Scottish Court of Session Decisions

On 10th July 1903 Mrs Margaret Mackenzie or Jopp, 5 Norwood Terrace, West Park Road, Dundee, presented a petition under section 104 of the Bankruptcy (Scotland) Act 1856 (19 and 20 Vict. cap. 79) to have certain funds taken out of the sequestration of the estate of the deceased Robert Fleming Johnston, W.S., Edinburgh.

A similar petition was presented by Mrs Charlotte Hawtrey Thwaites or Drummond, with which it is unnecessary to deal for the purposes of this report. The two petitions were conjoined.

Answers were lodged by the trustee on Mr Johnston's estate.

The following narrative is quoted from the opinion of the Lord Ordinary ( Pearson):—“This dispute has arisen in consequence of the sequestration of the estates of the late R. F. Johnston, W.S., who died on 12th July 1902. Mr Johnston carried on business under the firm name of Richardson

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& Johnston, but during the whole of the transactions now in question he was the sole partner of the firm.

On Mr Johnston's death his affairs were found to be embarrassed. On the application of his widow a judicial factor was appointed on his estates under section 164 of the Bankruptcy Act; and in January 1903 the factory was superseded by the sequestration of his estates at the instance of his creditors.

Among the assets which came into the factor's hands were five deposit-receipts with the Commercial Bank of Scotland in favour of Mr Johnston's firm, for the sum of 200 each, all dated 21st November 1900. These the judicial factor uplifted, and renewed in his own name as factor, with the interest added.

Two of the bankrupt's clients, Mrs Jopp and Mrs Drummond, now present those petitions under section 104 of the Bankruptcy Act, claiming right to the deposit-receipts and their contents or part thereof, and praying to have them taken out of the sequestration in whole or in part. They maintain that the sums in the deposit-receipts include moneys belonging to them which found their way into the hands of Mr Johnston as their law-agent and factor; and that the trustee in the sequestration, acting for the general body of creditors, has no right to retain and distribute the money as part of the bankrupt's assets. On the main facts of the case there is very little difference between the parties though they differ widely as to the inferences to be drawn and as to the legal principles to be applied.

I take first the case of Mrs Jopp, leaving over in the meantime the claim made by Mrs Drummond. In 1895 Mrs Jopp appointed Mr Johnston, who was agent on her deceased husband's trust, to be her own agent, and she granted a factory and commission in his favour, and handed over to him her papers, including the certificates of 150 shares of the North of Scotland Bank, Limited, of which she was the owner. In 1897 twenty-five of these shares were sold by Mr Johnston on the instructions of Mrs Jopp. In November 1900 the remaining 125 shares were sold by him without her knowledge or instructions, and she was not aware that he had sold them until after his death. Mr Johnston kept a current account in his firm name with the Commercial Bank, and did his business chiefly through the Haymarket branch. Into this account he paid on 19th November 1900 a sum of £1239, 19s. 3d., consisting of (1) £1194, 19s. 3d., being the net proceeds of the sale of the 125 bank shares, and (2) £45, being the half-year's rent of a property in Aberdeen belonging to Mrs Jopp, which he was in use to collect for her. A sum of £439, 17s. or thereby already stood at credit of the account, and this payment in on 19th November raised the credit balance to £1679, 16s. 3d.

It appears that Mr Johnston had certain heritable property of his own which was heavily bonded, and that he had been apprehensive that a second bond of £1330 secured on it might be called up. It was, however, allowed to remain, and the suggestion is, that having provided ready money by selling the bank shares, which turned out not to be required, he was desirous of putting the amount on deposit-receipt meanwhile until he could get a trust investment for it. We do not know what his ultimate intentions in the matter were, but what he did was to pass a cheque on the current account (dated 21st and debited 22nd November) for £1500, in exchange for which he got from the bank seven deposit-receipts in name of his firm, one for £300 and the other six for £200 each. Of these he afterwards uplifted two, the receipt for £300 and one for £200. The other five for £200 each were extant at his death, and are the five receipts above referred to, the contents of which form the fund now in dispute. I may add that at Mr Johnston's death there was also a credit balance of £738, 13s. 7d. on his current account, which was uplifted by the judicial factor.

Between the payment in of the £1239, 19s. 3d. and the drawing out of the £1500 the current account had only altered to this extent, that certain small sums amounting to £27, 18s. 6d. had been drawn out, and a sum of £155 had been paid in. The result was that after deducting the amount of the £1500 cheque the account still showed a credit balance of £306, 17s. 9d. And as the credit balance did not in the interval fall below the sum of £1239, 19s. 3d. paid in it is plain that that sum, or a great part of it, was taken out of the account-current by the £1500 cheque and put into the deposit-receipts.”

The contentions of parties are disclosed in the opinion of the Lord Ordinary, who on 8th April 1904, after a proof, pronounced the following interlocutor—“In the petition at the instance of Mrs Jopp, Finds that in respect of £1194, 19s. 3d., being proceeds of the sale of bank shares, the petitioner had right to the sums contained in the five deposit-receipts for £200 each, dated 21st November 1900, which were extant at the date of the death of the late Robert Fleming Johnston, with the interest accrued thereon, and is entitled to have the same taken out of the sequestration, and decerns and ordains the respondent forthwith to deliver over to the said petitioner the deposit-receipts which were substituted therefor, duly endorsed, with all interest accrued thereon.”

Opinion.—[ After the narrative above quoted, his Lordship proceeded]—“How much of it was so treated depends upon the view taken of the intermediate entries in the account, and of the balance of £439, 17s. which stood at credit immediately before the payment in on 19th November. If these are all to be regarded as entries in which Mr Johnston alone was concerned, then neither he nor the trustee for his general creditors could challenge the proposition that Mrs Jopp's money was taken out of the account and transferred to the deposit-receipts. To allow them to do so would be to enable them to benefit by his breach of the trust relation in which he

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stood and to force a settlement with her on the footing that his money was preserved in the deposit-receipts, while hers was left at risk in the account-current to be operated on by him in further breach of his duty. The true principle is the opposite one, namely, that the trust property comes first—see per Sir George Jessel in the case of Hallett ( 1879, Law Rep. 13 Chan. Div. 696, at p. 719), where he quotes Lord Hatherley to the effect that ‘if a man mixes trust funds with his own the whole will be treated as the trust property except so far as he may be able to distinguish what is his own.’ I am leaving out of account at this stage the claim of the other petitioner Mrs Drummond, who claims to be interested in the additional credit of £155 on 21st November to the extent of £139, and to be entitled to follow that sum into the deposit-receipts and to have it now taken out of the sequestration. I am considering Mrs Jopp's claim in a question with the bankrupt and his trustee, and unless they can show that the money now claimed, or part of it, has been otherwise made good to her, she is, in my opinion, entitled to vindicate what I regard as her money.

“No doubt the deposit-receipts and their contents did, prima facie, fall within the assignation of bankruptcy, because they were taken in favour of the bankrupt's firm. That is why a petition is necessary to take them out of the sequestration. But I cannot accept the respondent's argument that the case must be solved in his favour by distinguishing between the position of a trustee properly so called and of one who holds a fiduciary relation to another as factor or agent. It was suggested that a trustee can never become the owner of the trust-estate, and that his disqualification to do so, even if he invests it in his own name, is implied in his trust title, while a factor or agent purchasing or investing contrary to his duty in his own name acquires the property, and is only liable to a claim of damages. The distinction is an obvious one, and it may sometimes be important where the rights of bona fide onerous purchasers are concerned. But the trustee in bankruptcy and the general creditors cannot in this matter be regarded as third parties, and this being so, I cannot hold that it makes any difference that the bankrupt was a person who held a fiduciary position towards Mrs Jopp without being trustee for her in the ordinary sense. It is well settled in English law that the distinction cannot be maintained in such a case as this, and I do not think that the passages to which I was referred in our institutional writers (Stair, i, 12, 16; Ersk. iii, 3, 34; 1 Bell's Com. 285–7) are really to the contrary. The matter was discussed and decided in the case of Hallett above cited, where the Appeal Court affirmed that there was no such distinction between an express trustee and an agent or collector of rents or anybody else in a fiduciary position.

The real question is, whether and how far the proceeds of the bank shares can be traced or identified. Certainly the passing of the money through the agent's current account or deposit account will not prevent this result—see Macadam v. Martin's Trustee, 1872, 11 Macph. 33, and the English case of Pennell, 4 De Gex, M. & G. 372, as explained in the Lord President's opinion in Macadam. The requirements of the law as to the property or money claimed remaining distinguishable will be found fully stated in Bell's Com. i, pp. 286 and 287; it must be ‘capable of being traced by a clear and connected chain of identity, in no one link of it degenerating from a specific trust into a general debt.’ I may be allowed to refer to the opinion of Lord Justice Thesiger in the case of Hallett above referred to, at p. 723, where he states the rule in terms which, though he speaks of a specific chattel being the subject of the trust, seems to me equally applicable to bank share certificates, and he adds that all the cases where it has been held that money mixed and confounded but still existing in a mass cannot be followed, ‘may be resolved into cases where, although there may have been a trust with reference to the disposition of the particular chattel which these moneys subsequently represented, there was no trust, no duty in reference to the moneys themselves beyond the ordinary duty of a man to pay his debts—in other words, that they were cases where the relationship of debtor and creditor had been constituted instead of the relation either of trustee and cestui que trust, or principal and agent.’ In the present case the relationship of client and agent or factor undoubtedly continued, and it would, in my opinion, have been an additional breach of his specific duty to Mrs Jopp if he had uplifted all the deposit-receipts and used them for his own purposes. This consideration furnishes the true answer to the respondent's further observation, that Mr Johnston's practice in handling his bank accounts was not to treat sums of capital separately and put them on deposit-receipt as such, but was simply to pass cheques on his current account when it was large enough and again to uplift the deposit-receipts and pay them in to the current account as it became depleted. I do not think the trustee in bankruptcy is entitled to avert an adverse decision by founding on the mode in which the bankrupt was accustomed to manipulate his bank accounts as regards sums which should never have entered there at all.

I have hitherto treated Mrs Jopp's claim as a whole, without reference to the fact that the sum of £1239, 19s. 3d. paid in on 19th November, consisted in part (namely, to the extent of £45) of the half-year's rent of an Aberdeen property belonging to her. It was only the balance, £1194, 19s. 3d., which represented the bank shares sold, and the question is raised by the trustee whether the £45, which is of the nature of income, has not already been paid to Mrs Jopp. This is apparently not capable of exact demonstration, but it does appear that her accruing income, so far as

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it reached Mr Johnston's hands, as her factor, continued after the sale of the bank shares to be treated in the same way as it had been treated before. Mr Johnston continued until his death to pay to her or for her behoof out of his bank account sums in name of income, and although no doubt he was indebted to her at his death he would be presumed to make the payments out of the income in his hands in the order in which the items of income had reached him. As it happens, however, this part of Mrs Jopp's claim stands in this peculiar position, that in a question with the trustee it is immaterial whether she succeeds in it or not. The fund in medio is the £1000 contained in the five extant deposit-receipts, with interest, and if Mrs Jopp's claim is sustained, as I think it must be, to the extent of the proceeds of the bank shares—namely, £1194, 19s. 3d., with interest—that will exhaust the fund in a question with the trustee, who plainly cannot compete with her upon it.”

The respondent reclaimed, and argued—The money placed on deposit-receipt by Johnston was in the same position as if he had placed it to credit of current account. The petitioner had no better claim than any other creditor whose money had been placed on deposit-receipt— Knatchbull v. Hallett (1879), 13 Ch D 696. The present case differed from Macadam v. Martin's Trustees, November 5, 1872, 11 Macph. 33, 10 S.L.R. 30; there the money in question was distinguishable and specified. All that the petitioner could do was to constitute a claim—Stair, i, 12 and 16; Ersk. iii, 3–34. The deposit-receipts were in the same position as goods bought for another in the purchaser's name, and to such goods the purchaser's creditors would be preferred— Baylstoun v. Robertson & Fleming, 1672, M. 15, 125.

Argued for the petitioner—The case of Macadam v. Martin's Trustees, cit. sup., was not distinguishable. The bankrupt having mixed his own money with that which he held in trust, whatever was left was to be presumed to be the latter— Pennell v. Deffell, 1853, 4 De G. M. & G. 372. The deposit-receipts in question could never have existed but for the sum realised from the sale of the petitioner's stock. The respondent could have no higher right than the bankrupt would have had, and he would have had no answer to the petitioner's present claim.

At advising—