the capital of the estate in £3000 4 1 4 per cent. debenture stock of the Credit Foncier of Mauritius, Limited. The said debenture stock could not now be realised without loss.

For the settlement of this question among others a special case was presented for the opinion and judgment of the Court.

The parties to the special case were, inter alios, (1) the judicial factor, and (3) Andrew Rutherfurd Warren's executrix.

The fourth question of law was—“Was the investment on the debenture stock of the Credit Foncier of Mauritius, Limited, one authorised by the terms of Mrs Warren's settlement?”

Argued for the first party—The investment in question was not authorised by the trust-disposition and settlement. The authority given to lend the trust funds to persons or corporations did not give authority to lend the trust funds to a company registered under the Companies Act 1862— In re Smith; Davidson v. Myrtle [1896], 2 Ch. 590, opinion of Kekewich, J., 594. This investment was not a loan in the true sense of the word. The lender had no real security for the repayment of his money. Besides, the power to invest was qualified by the specification in the clause of certain debenture stock in which investment might be made. Further, the investment was not a prudent one, as the trustee might have been compelled under section 12 of Schedule 4 to accept speculative shares in place of the debenture stock. The third party was therefore bound to restore to the trust estate the £3000 so invested in exchange for a transfer in her favour of the said stock.

Argued for the third party—The Credit Foncier of Mauritius, Limited, was a corporation within the meaning of the trust-deed. Investing money in debenture stock was lending money to the company. The money lent was repayable in 1940. The case of in re Smith, supra, had no bearing. It only decided that a company incorporated by Act of Parliament signified a company incorporated by Special Act of Parliament.