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Accountant Bankruptcy v. Mackay, [2004] ScotCS 122 (26 May 2004)

OUTER HOUSE, COURT OF SESSION

A5528/01

OPINION OF LORD BRACADALE

in the cause

THE ACCOUNTANT IN BANKRUPTCY AND ANOTHER

Pursuer;

against

JESSIE ANNE MACKAY

Defender:

________________

Pursuer: Summers; Drummond Miller, W.S.

Defender: Sandison; Currie Gilmour & Co

26 May 2004

Introduction
[1] This case came before me on Procedure Roll on the second plea-in-law for the pursuers. Mr Summers, who appeared on behalf of the pursuers submitted that the defence stated to the action of reduction was irrelevant and that consequently I should pronounce decree in terms of the first conclusion for production and reduction of the disposition for love, favour and affection granted by Mr Kenneth Mackay ("the debtor") in favour of the defender dated 2 November 1998 and recorded in the Register of Sasines on 9 November 1998. There was some discussion as to why both the first pursuer, who is the Accountant in Bankruptcy, and the second pursuer, who acted as the local agent, were named as pursuers. However, nothing turns on that. It was agreed that the first pursuer was the Permanent Trustee in the sequestration of the debtor and it is convenient in this opinion to refer to the Permanent Trustee as "the pursuer".

[2] The defender offered a proof before answer.

The Pleadings
[3] It is common ground that the debtor was sequestrated on 25 March 1999. On that date the Sheriff of Grampian, Highland and Islands at Stornoway appointed the pursuer as the Permanent Trustee on the sequestrated estate of the debtor and the pursuer became vested in the estate of the debtor for the benefit of the creditors. It is further common ground that by this disposition the debtor conveyed to the defender, who is the wife of the debtor, one tenth of an acre to the north-west of the highway through Scalpay to Village Scalpay, Isle of Harris. It is common ground, subject to an explanation advanced by the defender that the debtor and the defender, reside in a dwelling house built on the plot described in the disposition and that the debtor was not paid by the defender for the property.

[4] It is averred in Article 4 of condescendence that the pursuer, as Permanent Trustee is entitled to challenge the gift of the property under Section 34(1)(b) of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act"). It is averred that the gift was an alienation within the meaning of Section 34(2)(a) of the 1985 Act. The alienation took place prior to the sequestration of the debtor and on a relevant day for the purposes of Section 34(2)(b) and (c) of the 1985 Act. It is averred that the alienation became completely effectual on registration of the disposition in the Register of Sasines on 9 November 1998. It is averred that the defender is an "associate" of the debtor within the meaning of Section 74(2) of the 1985 Act. It is further averred in Article 5 of condescendence that the debtor has no significant moveable estate. At the date of alienation his assets did not exceed his liabilities. At the date of sequestration, the value of the property was £36,000. The debtor owed £14,154.32 to the Inland Revenue and £455.90 to the Western Isles Council.

Relevant Provisions of the Bankruptcy (Scotland) Act 1985
[6] Section 3 provides for the appointment of a permanent trustee. Section 3(1)(a) provides:

"In every sequestration there shall be a permanent trustee whose general functions will be -

(a) to recover, manage and realise the debtor's estate, whether situated in Scotland or elsewhere;"

When the permanent trustee is appointed, the estate of the bankrupt vests in him for the benefit of the creditors. Section 31 provides for vesting of the estate at the date of sequestration and section 31(1) provides:

"(1) Subject to Section 33 of this Act and Section 91(3) of the Pensions Act 1995, the whole estate of the debtor shall vest as at the date of sequestration in the permanent trustee for the benefit of the creditors;"

Section 33 provides for limitations on vesting and section 33(1), which is crucial to the defender in this case, provides:

"The following property of the debtor shall not vest in the permanent trustee -

(b) property held on trust by the debtor for any other person."

Section 34 provides for gratuitous alienations. Section 34(1)(b) provides:

"Where this subsection applies, an alienation by a debtor shall be challengeable by -

(b) the permanent trustee, the trustee acting under the trust deed or the judicial factor, as the case may be."

Section 34(2) provides:

"Subsection (1) above applies where

(a) by the alienation, whether before or after the coming into force of this section, any of the debtor's property has been transferred or any claim or right of the debtor has been discharged or renounced; and

(b) any of the following has occurred

his estate has been sequestrated (other than, in the case of a natural person, after his death);
- (iv); and

Section 34(3)(a) provides:

"For the purposes of paragraph (c) of subsection (2) above, the day on which an alienation took place shall be the day on which the alienation became completely effectual; and in that paragraph "relevant day" means, if the alienation has the effect of favouring -

(a) a person who is an associate of the debtor, a day not earlier than five years before the date of sequestration, the granting of the Trust Deed or the debtor's death, as the case may be;"

Section 74(2) provides:

"A person is an associate of an individual if that person is the individual's husband or wife, or is a relative, or the husband or wife of a relative, of the individual or of the individual's husband or wife."

Accordingly, if the defender can demonstrate that the property can be brought within the terms of Section 33(1)(b) in relation to the property then she has a defence against action. Conversely, if the property cannot be brought within that provision, the disposition granted by the debtor in favour of the defender would appear to be an alienation within the terms of section 34.

The Pursuer's Submissions
[7] Mr Summers advanced two lines of argument. The first argument addressed the nature of the right which the defender had in relation to the property before the creation of the trust. In ascertaining what type of right the defender acquired, it was necessary to know what the nature of Norman McLeod's right was. Mr Summers submitted that this was unclear. He submitted that Scots Law does not recognise any right in relation to property intermediate between a real and a personal right. He referred to Burnetts Trustees v Grainger 2002 SC 580. (affirmed by the House of Lords on 4 March 2004 [UK HL 8]).

[8] Mr Summers submitted that the defender's pleadings did not specify the nature of the right held by Norman McLeod. He submitted that the defender should specify what the nature of the right was within the species of rights recognised by Scots law. What seemed to be averred was a form of "squatter's right" which was not a right recognised by Scots property law. There was nothing in the pleadings to indicate any form of written contract between Norman McLeod and the defender. There was no indication of knowledge or consent by the estate for the transmission of this "right" to the defender. Accordingly, Mr Summers submitted, the defender could not, as a matter of law, deliver to the debtor what, as a matter of law, could not exist.

[9] Mr Summers submitted that if the court were prepared to treat this "right" transferring from Norman McLeod to the defender as a recognisable right, the next question was what was required to constitute such a transfer. This led to his second argument, namely, that in order to constitute a trust over heritable property it would be necessary to have such a transfer in writing. Mr Summers referred to passages in Walker & Walker, The Law of Evidence in Scotland chapter 23.1.1 and 23.3. Mr Summers submitted that the requirement for writing in the transfer from Norman McLeod to the defender, also governed the transfer from the debtor to the defender. On the hypothesis that a property right acknowledged by law did exist, it related to heritage and therefore required to be constituted in writing. He referred to Gloag on Contract, chapter 10 pages 161-162. He referred to Gordon, Land Law, page 442 and page 444, paragraph 16-08. Mr Summers submitted that both before and after the coming into force of the Requirements of Writing (Scotland) Act 1995 ("the 1995 Act") writing was required to create a trust where the trust involved an interest in land.

The Defender's Submissions
[10] Mr Sandison on behalf of the defender, offered a Proof before Answer. With respect to the first argument advanced by Mr Summers, Mr Sandison submitted that this argument was misplaced because it proceeded upon the erroneous supposition that a trust over heritable property could not exist unless the beneficiary had a valid pre-existing legal right to the trust property. He said that that suggestion was without foundation. There was no need for the beneficiary to have had any pre-existing interest in the property. He referred to Heritable Reversonary Co Ltd v Robert Cockburn Miller (1892) 19R (HL) 43. In that case there was a latent trust which was not evidenced on the face of the title. Mr Sandison submitted that in that case there was no suggestion that for a valid trust over heritable property to exist it was necessary for it to be ex facie the title in the Register of Sasines or that the beneficiary required to have any pre-existing right in the property.

[11] Mr Sandison explained that the averments in Answer 4 between page 9D and 11D were simply designed to describe the background. These averments would add credibility to the averments that what was involved was a trust. The averments in relation to Norman McLeod's "interest" are not themselves designed to constitute a trust. The trust was constituted at the time of the granting of the disposition to the debtor by the estate. The nature of Norman McLeod's interest is neither here nor there. In 1978 it was thought appropriate that title should be taken by the debtor as apparent owner but in truth as nominee for the defender. The averments in relation to the creation of the trust are found in Answer 4, page 11D-E. It was unnecessary for the defender to have had any pre-existing right.

[12] Mr Summer's second argument referred to the need for writing to constitute a trust because it was over heritable property. Mr Sandison submitted that this argument was without foundation. In support of his proposition that no writing was required, Mr Sandison referred to the case of Hinkelbein v Craig 1905 SLT 84. He submitted that that case was indistinguishable from the present case. He referred to passages at pages 85 and 86 where, he submitted, the court did not accept the contention that the issue could only be proved by writing. The argument seemed to proceed on the basis that what the defender claimed to have had between 1978 and 1998 was a right in heritable property. That is not what she claimed to have. The beneficiary in a trust of heritable property does not enjoy any right in the property. He referred to the speech of Lord McNaughton in the Heritable Reversonary Co Ltd v Millar (supra) at page 53. Mr Sandison submitted that it had never been the law, and certainly not prior to 1995 and the coming into force of the 1995 Act, that the creation of an inter vivos trust of the kind contemplated here, even entirely made up of heritable property, required to be in writing. All that required to be in writing was the formal right of the trustee to the heritable property. It is the trustee who has the real right in the property. The right of the beneficiary need not be in writing and may be oral. No record is required. Mr Sandison pointed out that Mr Summers had not referred to any authority in support of the proposition that before 1995 writing was required to create a trust of heritable property. The passage in Gordon's textbook referred to the position after the introduction of the 1995 Act. Mr Sandison referred to the Scottish Law Commission Report on Requirements of Writing (Scot Law Com No 112) paragraph 2.33 where it was noted that the 1696 Act gave rise to great difficulties of interpretation.

[13] Prior to 1995, the provisions of the Blank Bonds and Trusts Act 1696 ("the 1696 Act") required proof by writ or oath of certain trusts. There was no rule that trusts could not be created without writing. In any event, the rule was abolished by the 1995 Act. The present trust was created in 1978. Therefore it was within the currency of the 1696 Act. If it was assumed that this was a trust to which the 1696 Act applied, then between 1978 and the coming into force of the 1995 Act the trust could not have been proved otherwise than by writ or oath of the defender. However, the action was raised after the implementation of the 1995 Act which had swept away the restriction on the mode of proof. Therefore, in the context of this action proof prout de jure was appropriate. Mr Sandison recognised that in the case of a trust constituted after 1995, it may be that writing is required. This view is expressed by the author in Gordon, Land Law at paragraph 16.08.

The Pursuer's reply
[14] In reply Mr Summers accepted that for many years the 1696 Act restricted the mode of proof but that the 1995 Act brought in a new era so far as mode of proof was concerned. However, a distinction had to be made between the constitution of a trust and the proof of it. Mr Summers submitted that the point that he was making was not taken in the case of Hinkelbein (supra). Mr Summers pointed out that the absence of authority for the proposition that writing was required for the constitution of a trust over heritage was because of the effect of the 1696 Act. He referred to the Scottish Law Commission Report paragraph 2.33 and also to Walker & Walker, The Law of Evidence in Scotland page 374.

[15] Mr Summers submitted that it rather side-stepped the issue to say that the right of the defender was a personal right. A right in relation to heritage may be real or personal. "Relating to heritage" identifies the subject of the right. The question of whether it is a real or personal right raises the question of whether it is a registered or non-registered right, that is to say good against the rest of the world or simply between parties. He posed the question what kind of a right was involved if it did not relate to heritage.

Discussion and decision
[16] Scots Law does not recognise any right in relation to property intermediate between a real and a personal right. This is clear from the case of Burnetts Trustees v Grainger 2002 SC 580. (affirmed by the House of Lords on 4 March 2004 [UK HL 8]). When a disposition is registered in the Register of Sasines the person in whose favour the disposition is made becomes infeft and acquires a real right in the property. A person with another interest, such as the beneficiary for whom the property is held in trust, does not have a real right, but rather a personal right, which can be vindicated against the trustee. In Heritable Reversonary Co Ltd v Miller (supra) at page 53 Lord McNaughton said:

"It is true that in the present case the complete feudal title was in the bankrupt. It is true that in a strict legal view the right of the beneficiaries was only for a personal claim against their Trustee."

[17] In my opinion this case is clear authority for the proposition that heritable property to which a bankrupt has an unqualified feudal title, but which is held in trust by him for another, does not fall within his property for the purpose of the Act, and does not vest in his Trustee. In that case the bankrupt, Daniel McKay, bought properties in Edinburgh on behalf of a limited company of which he was the manager. The subjects were conveyed to him by a disposition which was registered in the Register of Sasines and he became infeft. There was nothing ex facie the disposition to show that the company had any interest. Some years later McKay executed a trust deed in favour of the company but that was not registered. At page 44 Lord Herschell said:

"I cannot think, unless compelled by authority to take that view, that it [the property of the debtor] includes, or was ever intended to include, estates of which the bankrupt was a bare Trustee, and in which he had no beneficial interest."

[18] In Hinkelbein v Craig (supra) the pursuer was a creditor of James Hall as an individual. Both Mr Hall, as an individual, and the firm of Oswald & Hall, of which he was a partner, had been sequestrated on 6 November 1903. The pursuer sought Declarator that certain heritable property occupied by the firm, but which had belonged to Mr Hall before the constitution of the firm, and in which he remained infeft, fell to be attributed to his estate as an individual and not to the estate of the firm. The Lord Ordinary (Johnston) allowed a proof habili modo. At page 85 Lord Johnston said:

"Hall did not divest himself of the title of the property, but remained infeft therein as an individual and executed no declaration of trust in favour of his new firm."

And later in the same page:

"It was admitted by the pursuer that if the heritable subject had been acquired from a third party by the firm and the title vested in the partner James Hall without any recorded declaration of trust, the trust being proved, the property could have been vindicated by the firm and its Trustee as beneficial owner. The case would have been covered by the Heritable Reversonary Co Ltd v Miller 19 R (HL) 43."

At Page 86 Lord Johnston said:

"The defences contained an averment, not as specific as it might be, but still, I think, sufficient of an agreement that Mr Hall, while transferring his heritable property to the new firm should continue to hold it in trust for that firm, and of facts which import that thereafter both the possession and the beneficial ownership were in the firm."

And later:

"There remains the question of whether the proof must be limited. It may be that ultimately the rules limiting proof will be found to apply, but I think that it would be premature to sustain the pursuer's third plea at this stage. In any view, proof of surrounding facts would be required in order to expiscate the circumstances surrounding various of the balance sheets and other documents which are founded on, and will doubtless be adduced as proof of writ; and accordingly I think it safer to allow a proof habili modo, thus reserving to the pursuer his third plea."

In the present case the debtor became infeft when the Disposition in his favour in 1978 was registered. At that point he acquired a real right in the property. The defender offers to prove that at that point the trust was created. The history of the matter before that, while interesting, does not affect the creation of a trust in 1978, if such trust was created. It would not be necessary to demonstrate that the defender had a prior interest in the property. Accordingly, it is not necessary to examine the nature of the interest held by Mr McLean and passed by him to the defender. Nor is it necessary to analyse these interests in terms of the approach in Burnett's Trustees v Grainger (supra). It is sufficient to start with the disposition granted in favour of the debtor by the Scalpay Estate in 1978. It is clear from the analysis in Burnett's Trustees v Grainger that it was the registering of that disposition in the Register of Sasines that made the debtor infeft and gave him a real right in the property. Setting aside the question of the requirement of writing for the time being, I conclude that if the defender can demonstrate that at the time when the disposition was granted a trust was created by which the debtor held the property in trust for her, then the property will be caught by the provisions of section 33 of the 1985 Act and will not fall within the property of the debtor which vests in the permanent trustee for the benefit of the creditors. Accordingly, in my opinion, Mr Summer's first argument must fail.

[19] I turn now to the argument advanced by Mr Summers that writing was required to constitute the Trust because it was over heritable property and that in the absence of writing the trust cannot be said to exist. The starting point is again to note that a trustee who is infeft has the real right in the property and that the beneficiary has only a personal right which can be vindicated against the trustee. It is important to separate the issues of whether, on the one hand, writing is required to constitute a particular contract or right, and, on the other, writing, or reference to the oath, is required to prove the existence of the contract or right.

[20] In my opinion a trust of the type averred here is not a matter that required writing for its constitution. It is not in itself a contract relating to heritage. It creates a personal right. Again, on the approach which I have adopted, it is not necessary to consider whether there was a lack of writing in the transfer of interest from Mr McLean to the defender. That is simply nothing to the point. Mr Summers did not refer to any authority to support the proposition that the creation of the trust as averred by the defender was a trust that required writing for its constitution, at least prior to the 1995 Act.

[21] The question then arises as to whether the proof of the trust requires writing.

The 1696 Act provided:

"That no action of Declarator of Trust shall be sustained as to any Deed of Trust made for hereafter except upon a declaration or Back Bond of Trust lawfully subscribed by the person alleged to be the Trustee and against whom or his heirs or assignees the Declarator shall be intended, or unless the same be referred to the oath of party simpliciter, declaring that this act shall not extend to the indorsation of bills of exchange, or the notes of any trading company."

Whether, if the case was being considered prior to1995 and under the 1696 Act, the trust would have required proof by writ or oath, or, indeed, whether the 1696 Act would have applied in an action between the Trustee in Bankruptcy and the person who claimed to be the beneficiary of the trust, are matters that I do not have to consider. This is because of the provisions of the 1995 Act. Section 11 provides:

"11(1) Any rule of law and any enactment whereby the proof of matter is restricted to proof by writ or by reference to both shall cease to have effect.

(2) The procedure of proving any matter in any civil proceedings by reference to oath is hereby abolished.

(4) Subsections (1) and (2) shall not apply in relation to proceedings commenced before the commencement of this Act."

The present action was raised after the implementation of the 1995 Act accordingly proof prout de jure is appropriate.

[22] Accordingly, I am of the view that the defender is entitled to prove that the property falls within section 33 of the 1985 Act and does not vest in the Permanent Trustee. I shall allow a proof before answer. I shall reserve the question of expenses meantime.