Scottish Court of Session Decisions

LORD DUNPARK'S OPINION.—This Note of Appeal is taken against a deliverance of the liquidator of M'Innes Textiles Ltd., (hereinafter referred to as "the company"), which, being insolvent, went into voluntary liquidation on 11th February 1972. The appellant claimed that the company owed the Export Credits Guarantee Department the sum of £9,275.80 and this claim was admitted by the liquidator; but the appellant also claimed that a sum of £5,206 (now restricted to £4,263) is held in trust by the Company for the said Department, and this claim was rejected by the liquidator. The appeal is against this rejection.

The pleadings do not fully explain the business transactions out of which this rejected claim arose, but I shall endeavour to do so briefly as there is no dispute between the parties as to their nature. The company was engaged inter alia in exporting goods from the United Kingdom. On 22nd September 1971 the Bank of Scotland undertook to make immediate advances to the company against promissory notes given by the company to the Bank and, by the document produced as No. 15 of Process, headed "Banker's Guarantee" (Open Account) and dated 30th September 1971, the said Department guaranteed repayment to the Bank of all such advances made by them. As I understand the position, advances were made by the Bank to the company against invoices issued to foreign buyers so that the cash flow of the company was maintained during the period between the despatch of goods to foreign buyers and their payment therefor. With a view to securing repayment by the company of any sums paid by the Department to the Bank under the said guarantee the Department and the company purported to conclude a Recourse Agreement dated 21st September 1971. I observe now, what I did not notice during the hearing, that this agreement (which is No. 18 of Process) is not signed on behalf of the Department, but it bears to be signed on behalf of the company and, as the validity of the document was not challenged at the hearing, I shall assume that it is a valid writ of the company. Clause 3 of this document is the foundation of this appeal.

It is in the following terms:—

"The Exporter"

(i.e. the company) "hereby acknowledges and declares that all sums received by the Exporter or by any person on its behalf in respect of any transaction which is the subject of a Guaranteed Advance shall, unless repayments of that Guaranteed Advance shall have previously been made by the Exporter to the Bank, be received and held in trust by the Exporter for the Guarantor until the Exporter has made such repayment to the Bank or has paid to the Guarantor the amount of any demand made by the Guarantor in respect of that Guaranteed Advance." "Guaranteed Advance" is defined in Clause 1 of the document headed "Banker's Guarantee (Open Account)."

What seems to have occurred is that sums totalling £4,263, which were the subject of "guaranteed advances" made by the Bank to the company and thereby covered by the guarantee given by the Department to the Bank to pay the amount of any such advances which were not repaid by the company to the Bank, were later received by the liquidator after liquidation from foreign purchasers and have not been repaid to the Bank. Since these advances were made by the Bank towards the purchase price of particular sales, it appears that, to the extent of the £4,263 claimed by the appellant, the company has received the value of goods exported from two sources, namely, first from the Bank as an advance and later from the purchasers of the goods.

The issue is whether the liquidator is bound (1) to pay that sum to the appellant for behoof of the Export Credits Guarantee Department, or (2) to apply it for the benefit of all the creditors of the company. The answer depends upon whether or not Clause 3 of the recourse agreement constituted a trust whereby the company held all moneys received from purchasers, in respect of contracts which had been the subject of guaranteed advances, as trustee for the Department. If it did so, the liquidator is bound to pay the sum claimed to the Department, as the individual sums received by the company from purchasers never became the property of the company; if, however, Clause 3 did not create a trust, these payments went into the ordinary coffers of the company and the Department is no more than an ordinary creditor in the liquidation.

The reason given in a letter dated 9th April 1973 by the liquidator for rejecting this claim of the Department was:

"My appointment as liquidator interferes with the operation of the Recourse Agreement and, in my view, any sums recovered by me relative to export invoices against which promissory notes were issued, fall to be held for the general body of creditors."

It appears, therefore, that the liquidator construed clause 3 as part of a consensual contract which was frustrated by the liquidation. This denies effect to the declaration that all the sums specified in Clause 3 are to be "held in trust by the Exporter for the Guarantor," i.e. by the company for the Department. But the initial difficulty which I had with the terminology of clause 3 is that, read literally, it is no more than a declaration of intent. It is not a declaration that existing property of the company will henceforth be held in trust for the Department. It does not cover jura crediti; it refers only to sums received in the future. Counsel for the appellant submitted that the trust property consisted of debts due by purchasers to the company in respect of transactions which were the subject of guaranteed advances, but it seems to me that no such debts existed when clause 3 was executed. I do not see how any guaranteed advances could have been made by 21st September 1971, being the date of the recourse agreement, since, according to paragraph 2 of the preamble to the document headed "Banker's Guarantee (Open Account)", the company's agreement with the Bank was not made until 22nd September. Accordingly, no trust could come into being on 21st September in the absence of any trust property, but the question remains whether clause 3 is effective to incorporate every payment as specified therein as property held in trust by the company for the Department at the time of its receipt by the company.

Counsel for the liquidator submitted that the terminology of clause 3 was inappropriate for the constitution of a trust in respect that (a) it did not set up an immediate trust, being a promise to hold in trust property acquired in the future; (b) "the trust" was made subject to the contingency that repayment had not been made prior to receipt; and (c) the last part of the Clause limited the trust in point of time; but he did not submit that a trust could not be constituted in respect of property acquired by the truster after his declaration of trust, and I am not aware of any authority which supports such a proposition. Where there is no trust property in esse at the date of execution of a trust deed, there can, of course, be no trust at the date, but I see no reason why property acquired by the grantor after the date of the deed cannot be brought into trust by a sufficient description in the deed.

It is abundantly clear that the purpose of clause 3 was to secure for the Department, in the event of the company going into liquidation, the beneficial right to sums of money paid to the company by purchasers in respect of sales for which the Bank had made a guaranteed advance which had not been repaid prior to the purchaser's payment to the company. If the company repaid the Bank after receipt of the purchaser's payment, the Department's right to that payment was to be extinguished, and the Department then relied upon the Bank repaying it the amount paid by the Department under the Banker's Guarantee. In my opinion, the effect of the declaration in clause 3 is that every payment, which was made at a time when there was an outstanding guaranteed advance in respect of it, would be stamped by the company as the property of the Department to be held in trust for it until the company repaid the amount of the guaranteed advance to the Bank or to the Department. As parties are agreed that the payments covered by clause 3 total £4,263, I am of opinion that this sum is recoverable by the Department from the liquidator.

Counsel for the appellant founded upon a number of authorities in support of the proposition that, where a company held property in trust for a particular beneficiary, the liquidator must account to that beneficiary for the trust property. Those authorities were—Heritable Reversionary Co. Ltd. v. Millar, 1892, 19 R (H.L.) 43: Dingwall v. M'Combie, 1822, 1 S. 501 (N.E. 431): Gordon v. Cheyne, 5th February 1824, F.C.: Macadam v. Martin's Trs., 1872, 11 M. 33: Molleson v. Challis, 1873, 11 M. 510 and Smith v. Liquidator of James Birrell Ltd., 1968 S.L.T. 174.

Counsel for the liquidator disputed the application of any of those authorities to the facts of this case on the ground that, as there had been no effective divestiture by the Company of the right to the sums in question, no trust had been constituted in respect of them, and that the liquidator had acknowledged the only right which the Department had against the company, namely, the contractual right to repayment, by ranking the Department as an ordinary creditor of the company in liquidation. He supported this submission with the proposition that the only way in which the Department could have recovered repayment in full of the sums specified in Clause 3 from the company after liquidation was by the company intimating to the relevant trade debtors that any payments which they made to the company would be held by the company for the Department. This proposition is ill-founded, in my opinion, because it fails to distinguish between the assignation of a right in security and the vested right which a beneficiary may have to trust property. This case is not concerned with rights in security but solely with the question of whether the payments specified in clause 3 were received and held by the company or liquidator qua trustee for the Department. That is why the case which formed the key-stone of counsel's argument does not assist it. In Bank of Scotland v. Liquidators of Hutchison, Main & Co. Ltd., 1914 SC (HL) 1, there was no question of the company in liquidation having undertaken to hold property in trust for the Bank. The company agreed to obtain a debenture from one of its creditors and to assign that debenture to the Bank in security of its debt to the Bank. The company obtained the debenture but went into liquidation before assigning it. In the liquidation the Bank claimed as a creditor secured by the said debenture, but it was held that the Bank had no such right, the debenture not having been assigned to it. It was certainly argued in that case that at the date of the liquidation the company held the debenture as trustee for the Bank, but the terms of the agreement between the Bank and the company demonstrate clearly that the debenture was to be assigned by the company to the Bank as a security for its indebtedness to the Bank (see 1913 S.C. at p. 257). As the liquidation took place before the security transaction was completed, the Bank acquired no real right in security. The present case would have been analogous if the company had undertaken to assign its right to the relevant sums to the Department and gone into liquidation before it had done so; but that is not what this company undertook to do. It declared that these sums would "be received and held in trust," and no further action was required by the company under the recourse agreement at the date of its liquidation.

It was not suggested that the document containing this declaration was not delivered by the company to the Department before any of the payments, which are the subject of the claim, were made. The document is a printed form designed for use by the Department for this type of agreement and was produced by the Department. If it did not reach the Department until after the said payments had been made to the company, Counsel for the liquidator would surely have taken this point rather than put forward the unsound proposition that intimation to the trade debtors was necessary to make the declaration of trust effectual.

Counsel for the liquidator founded upon a passage from Lord Reid's speech in Allan's Trs. v. Lord Advocate, 1971 SC (HL) 45, at p. 53, as authority for the unchallengeable proposition that, in order to constitute a trust, there must be delivery or its equivalent by the truster. At p. 54, Lord Reid rejected "the argument … that mere proved intention to make a trust coupled with the execution of a declaration of trust can suffice"; but the proposition which he rejected was that the execution of a trust deed coupled with the proved intention of the truster that the trust should be irrevocable was sufficient to set up an irrevocable trust. In that case it was held that intimation of the existence of the trust to one of the beneficiaries brought the whole trust into operation and rendered it irrevocable. So, here, in my opinion, delivery of the document, headed "Recourse Agreement" and signed on behalf of the company, to the Department as sole beneficiary set up an irrevocable trust into which fell each of the payments specified in clause 3 as and when they were made.

In these circumstances I find that the Department's claim that the company holds the sum of £4,263 in trust for them is a valid one and that the liquidator is bound to pay this sum to the Department and rank the Department as an ordinary creditor for the balance of its claim.

Counsel for the appellant submitted a subsidiary argument based upon the insurance principle of subrogation. He founded upon MacGillivray and Parkington, Insurance (6th ed.), § 1868 and upon In re Miller, Gibb & Co. Ltd. (1957) 1 W.L.R. 703; but the argument is unsound in respect that the Department's claim cannot rest upon the principle of indemnity. They did not pay the Bank under a policy of insurance but as guarantors of advances made by the Bank to the company in terms of the agreement between them. Subrogation is "a general equitable right which arises whenever one person indemnifies another for a loss, pursuant to a legal obligation to indemnify"—see MacGillivray and Parkinson, § 1865. The principle has never, so far as I am aware, been applied to guarantee obligations in which the guarantor undertakes to pay the creditor a debt due by the principal debtor in the event of his default. Counsel for the appellant went no further than submitting that there was no good reason why the principle of subrogation should not be extended to cautionary obligations. That is not sufficient for me to hold that it does, particularly where a liquidation has intervened.

There being no judicial decision which directly covers the facts of this case, I do not find it surprising that the liquidator rejected the Department's claim. At the end of the debate I had not myself made up my mind what the correct answer was, but after considering the principles involved and the authorities cited, I have come to the conclusion that the liquidator made the wrong decision. I shall therefore sustain the appeal, reverse the adjudication and deliverance complained of, and direct the liquidator to admit the claim of the Department to the extent of £4,263 in full.

The defenders reclaimed and the reclaiming motion was heard before the Second Division.