Scottish Court of Session Decisions

The Bankruptcy (Scotland) Act 1856 (19 and 20 Vict. c. 79), sec. 102, enacts, inter alia—“The act and warrant of confirmation in favour of the trustee shall ipso jure transfer to and vest in him … the whole property of the debtor to the effect following:—… (2nd) … Provided always that such transfer and vesting of the heritable estate shall have no effect upon … the rights of the creditors of the ancestor (except that the act and warrant of confirmation shall operate in their favour as complete diligence).…”

John Little Mounsey, W.S., sole surviving trustee under the trust-disposition granted by the late James Christie Traill of Rattar, first party, the creditors of the said James Christie Traill, and the creditors of his ancestors James Traill and George Traill, presented a Special Case to have determined the rights of the respective creditors to the proceeds of two of the family portraits taken from Castlehill House and sold. The portraits belonged originally to James Traill, who owned Castlehill and other properties, and subsequently in succession, along with James Traill's properties, to George Traill and James Christie Traill. The second parties to the case consisted of the heritable creditors of James Traill, who held bonds over properties other than Castlehill; the fourth parties were the holders of bonds over Castlehill granted by George Traill; the fifth parties were holders of bonds over Castlehill and other properties granted by George Traill, and also creditors of James Christie Traill, holding bonds over the whole estates; the sixth parties were the holders of bonds granted by George Traill over estates other than Castlehill; and the seventh parties were the unsecured creditors of James Christie Traill.

The Special Case set forth, inter alia—“1. By inter vivos trust-disposition, dated 5th January 1887, the deceased James Christie Traill, Esq. of Rattar, on the narrative that he was indebted and owing to various persons certain sums of money, partly upon heritable securities over his estates therein disponed, and partly on bonds, bills, accounts, and otherwise, and that for further security and more ready payment to his whole lawful creditors at the date of the said trust-disposition, and being desirous that the said debts should be paid off as speedily as practicable, he had resolved to grant the said trust-disposition, gave, granted, alienated, disponed, and assigned to John Clerk Brodie, Thomas

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Dawson Brodie, David Wardlaw, and John Little Mounsey, all Writers to the Signet, Edinburgh, and to the survivors and survivor of them,… all and sundry his whole means, estate, and effects, heritable and moveable, real and personal, of whatever kind and wherever situated, then belonging to him, or which might belong and accrue to him during the subsistence of the trust.…

2. The said disposition was declared to be in trust for, inter alia, the following purposes:—… ( Thirdly) For payment to the truster's creditors of the interest due and to become due on the debts due by him, whether secured or unsecured, and of the annuities payable by him (the secured creditors being paid their interests and annuities according to the order in which their securities were recorded): ( Fourthly) For payment to the truster's creditors foresaid of the whole debts due by him to them, according to the several rights, interests, and preferences of the said creditors, and conform to a scheme or schemes of division to be made out and authenticated by the trustees.

3. By said trust-disposition it was, inter alia, declared with reference to said fourth purpose that every creditor ‘who holds a security over any part of the trust estate, heritable or moveable, shall be bound to value and deduct such security from the amount of his claim before ranking and specify the balance, and the trustees shall be entitled to a conveyance or assignation of such security at the expense of the trust estate on payment of the value so specified; and that acquiescence in or accession to this trust shall not preclude any such creditor from continuing to hold such security or from exercising all the powers (except the power of doing diligence against me) which they at present have in connection therewith, including, inter alia, the power of selling or disposing of the same as freely in all respects as if this trust-disposition had not been granted, or they had not acquiesced in or acceded thereto, they being always bound to give in writing to the trustees three months' notice of such intended sale as regards the heritable estate, and eight days' as regards the moveable estate, such creditors being in that event bound to impute to the amount of their claims the net sums realised on such sale and to account to the trustees for the balance, if any; but providing that so long as the trustees shall regularly pay the interests on the various secured debts as they fall due, none of the secured creditors shall, during the period of five years from the date hereof, be entitled to poind the ground or enter into possession of the security-subjects by maills and duties or otherwise; and also declaring that in the event of the trust estate being insufficient to pay to my creditors the full amounts of their respective debts and interest thereon, the trustees shall pay and divide the proceeds thereof, by one or more dividends, among all my creditors rateably and proportionally and according to their legal rights and preferences, such payment and division being made upon the same rules and principles as if made in a process of sequestration under the Scotch Bankruptcy Statutes, according to which rules and principles the trustees shall be guided in regard to the admission or rejection of all claims, the ranking of creditors, payment of dividends, and distribution of the trust estate generally; all questions of ranking and preference being determined on the same footing as if an award of sequestration of my estate had been made under the said Bankruptcy Statutes as at the date of execution hereof, but the trustees shall not be bound, except so far as they shall see fit, to adopt any of the formal procedure of a sequestration.’…

7. At the date of the said trust-disposition the heritable estates of the said James Christie Traill thereby conveyed consisted of, inter alia, the lands of Rattar, Bower-madden, Castlehill and Murkle, Holland-make, in the county of Caithness, and Hobbister and Elsness in Orkney.…

9. There are, in addition to the creditors holding heritable securities before referred to, various unsecured creditors of the said James Christie Traill. These creditors are the seventh parties hereto, and their claims, which have not yet been adjudicated on by the first party, amount to a large sum. None of these creditors is a creditor of Sheriff Janies Traill of Hobbister, the original owner of the pictures after mentioned, and granter of the first four bonds mentioned in the state, or of his son George Traill or his (the latter's) testamentary trustees.

10. It was understood from the commencement of the trust that some of the family portraits in Castlehill House, which stands on the lands of Castlehill, were painted by Sir Henry Raeburn, R.A., but at the inception of the trust they were not believed to be of great value. In 1911, however, arrangements were made by the first party for having two of these portraits, being those of Sheriff James Traill and Lady Janet Traill, removed to Edinburgh from Castlehill House for examination by experts and for safe keeping. From the time when they were painted till they were so removed to Edinburgh, the said two portraits were kept in and formed part of the plenishing of Castlehill House. After they had been examined by experts, who reported that they were genuine Raeburns, and of considerable value, the first party decided to consult the creditors as to selling them. He therefore reported the position to a meeting of creditors held on 3rd July 1911.…

11. At the meeting of creditors held on 3rd July 1911 the said report was considered and the following resolution was come to, as appears from the minute of the meeting:—‘It was agreed that the portraits of Sheriff Traill and Lady Janet Traill by Raeburn, which had been removed to Edinburgh from Castlehill House, should be forthwith despatched to Messrs Christie, Manson, & Woods, auctioneers, London, for public sale at their rooms on 14th curt., with such reserve prices as shall be fixed by the auctioneers, and the agents were

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directed to insure the pictures against transit risks to the extent of £4000. It was further agreed that the price or prices realised by the pictures, under deduction of all expenses connected with the transaction, should be held by the trustee until the rights of all parties concerned should be definitely ascertained or agreed upon.’ In accordance with these instructions, the first party exposed the pictures for sale in London on 14th July 1911, when they realised together £18,375. After deduction of auctioneers' commission and other expenses and charges, the net proceeds amounted to £16,626, 9s. 6d.…

13. The two portraits in question originally belonged to the said Sheriff James Traill of Hobbister, who was owner of the whole estates mentioned in the foregoing list of heritable debts except the small estate of Hollandmake. The said Sheriff James Traill died in 1843. He was succeeded in the estates by George Traill, his son, to whom he had previously by inter vivos conveyances disponed his heritable estates, but who did not complete his title to the said estates until after his father's decease. The said George Traill was executor and residuary legatee under a general disposition and assignation executed by the said Sheriff James Traill on 8th April 1811, and on his death succeeded to his moveable property, which included the portraits in question, and to which the said George Traill confirmed, conform to testament-testamentar in his favour by the Commissariot of Caithness dated and sealed 25th October 1844. The said George Traill purchased the estate of Hollandmake prior to 27th March 1845, the date of his infeftment therein. The said George Traill died on 29th September 1871, leaving a trust-disposition and settlement dated 27th May 1870, and registered in the Books of Council and Session 13th October 1871, under which he conveyed to his trustees therein mentioned his whole estates, heritable and moveable, including the furniture and plenishing in the mansion-house of Castlehill, and after making certain directions as to payment of debts, annuities, &c., and for the sale of certain portions of his estate, he directed his trustees to make over and convey his whole estates so far as not sold to and in favour of his brother James Traill of Hayes, and his heirs, but always under burden of any heritable securities which might then affect the said estates, and under the declaration that notwithstanding the said James Traill of Hayes should predecease the said George Traill, or die before obtaining a conveyance to the said estates, he should have power by any writing under his hand to dispose of or burden for behoof of his younger children, or otherwise, the whole or any part of the said estates therein before directed to be conveyed to him, as he might see fit, and his trustees were thereby directed to dispone or convey the same in terms of such disposal. Under the said trust-disposition and settlement the said George Traill appointed his trustees to be his executors, and they subsequently obtained confirmation by testament-testamentar in favour of their commissioner expede before the Commissary of Caithness on 12th January 1872. The said James Traill of Hayes survived the said George Traill, but died before the said trustees had divested themselves, leaving a deed of settlement dated 1st November 1871, and, with codicil thereto, recorded in the said Books of Council and Session 27th October 1873, under which he requested and appointed the trustees of the said George Traill to make over, assign, convey, and dispone to and in favour of his eldest son James Christie Traill the said estates so far as not sold. In accordance with said request the said trustees of the said George Traill, on the narrative of the said trust-disposition and settlement of the said George Traill, conveyed the whole heritable estates to which he had succeeded from the said Sheriff James Traill, along with the estate of Hollandmake purchased by the said George Traill, ‘and also all and whole the furniture and plenishing in the mansion-house of Castlehill, and the whole other personal estate of the said George Traill in so far as not sold or disposed of,’ to the said James Christie Traill, the truster, by disposition dated 2nd and 5th, and recorded 24th August 1880. The said disposition contains warrandice from facts and deeds, but excluding from said warrandice all debts or securities affecting or which might be made to affect the said lands and others prior to the date of entry (Martinmas 1879).

14. The heritable securities over the estate date from 1820 onwards, and were granted at various times by the respective proprietors.… Bonds of corroboration of the bonds and dispositions in security by the said Sheriff James Traill were granted by George Traill or his trustees, and George Traill's trustees also granted bonds of corroboration in connection with certain of the bonds and dispositions in security granted by the said George Traill.… The said James Christie Traill never granted any bonds in corroboration of the bonds and dispositions in security granted by the said Sheriff James Traill or by the said George Traill or by his commissioners or his trustees.… The various bonds granted by George Traill's trustees or commissioners were granted in respect of debts of George Traill. None of the creditors in the various bonds and dispositions in security ever discharged the personal obligations therein contained. The creditors of Sheriff James Traill and of George Traill have not hitherto made any claim against the personal estate of either Sheriff James Traill or George Traill, but have for many years acquiesced in and taken the benefit of the management of the estate by the trustees under the said trust-disposition by James Christie Traill, through whom they have periodically received payments of interest. Until the matter was brought under their notice by the sale of the said portraits, they were not aware of the existence of personal property in the hands of the trustee identifiable as having belonged to the said Sheriff James Traill or George Traill……

17. The second parties contend ( a) that

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as creditors of the ancestor Sheriff James Traill they are entitled to a preference, along with other creditors of the said Sheriff James Traill, pari passu among themselves, over the creditors of subsequent owners, upon the fund which can be identified as being the proceeds of personal estate which belonged to their debtor, the said Sheriff James Traill; or alternatively, that if it be found that they have no such preference, then as creditors of the ancestor George Traill they are entitled to such a preference along with his creditors over the creditors of his trustees and the creditors of James Christie Traill; and ( b) that no diligence having been used by the creditors on the estate of Castlehill, such creditors are not entitled to any preference to the prejudice of these parties. In case these contentions should be repelled they concur in the contention of the seventh parties

19. The fourth parties contend (1) that the portraits in question formed part of the security of the heritable creditors holding securities over the estate of Castlehill, and that under and in terms of the trust-disposition of 1887 the proceeds of the portraits fall to be paid to these creditors according to the ranking of their bonds; and (2) in the event of it being held that the portraits did not form part of their specific security, that the portraits, being part of the moveable estate of the truster's ancestors, Sheriff James Traill and George Traill, still capable of identification, the proceeds thereof fall to be distributed among the creditors of George Traill preferably to the creditors of the truster.

20. The fifth parties contend ( a) that the pictures in question at the date of their removal by the trustee formed part of the security of the heritable creditors holding securities over the estate of Castlehill, and that under and in terms of the trust-disposition of 1887 the proceeds of the pictures as a surrogatum therefor fall to be paid to these creditors according to the ranking of their bonds; or otherwise ( b) that the said pictures formed part of the security of the said heritable creditors as at the date of the trust-disposition, and if an award of sequestration of the said James Christie Traill's estate had been granted at said date would have vested, in terms of section 102 of the Bankruptcy (Scotland) Act 1856, in the trustee for behoof of the heritable creditors on Castlehill so far as such creditors were creditors of James Christie Traill's ancestors, and that accordingly in terms of said trust-disposition the prices of the pictures belonged to these creditors according to the ranking of their bonds; or otherwise ( c) in respect that said pictures belonged to and formed part of the estates of Sheriff James Traill and George Traill, the ancestors of James Christie Traill, (1) that the creditors on the estate of the said James Traill have lost any right to claim by reason of the negative prescription, and (2) that the price of said pictures falls primo loco to be applied for behoof of the creditors of the said George Traill, and (3) that these creditors are bound to value and deduct their securities in order to rank.

21. The sixth parties contend (1) that the creditors holding bonds over the estate of Castlehill are not entitled to a preference; (2) that after the creditors of Sheriff James Traill of Hobbister they as creditors of George Traill of Rattar are entitled to the fund along with the other creditors of George Traill.

22. The seventh parties contend that the whole creditors, secured and unsecured, are entitled to be ranked on the proceeds of the said pictures pari passu, the secured creditors being bound to value and deduct their securities in order to rank.”

The following questions of law were submitted “1. Do the proceeds of the sale of the said portraits fall to be distributed among such of the parties as hold bonds over Castlehill, and are also creditors of the truster's ancestors Sheriff James Traill or George Traill, in the order of their bonds? or 2. Do the said proceeds fall to be distributed among the whole of the parties holding bonds over Castlehill in the order of their bonds? or 3. Do the said proceeds fall to be distributed ( a) primo loco among the whole creditors of Sheriff James Traill pari passu, and secundo loco among the whole creditors of George Traill pari passu, or ( b) among the whole creditors of George Traill pari passu? or 4. Do the said proceeds fall to be distributed among the whole creditors, secured and unsecured, of the truster and of his ancestors or predecessors in title pari passu? 5. In the event of either of the foregoing questions Nos. 3 and 4 being answered in the affirmative, are the creditors of Sheriff James Traill or George Traill, or the secured creditors of the truster, as the case may be, bound to value and deduct their securities before ranking?”

Argued for the fifth parties—The law as it stood at the date of the granting of the trust deed was stated in the Bankruptcy (Scotland) Act 1856 (19 and 20 Vict. cap. 79), secs. 102 and 118, and the Conveyancing (Scotland) Act 1874 Amendment Act 1879 (42 and 43 Vict. cap. 40), sec. 3. Accordingly at that time the act and warrant of a trustee was the equivalent of a completed diligence in favour of ancestors’ creditors— Millar's Trustees v. Horsburgh, February 5, 1886, 13 R. 543, 23 S.L.R. 363. It was true that the law was afterwards amended by the Conveyancing (Scotland) Acts 1874 and 1879 Amendment Act 1887 (50 and 51 Vict. cap. 69), but that statute was subsequent to the trust deed and so did not affect the present case. By the terms of the trust deed it was to be held equivalent to a sequestration, and so under section 2 of the 1856 Act ( cit.) the creditors who had bonds over Castlehill must be treated as if they had poinded the ground and thereby attached the moveables on it. This right of poinding was not struck at by the terms of the trust deed— Athole Hydropathic Company v. Scottish Provincial Assurance Company, March 19, 1886, 13 R. 818, 23 S.L.R. 570. Alternatively as ancestors’ creditors these parties had a preferential right over the truster's creditors over any property which could be identified as belonging to the ancestors, for the heir only took what the ancestor died possessed

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of, and held the estate as a trustee for ancestors’ creditors—Stair, Inst., iii, 8, 71; Ersk. Inst., iii, 9, 42; Bell's Comm., vol. ii, p. 85; M'Laren on Wills, pp. 866, 1299; Kelhead v. Irving, December 16, 1674, M. 3124; Tait v. Kay, 1779, M. 3142; Bell v. Campbell, November 28, 1781, M. 3861; Murray of Kinninmond's Creditors, 1744, Elchies, voce “Execution,” No. 13; Kinloch v. Blair, December 1721, M. 3836. The creditors of James Traill, however, not having taken any steps to establish their preference were now excluded by the negative prescription— Parishioners of Abersherder v. Parish of Gemrie, December 7, 1633, M. 10,972.

Argued for the fourth parties—[ Counsel adopted the arguments of the fifth parties]—The trustee was barred from removing the pictures by the terms of the trust deed, and so they must be regarded as still part of the Castlehill bondholders' securities. In regard to the question of valuing and deducting the securities, George Traill was never a bankrupt, and so his estate was set aside for his creditors and did not fall under James Christie Traill's trust deed. Accordingly his creditors divided his estate equally, and did not need to value and deduct their securities—Bell's Comm., vol. ii, p. 419; Goudy on Bankruptcy (new ed.), 505–6, (3rd ed. 553–4); Kirkaldy v. Middleton, December 8, 1841, 4 D. 202; The Heritable Reversionary Company v. Millar, August 9, 1892, 19 R. (H.L.) 43, 30 S.L.R. 13; Kintoch v. Blair ( cit.). While the preference of James's creditors was cut off by the negative prescription, the preference of George's was not, because the trust deed was a taking of document on their preference, and so interrupted the prescription against them.

Argued for the second parties—The Castlehill bondholders had no right to a preference here, for they had not poinded, which was the only way in which they could have obtained one— Royal Bank v. Bain, July 6, 1877, 4 R. 985, 14 S.L.R. 612; Campbell v. Edinburgh Parish Council, 1911 S.C. 280, 48 S.L.R. 193; Sinclair v. Edinburgh Parish Council, 1909 S.C. 1353, 46 S.L.R. 973; Hay v. Marshall, March 22, 1826, 2 W. & S. 71; Bell's Comm., i, pp. 766–9. The case of Sinclair ( cit.) in particular was fatal to the argument that diligence had been done by the trust deed As personal creditors of James these creditors were entitled to a preference over the creditors of George and James Christie, who had only taken the estate subject to James's debts— Bell v. Campbell ( cit.); Bain v. Assets Company, March 18, 1904, 6 F. 692, 41 S.L.R. 517. In virtue of the personal obligation in the bonds they were entitled to ask anybody who was in right of James to pay these at once without diligence. They were not bound by their bonds to go only against the heritable estate, but could go against heritage or moveables as they chose—M'Laren on Wills, secs. 2387, 2417, and 2431. The negative prescription did not apply to them, because as long as the personal representatives were paying interest they had no need to assert their right— Jamieson v. Clark, January 24, 1872, 10 Macph. 399, 9 S.L.R. 233.

Argued for the sixth parties—The Castlehill bondholders not having poinded had no preference over other ancestors' creditors— Hay v. Marshall ( cit.). Because a debt was an ancestors' debt it did not follow that the creditor was to be considered for all time an ancestors' creditor. Once the heir was infeft in the land the heritable debts were his debts, and so the Castlehill bondholders could no longer be considered ancestors' creditors in virtue of their bonds over the estate after the estate had changed hands. The 1856 Act, sec. 102, had therefore no application to the fourth and fifth parties, who could only claim on the same grounds as George's other creditors. James Christie Traill was the universal legatee of George, and so was responsible for his debts, and so George's creditors had a right to a preference over James Christie's, while James's creditor's preference was cut off by the negative prescription.

Argued for the seventh parties—No preference could be claimed here by ancestors’ creditors. The Castlehill bondholders to obtain a preference would have had to poind, for section 102 of the 1856 Act would not bear the interpretation they sought to put upon it. The real intention of the section was shown in Bennet v. M'Lachlan, June 15, 1829, 3 W. & S. 449. Ancestors’ creditors had no right ipso facto to poind unless they had a real right, and if the fourth and fifth parties had poinded it would not have been as ancestors’ creditors but as people who were infeft in the land— Bell v. Cadell, December 3, 1831, 10 S. 100; Bell's Comm., ii, 56. Further, section 102 dealt only with heritage, not with moveables. The pictures in any event were now removed from the ground, so that the fourth and fifth parties had no claim to them— Urquhart v. Anderson, June 16, 1883, 10 R. 991, 20 S.L.R. 670. Accordingly the Castlehill creditors were in no better position than the other ancestors’ creditors, and could only claim a preference under the common law rule that the heir took the estate subject to his ancestors’ debts. This preferential right of ancestors’ creditors was, however, subject to the negative prescription, and as nothing had been done by any of the creditors of James and George to establish their right for more than forty years the right had been cut off. Even apart from the effect of the negative prescription they could not now claim preference in virtue of a debt which they should have claimed before—Stair, iii, 8, 71; Ersk. Inst., iii, 9, 42, 46; Wyllie v. Black's Trustee, December 13, 1853, 16 D. 180; Thriepland v. Campbell, February 23, 1855, 17 D. 487; Stewart's Trustees v. Evans, June 9, 1871, 9 Macph. 810, 8 S.L R. 549; Taylor & Ferguson v. Glass's Trustees, 1912 S.C. 165, 49 S.L.R. 78; Magistrates of St Andrews v. Forbes, November 28, 1893, 31 S.L.R. 225 (O.H.); Jamieson v. Clark, January 24, 1872, 10 Macph. 399, 9 S.L.R. 233. If, however, the parties claiming as ancestors’ creditors were entitled to a preference they were certainly bound to value and deduct their securities when claiming. James Christie Traill had no fiduciary relationship to his ancestors’ creditors— Fleeming v. Howden, July 19, 1868, 6 Macph. (H.L) 113, 5 S.L.R. 698; Robertson v. Strachans,

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1760, M. 8087—but held the property over which they had securities as his own. The property therefore fell under the trustdeed, which must be held equivalent to a sequestration of the debtor at the date when it was delivered, and in any event by its terms imposed the necessity of valuing and deducting. The sum in question accordingly fell to all the parties equally. Counsel also referred to H. M. Advocate v. Hay, April 24, 1758, 2 Pat. 266; Fenton Livingston v. Crichton's Trustees, 1908 S.C. 1208, 45 S.L.R. 896; Heritable Securities Investment Company v. Miller's Trustees, December 17, 1892, 20 R. 675, 30 S.L.R. 354.

At advising—