Scottish Court of Session Decisions

Alan Taylor Cathcart, Weem, Aberfeldy, brought an action of count, reckoning, and payment against Edward Armitstead Baxter of Kincaldrum and another as trustees acting under deed of declaration of trust for the pursuer in liferent and his children in fee, dated 3rd and 5th November, and registered in the Books of Council and Session 15th December 1914, and as individuals, in which he concluded for decree of accounting by the defenders of

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their intromissions with his (the pursuer's) share (one-half) of a legacy of £20,000 bequeathed to him by the late Sir David Baxter, and administered by the defenders as trustees under the said deed of declaration, and for payment of the sum of £200 as the balance of their intromissions.

The averments and pleas of the parties sufficiently appear from the opinion ( infra) of the Lord Ordinary ( Sands), who on 14th February 1920, after a proof, assoilzied the defenders.

Opinion.—“This is an action against trustees in respect of loss of income owing to an unwarrantable investment of the trust funds. The action purports to be one of count, reckoning, and payment, and in its original form pursuer's pleadings seemed suggestive of the theory that it is the duty of trustees to make the interest forthcoming whether or not the trust investments have earned it. It was only in adjustments in answer to the defenders that the true question at issue was brought out.

The defenders are called as trustees acting under a declaration of trust made by themselves in 1914 as trustees of the late Sir David Baxter. Prima facie they cannot under this action be held responsible for anything which was done before 1914, and yet a great part of the evidence is directed to the alleged misfeasance of their technical predecessors, Sir David Baxter's trustees. There was, however, apparent indisposition on both sides to argue this question, and I shall treat the matter upon the footing on which apparently both parties were content to take it, that the trust is to be regarded as a continuous one throughout.

One of the investments of part of the estate of the late Sir David Baxter, in which the pursuer is liferenter, is £1000 4 per cent. ‘A’ debenture stock of the Mexican Central Railway Securities Company, Limited—a company registered in London. No interest has for several years been paid upon the investment, and the pursuer maintains that the defenders are bound to account to him for interest for the period on the ground that the investment was an unwarrantable one.

The first question is whether the investment was of a category within the investment powers of the trustees. Under the investment clause both of the original trust and of the declaration of trust the trustees may invest, inter alia, ‘in debentures or mortgages by railway or other joint-stock companies or trusts or corporations of a public nature.’ It was argued for the pursuer that the company here in question was not a public company within the meaning of this power. I am of opinion, however, that the Mexican Central Railways Securities Company falls under this description. That appears” to me to be settled by a number of authorities, most of which are collected under Vox ‘Public Company’ in Stroud's Judicial Dictionary.

Pursuer, however, argues further that, esto that the investment was of a class within the powers of the trustees, this particular investment was of so hazardous a nature that the defenders are responsible for having made and retained it. The investment was made in 1909 after full consideration by three trustees, all men of high standing in the business and financial world, and one at least of them, the late Sir William Ogilvie Dalgleish, of exceptional authority in financial matters. They had the guidance and assistance of a firm of solicitors of good standing and wide investment experience, and also the advice of experienced London brokers. Notwithstanding these considerations, it may still be possible for the pursuer to show that the investment was an improper one. It is therefore necessary to consider the evidence as to the nature of the security. The Mexican Central Railway Company had issued a number of 4 per cent. debenture bonds which constituted a first charge upon its revenue and capital. A number of these bonds were held in this country. In 1899 the Securities Company was formed with a strong board of directors to acquire these bonds in return for debenture stock to be issued by the company. The object was twofold. In the first place the bonds of the railway company were of short currency, and it was desirable to have an organisation in London, where the bonds were largely held, to negotiate the terms of their renewal. But behind this, and probably quite as potent a factor in leading to the formation of the company, were certain financial considerations which about that time were very operative. There were many investorswho desired a safe investment and were content with moderate interest with security. On the other hand, there were many more or less speculative investors who were content to take some risk for the sake of high interest and possible capital appreciation. Many of the stocks in the market did not satisfy either class. An element of risk frightened away the former class. Only a moderate rate of interest and limited speculative possibilities presented insufficient attraction to the latter. Accordingly the expedient was devised of splitting stocks and creating one block with the security of the whole but yielding a low rate of interest, and another block with only the residual security but yielding a high rate of interest upon its market price. This created a much freer market, with the result that the split stock really commanded a higher price than the original stock.

In the case of the Mexican Central Railway Securities Company, the holder of 100 of 4 per cent. ‘A’ debenture stock had the security both as regards principal and interest of £200 4 per cent. debenture bonds. If only one-half of the interest, or 2 per cent. should be paid in any year, he would still be secure. The company was successful, and down to the date of the investment in 1909 it held a high position in the London market where its stock was principally dealt in. At the price of the day the return for investment was approximately 4 1 4 per cent., a rate which obviously was not such as would attract the speculative investor. From the market point of view I do not think that any exception could be taken to the investment under a trust where the

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testator had authorised his trustees to go outside the limits of ordinary trust investment. It is objected, however, that the security depended upon political conditions in Mexico which were of an unstable character. The position which the stock held in the London market was no doubt governed by the opinion held in the world's banking and financial centre of the stability of Mexican Government. But it is said that the trustees in Dundee might have known better. Mexico was a Latin American Republic, and such republics have had chequered histories. Now doubtless there would be great force in such an argument if used of a Mexican investment now, and there might have been like force forty years ago. But in the beginning of the present century it appeared to the world that in the apparently progressive Latin Republics like the Argentine, Uruguay, and Mexico, the wild oats had been sown, and that these countries with their enormous natural resources had definitely entered upon an era of stable government and assured prosperity. As regards Mexico this belief has been falsified. It was not realised either in the financial or political world that order and progress in Mexico were largely dependent upon the iron rule of President Diaz. It was not realised that his removal would mean the deliverance of that country from an autocracy and the restoration of all the joys of self-determination.

I am unable to hold these trustees responsible for not having been wiser than the rest of mankind and for not having anticipated the renewal of revolutionary government in Mexico. Accordingly I cannot hold that in making this investment in the circumstances the trustees were guilty of such negligence as to render themselves personally liable for the depreciation of the security.

There remains the question—Whether the defenders ought to have realised the investment subsequently when clouds had gathered. Mr Mackay for the pursuer fixed upon twoalternative dates when thesecurity ought to have been realised, and limited his argument on this branch to these dates. The first was January 1912. At that date there was no appreciable decline in the market value of the security. A sale would I think have shown a loss of £37, an amount not greater than is represented by the slight sagging in the value of all high-priced securities which at that time was general. By this time President Diaz was gone, and there had been political disturbances in Mexico, but the matter was not regarded by the market as portending any serious financial collapse or repudiation, and interest on Mexican securities was being regularly paid. A great deal was made by the pursuer of certain changes that had been made in the securites held by the company. The Mexican Central Railway Company had been amalgamated with the Mexican National Railway and new bonds had been issued. This matter had been negotiated with the Securities Company who were perfectly satisfied with the arrangement. There was no suggestion of financial difficulty or default about the matter. In regard to the nature of the arrangement I accept the evidence of Mr Dickson, late Chairman of the Edinburgh Stock Exchange, who seemed to me to speak with full knowledge and understanding of the matter. The bonds of the Mexican Central Railway Company stood at their normal face value in the books of the Securities Company. This value had always been greater than market value. In exchange for these bonds, which were of short currency, the Securities Company obtained, as the result of amalgamation, 4 1 2 per cent. long currency securities. An amount of these equivalent in market value to those for which they were exchanged would have shown a less face value, as the new 4 1 2 per cent. securities were of higher market value than the old 4 per cent. ones. This would have disturbed the theoretical balance of the Securities Company. Accordingly some second preferred shares were given in addition to bring up the face value of the Securities Company's holdings to the full amount of the old face value. Such shares in such railways generally represent not money but water, and as they come after almost everything else they are seldom more than a speculative possibility. They are like the 1s. ordinary shares one often sees in a prospectus, which are not to rank for dividend until the preferred shares get a dividend of ten per cent. In selling these shares for £189,000 the Company did exceedingly well. It is true that they found difficulty and were not very successful in adjusting the matter to their theoretical balance sheet. But to anybody who had followed the history of the Company and understood the nature of the transaction there was nothing to cause any disquiet. I am of opinion that the pursuer has not made good that the defenders were guilty of negligence in not realising in January 1912.

The last date is January 1914. By this time matters in Mexico had become serious and interest on the ‘B’ debentures was in default. The shares could then have been realised for £640, showing a loss of £317, or one-third of the whole investment. The defenders deemed it better to hold on in the expectation of more settled conditions rather than to cut this loss. There is no doubt that trustees would not have been justified at this time in putting £640 into this investment. I do not think, however, that this is a satisfactory test and that trustees are bound to realise in an adverse market whenever the conditions have become such that a new investment would not be warranted. Regard must be had to the circumstances which have caused the slump. The special conditions of the European war present illustrations of this. Trustees might not have been justified, though it was within their powers of investment, in investing in Russian stock immediately after the revolution was announced. But I do not think that trustees who held stock at that time could now be made liable for having held on, disastrous as the sequel has been. The interference with the railway by the Revolutionary

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Government, and default in interest which happened in the present case, might very well appear to trustees to be events which had depressed the current value of the shares much below their intrinsic worth. I think that trustees are entitled to exercise their judgment in the matter. It is contended that in the present case the suspension of interest was specially serious in view of the fact that the pursuer had only a liferent interest. If the matter rights itself the interest must be paid up to him, but this does not altogether eliminate the difficulty. This consideration, however, is one, but only one among several, which trustees must keep in view, and they are not under obligation to let it over-ride all other considerations.

If the defenders erred in not realising this stock when it had fallen very considerably in value owing to the revolution in Mexico, in my view that was an error in judgment, and not negligence rendering them personally liable. It would have been more satisfactory if they had regularly minuted their consideration of the matter. But the defenders were brothers in daily touch with one another, and I accept their evidence, and that of their law agent, Sir Herbert Ogilvy, with whom they were in constant communication, that it was their deliberate opinion that it was the wiser course to hold on and not realise the investment.

I shall accordingly assoilzie the defenders with expenses.”

The pursuer reclaimed but did not lodge prints of the evidence.

Argued for reclaimer—The Mexican Central Railway Securities Company was not a company “of a public nature” in terms of the trust deed. The investment therefore was ultra, vires. Assuming the investment to have been within the powers of the trustees, it was of so hazardous a nature that they had acted with negligence in making and retaining it. The following authorities were referred to—Bell's Principles, 403 A; Ersk. Inst., iii, 3, 28 note; Sanders v. Sanders' Trustees, November 7, 1879, 7 R. 157, 17 S.L.R. 75; In re Sion College, 55 L.T. 589; Wale v. Westminster Palace Hotel Company, Scot's Rep., 8 Com. Bench (N.S.) 276; Attorney-General v. Margate Pier Company [1900], 1 Ch. 749; In re Castlehone [1903], 1 Ch. 352; In re Sharp, L.R., 45 C.D. 286; In re Lysaght [1898], 1 Ch. 115; In re Hilton [1909], 2 Ch, 548; Breatcliff v. Bransby's Trustees, January 11, 1887, 14 R. 307, 24 S.L.R. 233.

Argued for Respondents—The 4 per cent. “A” debenture stock of the Mexican Central Railway Securities Company, Limited, being one of the authorised securities set forth in the schedule annexed to the Declaration of Trust, was an investment within the powers of the trustees. The Company in question fell within the category “trusts or corporations of a public nature”— Macintyre v. Connell, 1 Simon (N.S.) 225; In re Sharp ( cit.); In re Stanley [1906], 1 Ch. 131; In re Hilton ( cit.). The pursuer had failed to prove negligence on the part of the trustees.

The proof was not before the Court, and on this question therefore the Lord Ordinary's judgment must stand.

At advising—