OUTER HOUSE, COURT OF SESSION
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A83/10
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OPINION OF LORD GLENNIE
in the cause
ANDREW DE FAZIO
Pursuer;
against
(FIRST) RAYMOND DE FAZIO; and (SECOND) PAULINE WESTGATE
Defenders:
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Pursuer: McShane; Morisons LLP
First Defender: Stalker; Lindsays WS
Second Defender: no represented
21 March 2014
Introduction
[1] The
pursuer ("the pursuer" or "Andrew") and the first defender ("the defender" or
"Raymond") are brothers. Their father and mother ("Mr and Mrs De Fazio")
died respectively on 11 December 1975 and 17 March 1989. Andrew is a
retired hairdresser and is now 66. Raymond is 60. He describes himself as a
"restaurateur". He has been involved, with mixed fortunes, in bars and
restaurants both in Glasgow and London.
[2] In January
1974, nearly two years before his death, Mr De Fazio executed a
Testamentary Trust Disposition and Settlement, the principal purposes of which
were: (i) the payment of his debts and funeral expenses; (ii) the
payment of £500 to his sister; (iii) the granting to Mrs De Fazio of
the liferent of the revenues and use of certain heritable subjects, namely shop
premises at 476 and 478 Great Western Road, Glasgow and adjacent
residential property at 2 Belmont Street, or, in the event of their sale,
the payment to her of £10,000 and a liferent of the balance of the proceeds;
(iv) the holding of a shop and business, or the investments from the proceeds
thereof if sold, for behoof of Andrew and Raymond equally, payable to them when
and to the extent that the same were not set freed by the termination of the
liferent and on their respectively attaining the age of 40 years; and
(v) the payment to Mrs De Fazio of the residue of the estate. The
business carried out from the shop premises was a ladies' and gentlemen's
hairdressing salon and boutique. After the execution of the trust but before
his death, Mr De Fazio disponed to Mrs De Fazio the residential
property at 2 Belmont Street, so that on his death this was no longer
subject to the trust.
[3] Mrs De Fazio
was one of the original trustees and executors of Mr De Fazio's estate.
In January 1977, upon the resignation of the other trustees and executors,
Andrew and Raymond were assumed as trustees and executors in their place,
alongside Mrs De Fazio. After Mrs De Fazio's death in 1989, Andrew
and Raymond were the sole surviving trustees until February 2006 when, in
an order made of consent in a petition (P401/01) raised by Andrew for his
removal, the court removed Raymond from the office of trustee and executor and
appointed the second defender to be a trustee in his place. She has played no
part in these proceedings (when I refer to "the defender" I mean to refer only
to Raymond). During the years with which this dispute is concerned, 1979 and
1980, Mrs De Fazio, Andrew and Raymond were the only trustees and the
only beneficiaries.
[4] On
5 October 1978 the Sheriff Principal of Glasgow and Strathkelvin confirmed
all three to the property listed in the inventory. The net value of Mr De Fazio's
estate when he died in 1975 was stated at £22,880.64.
[5] In 1979
the trust sold the property at 478 Great Western Road ("478") for
£15,000. In June 1980 missives were entered into for the sale of
476 Great Western Road ("476") for an agreed purchase price of £14,000
but, although agents for the intended purchasers forwarded the sum of £12,000
to the solicitors acting for the trust, retaining only £2000, for some reason
which was never explained that sale did not proceed. At the same time, also in
June 1980, an agreement was entered into with the prospective tenant of
476 for the purchase by her of the contents thereof, for which she paid £5,000
to the solicitors acting for the trust.
The dispute
[6] This
dispute centres on loans made to Raymond from the trust estate in 1979 and
1980. There is no doubt that loans were indeed made to Raymond from the trust.
He admits this, although there is a difference between the parties as to
whether the amount of the loans was £37,000 (which Raymond admits) or £42,000
(as Andrew contends). For reasons which I shall explain later, I consider that
the correct figure is £42,000.
[7] The loans
were recorded in documents bearing to be minutes of meetings of the trustees
(generally "minutes") signed by all three trustees, including Andrew. I shall
look at this in more detail later. On behalf of Andrew it was averred on
record that his apparent agreement to the minutes and certain other documents
had been obtained through facility and circumvention and/or undue influence and
was therefore voidable. He concluded for production and reduction of a number
of such documents. As the evidence was led, however, it became apparent that
Andrew and Raymond had never had anything in common and that, at least from the
time of their father's death, they had actively disliked each other. Certainly
there was no trust between them. In those circumstances Mr McShane, who
acted for the pursuer, candidly recognised in his final submissions that a
claim premised upon facility and circumvention and/or undue influence could not
succeed. The required factual underpinning of a relationship of trust and
reliance was wholly absent. This concession was, in my view, inevitable. But
the importance of this absence of trust does not rest there. To my mind it
casts an important light on the probabilities attaching to the evidence of both
Andrew and Raymond concerning the events giving rise to the loans and the
signing of the various minutes and other documents.
[8] The
alternative case put forward by the pursuer, the only case still insisted on,
is in many ways more straightforward. He contends that Raymond's borrowings
were in breach of trust. The terms of the trust contained no power to make
loans to trustees other than Mrs De Fazio. In the absence of such a
power, the loans to Raymond as a trustee were absolutely prohibited. They
amounted to a breach of trust. Further, Raymond, as a trustee, owed duties of
good faith not only to the beneficiaries of the trust but also to his fellow
trustees. Andrew was both a beneficiary and a fellow trustee. His consent to
the loans was obtained by "fraud", within the extended meaning of that word as
used in the context of trusts. In those circumstances Andrew, as trustee, was
entitled to sue for the loss suffered by the trust. In practice, as a
beneficiary entitled to one half of the trust estate, Andrew was entitled to
payment of one half of that loss. Further, he was entitled to interest on that
sum at the judicial rate, compounded with monthly or annual rests, from the date
of the transactions in 1979 and 1980 to date. The sting in the tail,
of course, lies there; the principal amount sued for is relatively small, but
the claim for compound interest at the judicial rate would take it well over
the million pound mark.
[9] The
defender denied any breach of trust. He contended that the loans were made
with the consent of all of the trustees and beneficiaries as evidenced by the
signed minutes and other documents. There was no fraud or deception. The
consent was obtained openly and legitimately. And in any event, any obligation
to make reparation for the alleged breach of trust had prescribed long ago.
Relationship and credibility
[10] Before
turning to discuss in more detail the oral and documentary evidence, I should
say something about Andrew and Raymond as individuals and the relationship
between them. This is important to a determination of the probabilities of
what took place, as well as to the issues of reliability and credibility.
[11] Andrew and
Raymond gave very similar evidence about their relationship or lack of it.
Andrew is now 66. He is the elder by six years. At a young age he
was sent to boarding school but left at the age of 12. At about the time
Andrew came back home, Raymond was sent to boarding school. So there was
little contact between them at that stage. They were like two ships that
passed in the night, as Raymond put it. Raymond said in evidence that Andrew
chose not to take up his education opportunities. Whether or not it was a
matter of choice, the fact is that when Andrew left school he went straight
into his father's hairdressing business. Andrew explained that he worked with
his hands, not his head. He trained as a hairdresser. His father offered him
a share in the business but he did not want that. He wanted his father to sell
the business and give him the money to enable him to open a nightclub. When
his father refused, Andrew left home for a while. Raymond, by contrast, was
quite academic. Andrew described him as moving in younger and more intelligent
circles than him. He stayed at school until he was 18 and went on to
university. He had an entrepreneurial spirit and some business acumen. He
opened a bar in Glasgow (Nico's), and was involved in that until sometime in
1980. At the same time was involved in running a menswear shop, Royalle
Fashions, or from 476. His involvement in each of those ventures was ultimately
unsuccessful, for different reasons, but for present purposes that is beside
the point. The two brothers were like chalk and cheese. Asked in evidence to
describe their relationship, each of them was emphatic that there was no
relationship. They had not really grown up together and had nothing in common.
[12] Such
relationship as there was deteriorated further at the time of their father's
death. Raymond described an incident on, I think, the night his father died.
He was staying with his mother in Belmont Street and Andrew was in the flat
below with his wife. When a phone call came through about his father dying,
Raymond went to his brother's flat to get him. There was a party going on and
people were drinking. Andrew said that he would come when he was ready.
Raymond insisted that they go there and then, and picked up the car keys.
According to Raymond, Andrew ran at him and struck him on the face with an
unopened beer can, leaving him with blood on his face and an open wound. From
having a non‑relationship, that, according to Raymond, took it beyond the
pale. Thereafter they had an estranged relationship. They were not on good
terms. They did not socialise. They did not speak much. They only spoke when
they had to, about things to do with the trust, and the sale of the family
houses etc. It was put to Andrew in cross‑-examination that he had
assaulted Raymond on the day that his father had died with a beer can. Andrew
said he had no recollection of anything like that. Ultimately, however, the
details of the incident, if it happened, do not really matter. Andrew agreed
that they had no relationship. At times in his evidence he agreed that he
actively disliked his brother. At other times he said that he did not dislike
him, but he accepted that they never spoke apart from when they had to for
business purposes. As he put it: "I did not know the man, we did not spend
time together". The only material difference between them, so it seemed to me,
was whether there had been a particular incident causing the relationship to
deteriorate, or whether it had always been bad.
[13] The
relevant events took place over 30 years ago. Apart from the minutes
themselves and other signed documents, the circumstances surrounding which were
the subject of dispute, there was little other documentation shedding light
upon the all-important question of whether Andrew's apparent consent to the
loans was obtained by deception or whether it was obtained on an open and
informed basis. I did not find Andrew's evidence to be wholly satisfactory.
It seemed to me that he understated the number of times when documents were
signed in the presence of solicitors; and I did not believe his evidence that
he was persuaded to sign a document in blank (i.e. signing a blank piece of
paper to be filled in by Raymond in due course), or to sign a completed
document without either reading it or having it explained to him. Although he
did not persevere with his schooling, he was by no means stupid. He said in
evidence, in relation to some of the documents he signed, that the contents
were really quite straightforward and easily understood. To sign blank pieces
of paper, or to sign completed documents without reading them, might readily be
understood without the need for detailed explanation in the case of someone
with no education, but not in Andrew's case. Andrew did not appear to me to
have any coherent explanation for why he should be willing to sign on this
basis, given that there was clearly neither love lost nor trust between him and
his brother. The theme running through his evidence was that he did not
understand anything about the trust, that he regarded Raymond as the "Chief
Executor" (rather like the Chief Executive of a company) and that he saw his
role as being to do whatever was necessary to support the Chief Executor in the
decisions he made concerning the trust. Although, despite their differences,
Andrew retained some respect for Raymond's business and intellectual
capabilities, I do not consider that this account is consistent with the
animosity and lack of trust which existed in their relationship. It is, to my
mind, simply not credible that against that background Andrew would willingly
have signed documents without reading them through or without requiring any
necessary explanation, still less that he would sign documents in blank.
Raymond gave his evidence more confidently, but I consider that this may well
have been simply a reflection of his better education and, more importantly,
his relative success and confidence in life. I was not persuaded that I could
necessarily accept at face value everything that either of them said in
evidence, not because I considered that they were deliberately lying but rather
because I considered that each of them had, to some extent, over time persuaded
themselves of the narrative to which they each subscribed.
[14] I should
briefly refer to certain other matters which are potentially relevant to an
assessment of the evidence given by Andrew and Raymond. Andrew took his father's
death the very badly. He started drinking heavily, and was drinking heavily in
the period (1979 and 1980) with which this action is concerned. However, it
does not appear that this affected his ability to think straight and carry out
his work. In 1979 and for a year or two after that he worked for Raymond in
his menswear shop in Mitchell Street. Raymond said that he gave Andrew a job
because requested to do so by his mother at the time when she waived her
entitlement to the sum of £10,000 on the sale of 478. Andrew
accepted that it was possible that it had been at his mother's request that
Raymond had given him the job. At all events, he was able to carry out the
work satisfactorily despite his excessive use of alcohol. Raymond described
him as a good salesman. Andrew's drinking during this period was not put
forward by him in his evidence as a reason why he might have signed blank
pieces of paper or have signed completed documents without reading them.
Accordingly, I need say no more about it.
[15] In the late
1970s there were subsidence problems affecting the building of which 476 and
478 and also the Belmont Street property were part. That problem was
effectively beyond repair and led, in due course, to a compulsory purchase
order being made by the council. That problem affected the value of the
properties. On a date before 1979, the pursuer moved into a property at 1 Westbank
Quadrant. His mother stayed there with him for much or all of the period with
which this action is concerned. This is of some relevance because it is
difficult to accept that Andrew and his mother did not speak from time to
time. Given that each of the documents signed by Andrew was also signed by his
mother, and that his mother also signed a document agreeing to renounce her
right to the £10,000 at a time when she was living there with him, it is
all the more difficult to accept Andrew's evidence that he knew nothing about
any of the matters of which he now complains.
[16] Finally, in
this context, I should mention that Raymond was sequestrated on 1 March
1984. He avers on record that he was discharged from bankruptcy on 28 August
1986, though this was not the subject of evidence. This provides some evidence
that his business ventures were not entirely successful. But it has no legal
effect on the claim made against him. Assuming his discharge from bankruptcy
to have been automatic in terms of the transitional provisions of sections 74
and 54 of the Bankruptcy (Scotland) Act 1985, acts of fraud and
breach of trust are specifically excepted from the discharge: see section 55(2).
In any event, no defence based on his discharge from bankruptcy was raised by
Raymond on record.
[17] In addition
to evidence from Andrew and Raymond, I also heard evidence from Mr Marr, a
solicitor with Messrs Boyds who took over the handling of trust matters
from Dorman Jeffrey & Co in 1980 and was involved in the preparation
of some of the disputed minutes. He was able to speak to relevant events by
virtue of his own personal involvement and was able to do so by reference to
the "handover notes" prepared for him by Mr Cuthbertson of Dorman Jeffrey
as well as to some items of his correspondence. I had no doubt that he was
endeavouring to do his best to help the court, but these were events of over
30 years ago and inevitably his evidence, though based in part upon direct
recollection, was perhaps based more on his reconstruction from what he would
generally have done as a matter of practice.
[18] In those
circumstances it seemed to me to be safer to start with the documents and to be
cautious about accepting any evidence from Andrew or Raymond, or even from Mr
Marr, which did not appear to fit in with those documents.
The terms of the trust
[19] The
Trust Disposition and Settlement is dated 6 January 1976. It appointed
Mrs De Fazio and two solicitors as trustees over Mr F's estate at the
time of his death, to hold them in trust for the purposes which I have already
mentioned. The provision concerning Mrs De Fazio's liferent was in the
following terms:
"IN THE FOURTH PLACE, I direct my Trustees to make payment to my wife ... of the whole free income or annual produce or otherwise allow her the liferent use and enjoyment of the heritable property at Four hundred and seventy six to Four hundred and seventy eight Great Western Road, and Two Belmont Street, Glasgow, belonging to me or in the event of the sale thereof, I direct my Trustees to pay the sum of Ten thousand pounds (£10,000) to my said wife from the free proceeds of the sale as soon as convenient to my Trustees after my death free of all government death duty but without interest and to make payment to my wife of the whole free income or annual produce or otherwise to allow her the liferent use and enjoyment of the remainder of the proceeds which shall be invested by my Trustees and that during all the days and years of her life and at such times as may be convenient to my Trustees and her; Declaring (First) that such an liferent shall be strictly alimentary and not assignable by my said wife or affectable by her debts or deeds or attachable by the diligence or execution of her creditors (Second) that is no apportionment shall be made in respect of income accrued but unpaid at the date of commencement or termination (for whatever reason and to whatever extent) of the said liferent or at the date of acquisition or disposal of any income-bearing property or investments by my Trustees (Third) that notwithstanding the alimentary nature of the foregoing liferent my said wife shall have power should she desire to do so at any time and from time to time give up, renounce and discharge such liferent right as regards whole or any part of the said property in order that the fee or capital thereof may thereupon be paid or conveyed or otherwise be retained by my Trustees in terms of the provisions hereinafter written ...; AND IN THE FIFTH PLACE I direct my Trustees subject to the foregoing provisions to hold the said shop and business or the investments from the proceeds thereof for behoof of my sons, Andrew Raymond F and Raymond Alexander F equally ... Declaring (One) that the shares in the property or investments of the proceeds of sale thereof shall only invest in and be payable to my children or their issue as and when and to the extent to which the same shall be set free by my own death or by the expiry, termination of failure for whatever reason of the foregoing liferent provision in favour of my said wife and on their respectively attaining the age of Forty years ... And I specially authorise and empower my Trustees in their sole discretion to invest the trust funds or any part thereof in loans to my said wife and to accept her IOUs as sufficient evidence and security thereof and I provide and declare that no liability shall attach to my Trustees in respect of or on account of any said loan or any loss resulting therefrom ..."
It was pointed out on behalf of the pursuer, Andrew, that there was a specific provision for making a loan or loans to Mrs De Fazio from the trust estate but no similar provision for making loans to either Andrew or Raymond. In those circumstances it was contended that there was no room for any implication to the effect that the trustees could advance money by way of loan to one of their own number. That was not challenged by the defender, Raymond, and I accept that.
The loans from trust funds
[20] It
is averred by the pursuer on record that "by July 1980 the first defender
had taken or had had the benefit of funds belonging to the estate to the value
of at least £42,000". Reference is made thereafter to the fact (i) that
in March 1979 the property at 478 was sold for £15,000;
(ii) that in February 1979 Mrs De Fazio executed a minute
renouncing her rights under the will in the event of the sale of the heritable
property; (iii) that in April 1979 a Standard Security was granted by
the trustees over trust property in favour of Georgian Finance Company Ltd
("Georgian Finance") in respect of the sum of £7,000 borrowed ultimately
by Raymond for his own use or that of one of his business ventures;
(iv) that in July 1979 Raymond executed a Bond binding himself to pay
£20,000 to the trustees in respect of his borrowings to date from trust funds;
(v) that in October 1979 a Standard Security was granted over trust
property in favour of Lynpark Finance Ltd ("Lynpark") and that "the proceeds of
that loan, amounting to £5,000, fell into trust funds and that Raymond borrowed
further from trust funds for his own use or that of one of his business
ventures"; and (vi) that in June 1980, in connection with the sale
or proposed sale and/or lease of 476 and the sale of some of the furnishings
and equipment therein, Raymond received a further £17,000 which he applied to
his own use or that of business ventures in which he was interested. In the answers,
the defender admits borrowing from trust funds. Specifically, he admits the
matters referred to in points (i) - (v) above. Although no admission is made
about the borrowing of the further £17,000 referred to in point (vi) above,
Mr Stalker, on Raymond's behalf, in his final submissions, did not dispute
that the sum had in fact been borrowed. The evidence established that it had.
[21] It is not
entirely clear whether the £20,000 referred to in point (iv) above covers
the entirety of Raymond's borrowings from trust funds to July 1979, nor
how it ties in as a matter of arithmetic with the £15,000 realised on the sale
of 478 (all or at least part of which, as I understood it, was borrowed by
Raymond) and the £7,000 borrowed ultimately by Raymond from Georgian Finance.
But this does not matter, since in respect of the period up to and including
July 1979 the claim against Raymond is limited to the borrowings totalling
£20,000. Thereafter, the only live issue relates to the £5,000 borrowed
against the Standard Security in favour of Lynpark. As it stands in the
pleadings, Raymond admits that the Standard Security in favour of Lynpark
resulted in a loan of £5,000 falling into trust funds. He also admits that he
borrowed further from trust funds, the inference being that he did so on the
basis of this further loan from Lynpark. However, in his closing submissions,
Mr Stalker submitted that it was in fact open to doubt whether the sum of
£5,000 was actually lent to Raymond by the trust. In terms of the documentation,
the borrowing from Lynpark was borrowing by Raymond, not by the trust. The
role of the trust was only to guarantee that borrowing and grant a Standard
Security in favour of Lynpark for that sum over its own property at 476. In
return Raymond entered into a personal bond in favour of the trust for payment
to the trust on demand of the sum of £5,000. Mr Stalker's point is simply
this: on the evidence, Raymond appears to have borrowed the £5,000 direct from
Lynpark, and although the trust guaranteed that borrowing and gave a Standard
Security in respect of that guarantee, there is no evidence that it was
required to pay Lynpark anything under the guarantee or to discharge the
Standard Security. On that basis, Mr Stalker sought to withdraw the admission
in the Answers that the proceeds of the loan from Lynpark fell into trust
funds. That was opposed by Mr McShane. I indicated that I would give my
decision on the point when giving judgment. Having considered the matter I do
not think that it would be right at this stage, when all the evidence has been
led, to allow that admission to be withdrawn. I cannot say that there would
have been relevant evidence on this particular matter which could have been led
had there not been an admission on record; there may well not have been. But
there are a number of areas where the documentation is incomplete and there is
uncertainty as to precisely what occurred. It may be, as noted above in
relation to the £20,000, that Raymond has to some extent benefited from this
uncertainty, though again I do not know whether that is the case or not.
However, in the circumstances of this case, I think it would be unfortunate,
and potentially unfair, to allow an admission as to one of the primary facts in
issue, namely the amounts borrowed by Raymond from trust funds, which has stood
on record for some considerable time, now to be withdrawn after all the
evidence has been heard.
[22] In those
circumstances I am satisfied that the pursuer has established, on balance of
probabilities, that, in the period up to mid‑1980, Raymond borrowed from trust
funds sums of at least £20,000, £5,000 and £17,000, amounting to at least
£42,000.
Documentation
relating to the loans
[23] The
principal issue of fact in this case is as to whether Andrew gave his informed
consent to Raymond borrowing these sums from the trust. Mrs De Fazio's
consent is also relevant, of course, but no issue is raised in these
proceedings as to the validity of her consent. The starting point, therefore,
is to consider the documents directly relating to the transactions in which
these sums were agreed to be lent. It is not necessary to recite in great
detail the whole narrative of events and correspondence surrounding the sale of
trust properties, save to put these key matters in context. I shall therefore
deal briefly with those parts of the narrative.
[24] The
documentation relating to the sale of 478 begins in January 1979. At
that time the affairs of the trust were being handled by Mr Cuthbertson of
Messrs Boyds, solicitors. The sale of the property was being handled by estate
agents. On 24 January 1979 agents for potential purchasers wrote to the
estate agents with a formal offer to purchase for £15,000. That offer was
passed on to Mr Cuthbertson who, on 26 January, wrote to Raymond, in
terms which make it clear that Mr Cuthbertson and Raymond had had a discussion
about the matter. Mr Cuthbertson enclosed not only a copy of the offer
received for the property but also a copy of his qualified acceptance "following
on our meeting this morning". He added that he would let Raymond have a letter
shortly for signature by Mrs De Fazio to the effect that she would waive
her right to payment of £10,000 due to her so that the monies could be
applied "towards redemption of the loan arranged for the benefit of the
Trustees". This I understood to be a reference to the Georgian Finance
loan (see below). In terms of the Trust Disposition and Settlement, the right
to payment of £10,000 arose in the event of the sale of one or more of the
heritable properties. Raymond gave evidence, which was not challenged, that
his mother was prepared to lend him that sum of £10,000 to support him in
establishing a business venture in Glasgow (either "Nico's", in Sauchiehall
Street, or the menswear business then run from 476 and later from Mitchell
Street). He agreed, in return, to aliment her for the remainder of her life.
However, if Mrs De Fazio renounced her right to receive the £10,000, that
sum would simply go into the trust fund. It would require the consent of the
other trustees/beneficiaries for that money to be lent to Raymond.
[25] Raymond
gave evidence that the events of this time were so long ago that he could not
remember them in great detail. That does not surprise me. However, he did
accept that it was probably he who had first mooted the idea of selling 478
coupled with his mother renouncing her right to receive that sum. He thought
that he mentioned it for the first time when everyone (i.e. his mother, his
brother and himself) was together, probably at his mother's house at 1 West
Bank Quadrant, where Andrew was then living too. He said it felt like a family
loan.
[26] There
was no clear evidence about the course of discussions between the three
trustees thereafter. However, it is clear that the sale proceeded and Mrs De Fazio
did indeed agree to renounce her right to receive the £10,000. A number of
points should be noted.
[27] First, in
all correspondence relating to the sale of 478, Mr Cuthbertson, who was
acting on behalf of the trust, wrote to Raymond and not to the other trustees.
There is nothing wrong in this, provided that Raymond had the authority of the
other trustees to act in this matter on their behalf. I have already referred
to the letter of 26 January 1979 from Mr Cuthbertson to Raymond. The
qualified acceptance sent by him to the agents for the potential purchasers was
also dated 26 January 1979. That qualified acceptance was accepted on
30 January 1979 and the bargain was thereby concluded. On 1 February
1979, Mr Cuthbertson wrote to Raymond enclosing: (i) a Deed to be
signed by his mother waiving her right to receive the payment of £10,000 from
the trust following the sale; and (ii) a mandate by all of the trustees
authorising Mr Cuthbertson to act on their behalf with regard to the sale
of the property. He asked Raymond to have these documents signed and witnessed
and returned to him in early course. Clearly Mr Cuthbertson considered
that Raymond was acting on behalf of the trustees and with their approval.
[28] The second
point to notice is that these two deeds were both signed and witnessed at the
offices of Boyds. This was done on 12 February 1979. That this was done
at the solicitors' offices is to be inferred from the fact that the two witnesses
to the signatures on the deeds were employees of Boyds. There is a letter from
Mr Cuthbertson to Raymond dated 14 February 1979, at the end of which
he says that he would be grateful if he, Raymond, would return the mandates (as
he called both documents) to him, thus suggesting that he was expecting them to
be sent to him by post rather than signed in his office. There is a PS to that
letter saying "Mandates received". There may be any number of explanations for
that. It may be, for example, that Mr Cuthbertson was out of the office
at the time of dictating the letter and did not realise that the deeds had in
fact been signed in his office. I do not know. In the absence of other
evidence, however, I do not think that I should allow speculation about this
letter to deter me from drawing the inference that the two deeds were indeed
signed in the solicitors' office.
[29] That is of
some importance. It fixes Andrew with knowledge of the sale of 478 and the
involvement in that sale of Boyds. At times in his evidence Andrew denied all
knowledge of the sale of 478. It was not discussed with him. He had no
knowledge of it happening. He had no knowledge of Boyds being instructed. He
was not aware of the proposal to sell the property or of any offer to purchase
it. He did not know about the document signed by his mother waiving her
entitlement to the £10,000. However, he did accept that he had once attended
the solicitors' office to sign documents and he appeared to accept that the mandate
dated 12 February 1979 must have been the document which he signed
there. But he was insistent that he did not read it and indeed that he was
not aware of the contents of any documents signed on that day. This is
consistent with evidence given by him in respect of subsequent documents. It
formed a constant refrain which I found hard to credit. I also found it hard
to accept that he would be unaware of his mother signing a separate document on
that same occasion; and that he and his mother would not have discussed these
matters.
[30] Soon after
the sale of 478, on 26 March 1979 (the date appears from the Standard
Security referred to below) Raymond entered into a loan agreement with Georgian
Finance in terms of which he took a loan of £7,000. The loan agreement itself
was not lodged in process. By a deed dated 4 April 1979 the trustees
undertook to pay Georgian Finance all sums due and to become due by Raymond to
it in terms of that loan agreement, and granted a Standard Security in favour
of Georgian Finance over the premises at 476. The deed was signed by all three
trustees, including Andrew, and their signatures were witnessed by two
witnesses, one of whom was Mr Cuthbertson. In his evidence Andrew said
that he did not recognise that document. He did not dispute that it was his
signature, but he did not recollect being at the solicitors' office. He said
that he did not read the document and may have signed it in ignorance of its
contents. I was not persuaded that this evidence was to be relied on. Whatever
might be the position in respect of a deed signed in the presence of two junior
employees of the solicitors, I find it difficult to conceive of Mr Cuthbertson
himself being present and allowing a document of this sort to be signed without
any explanation of or discussion about its contents.
[31] The next
document of importance bears to be a minute of a meeting of the trustees in
July 1979. The precise date is left blank. The document is signed by all
three trustees though their signatures are not witnessed - the space for the
witnesses to sign is left blank. The first three paragraphs of the minute record
that Dorman Jeffrey were now instructed instead of Boyds. Mr Cuthbertson
had left Boyds and joined Dorman Jeffrey. Paragraph 4 of the minute referred
to the £7,000 loan with Georgian Finance and confirmed that that loan,
"presently secured over 476 Great Western Road" should continue in full force
and effect. I should quote paragraph 5 in full:
"It was further confirmed that [Raymond] had not been gifted either the whole or part of either the proceeds of the said sale of 478 Great Western Road, Glasgow or of the said loan from [Georgian Finance] but that the sum of £20,000 had been lent to him for his own use and purposes whatsoever. It was further agreed and confirmed that the said [Raymond] would forthwith enter into a formal document of debt with the Trustees stating the amount of the loan and specifying the terms of repayment, namely that repayment would be made by him on demand but without any interest being levied or charged on the principal whatsoever."
Paragraph 6 confirmed that Mrs De Fazio had renounced her right to payment of the sum of £10,000 due under the trust as evidenced in a formal document previously executed by her. Finally, in paragraph 7, it was agreed that Dorman Jeffrey should be instructed to prepare a personal bond to be executed by Raymond in favour of the trustees. This minute is the basis of the figure of £20,000 as the amount borrowed up to that date by Raymond from the trust. It is possible that more had been borrowed, having regard to the proceeds of sale of 478 Great Western Road (£15,000) and the loan from Georgian Finance (£7,000) - but I am not concerned with that.
[32] This
document too was signed by Andrew. He said in evidence that there had not been
such a meeting of the trustees. He was never told there would be a meeting and
they never sat down as trustees in a meeting to discuss this or any other trust
business. It is possible that this part of his evidence is correct. It is by
no means unusual, and I think Mr Marr's evidence supported this, for a "Minute"
to be drawn up to reflect agreements reached or other matters which it is
thought important to place on record, without there having in fact been a meeting.
I will return later to the question of whether this matters for the purposes of
this dispute. For the present, however, I should record that Andrew went on to
say that he was never consulted about using Boyds or Dorman Jeffrey and that he
had no knowledge of Georgian Finance until starting this action. There was no
meeting to discuss the £20,000 loan. He made it clear that he did not regard
the contents of this minute as technical or difficult to understand. He would
have understood it if he had read it, but he did not read it until 1994. He
suggested that he might have signed a blank piece of paper presented to him by
his brother Raymond. I do not regard this last suggestion as credible. Given
the relations between them, particularly after their father's death, I do not
accept that Andrew would have been willing to sign a blank piece of paper
presented to him by his brother. Nor do I accept the alternative case that he
would willingly have signed the completed document without reading it. In my
judgement he must have read it before he signed it, and he would have
understood it. He would have known from this document about the £20,000 loan
to Raymond as well as the loan from Georgian Finance and the waiver by his
mother of her right to the £10,000 on the sale of 478. When he saw these
matters raised in this document, he would have recognised that he had already
signed a document relating to certain of these matters and been aware of the
others; otherwise he would have asked what on earth was going on and protested,
but there is no evidence that he did that.
[33] On 17 July
1979, Raymond gave a personal bond binding himself to pay the trustees on
demand the sum of £20,000 with no interest or other charges falling due
thereon. This is referred to in a document bearing to be a minute of a meeting
of the trustees, undated apart from the year 1979, signed by the three
trustees (including Andrew). The minute refers to the personal bond for
£20,000. It notes that it was agreed that Raymond would grant the trustees
security over his shares in Royalle Fashions Ltd. That was done in an undated deed,
signed by Raymond in front of two witnesses, granting security to the
trustees over his shares in Royalle Fashions as security for the borrowings of
£20,000.
[34] Later
in 1979 Raymond wished to raise a further sum of £5,000. It appears to
have been intended at first that this be added to the loan from Georgian
Finance, on the basis that the Standard Security executed by the trustees in
favour of Georgian Finance for the existing loan of £7000 would be sufficient
security also for that additional sum. However, in the end the money was
borrowed from Lynpark. I have already referred to this loan. The matter is
referred to in two versions of what bears to be a minute of a meeting of the trustees,
both undated but probably taking place (if it took place) in September or
October 1979. The differences between the two versions are not material,
though it is curious that there are two versions each of which is signed by all
three trustees, including Andrew. Paragraph 1 of each version refers to
the agreement of the trustees that the sum of £5,000 would be borrowed from
Georgian Finance, from Lynpark or from some other finance company, and that if
it was a company other than Georgian Finance this would involve a second
Standard Security. At the end of paragraph 1 of each version it is stated
that:
"It was further agreed that [Raymond] would be entitled to the exclusive benefit of said monies."
In paragraph 4 it was decided that another personal bond for this further borrowing of £5,000 should be obtained. At about the same time the three trustees, including Andrew, subscribed a deed in the following terms:
"... CONSIDERING That I [Raymond] as an individual have had the benefit of Seven Thousand Pounds obtained by way of loan from [Georgian Finance] and secured over subjects at 476 Great Western Road, Glasgow by Standard Security by us the said Trustees ... and FURTHER CONSIDERING THAT I the said [Raymond] and desirous of obtaining further funds WE [the Trustees] hereby AGREE and AUTHORISE SUMS further to the extent of £5,000 to be obtained from the said [Georgian Finance] pursuant to said Standard Security and as with the said sum of £7,000 to be used for the exclusive benefit of the said [Raymond] alone."
This deed is undated, but it is signed by all three trustees, though the signatures are not witnessed.
[35] In
accordance with the scheme outlined in those documents, a loan agreement dated
16 September 1979 was entered into between Raymond and Lynpark. A personal
bond in favour of the trustees was given by Raymond on 16 October 1979.
On 26 October 1979 the trustees entered into a Deed guaranteeing the
borrowing from Lynpark and granting a Standard Security in favour of Lynpark
over the property at 476. That deed was signed by all three trustees,
including Andrew, in front of two witnesses. In his evidence Andrew said that
he had no knowledge of any of these matters.
[36] Moving
forward in time, I should note that there was lodged in process an undated
document bearing to be a minute of a meeting of the trustees held in January
1980 dealing with certain shareholdings held within the trust estate. The
contents do not matter. Of importance for present purposes is the fact that
this document is also signed by all three trustees, including Andrew, though
not witnessed. In his evidence Andrew suggested that this too had been signed
by him in blank. Asked why he would have done this, he said that his brother
Raymond was educated and that "we trusted him". For reasons set out earlier, I
find this hard to credit.
[37] Sometime in
early to mid‑1980 Mr Cuthbertson passed the file over to Mr Marr,
a former colleague of his at Boyds who had started his own firm, JE Marr & Co.
Mr Marr dealt with the negotiations surrounding the attempted sale and/or
lease of 476. In a document bearing to be minutes of a meeting of the trustees
on 12 June 1980, signed by all three trustees, including Andrew, though
not witnessed, it was agreed to authorise and instruct JE Marr & Co to act
on behalf of the trustees in these matters. Paragraph 3 of the minutes provides
as follows:
"It was further unanimously agreed that any sums received in respect of the sale of shop fittings to Mrs Kettlewell and the proceeds of sale of the heritable property at 476 Great Western Road be made available to [Raymond] for his exclusive use in such manner as he might determine. The Trustees agreed that no security would be taken from [Raymond] in respect of the said funds but that if required by the Trustees [Raymond] would grant a Personal Bond in their favour for the said proceeds of sale."
Andrew said that he was never made aware that Mr Marr was to act for the trustees. There was no proposal to appoint him. There was no meeting to discuss the sale or lease of 476 Great Western Road. There was no discussion at which the trustees were advised of the financial risk to the trust from lending money to Raymond. If there had been any such discussion, he would not have agreed to it. He knew nothing of any of this. I shall come back to consider the point about the absence of advice, but, for the reasons given earlier, I do not accept the constant refrain in Andrew's evidence that he knew nothing about documents which he did in fact sign. Since I do not accept that he signed blank pieces of paper at the request of his brother whom he did not like and did not trust, and do not accept that he signed documents without reading them simply because he was asked to do so by that same brother, I cannot accept that he was unaware of the contents of this or any other document to which he appended his signature.
[38] At a
meeting on 18 June 1980, Mr Marr handed Raymond a cheque for £17,000
representing the payment to account for 476 of £12,000 and the payment by
Mrs Kettlewell of £5,000 in respect of trade fixtures and fittings in the
premises. This was in accordance with the agreement recorded in the minutes
referred to above. In his letter to Raymond of 19 June 1980 confirming
this, Mr Marr indicated that he would soon be seeking a cheque for
£1,170.02 from Raymond to settle outstanding rates and accrued interest and
Sheriff Officers charges. He also indicated that when the sale of 476 finally
settled, he would require to discharge the Standard Securities over it in the
sum of £12,000. This was the aggregate of the loans from Georgian Finance and
Lynpark, though it omits any interest and legal expenses. Normally, he said, a
sum would be set aside from the proceeds of sale to discharge those Standard
Securities. However, he noted that Raymond had identified an alternative
source of finance for discharging them in the form of the proceeds of sale of
another property. Mr Marr addressed the complications in such arrangements
and urged that these be addressed without undue delay.
[39] The
evidence on what happened from this point onwards in relation to 476 is
unsatisfactory. For whatever reason, the sale on which agreement had been
reached and in respect of which £12,000 had been advanced by the potential
purchaser did not proceed. The Standard Securities over the property were not
discharged by Raymond, whether by the use of the £17,000 or by the proceeds of
sale of the other property. The net result is that Raymond should be regarded
as having received for his own use the whole of the sum of £17,000 paid to him
by Mr Marr on 18 June 1980.
Did Andrew agree to
Raymond borrowing these sums from the trust fund?
[40] There
is no doubt that the documents relating to the various transactions (which
resulted in borrowings by Raymond from the trust estate) bear on their face to
show that both Andrew and Mrs De Fazio, the two other trustees and
beneficiaries, agreed to the arrangements and agreed that the money could be
used by Raymond as a loan to him for his own purposes.
[41] Andrew's
evidence was that whatever the documents might suggest, he did not in fact give
his consent and did not in fact know anything about either the loans or the
wider transactions, including the sale of properties, in the context of which
they arose. In going through the relevant documentation bearing Andrew's
signature, I have endeavoured to set out his evidence and to explain why I find
that evidence difficult to accept. But I should say something more about it at
this stage.
[42] I have
already outlined in some detail the relationship or lack of it between Andrew
and Raymond. Of course, the fact that the brothers did not like each other -
and even disliked each other - does not necessarily mean that Andrew would not
do what Raymond told him to do. There is a difference between affection and
trust, dislike and lack of trust. Andrew's evidence was that he regarded
Raymond as the "Chief Executor", who was in charge of the body of trustees; his
decisions were to be followed. That was wrong, but it is possible to conceive
of that frame of mind - Raymond was the cleverer of the two, had had a much
better education and had some business experience. To that extent Andrew may
have "trusted" him, not because of any affection between them but because he
thought Raymond was knowledgeable, competent and capable of dealing with trust
matters. His evidence was that he thought that everything was being done to
build up the trust funds, and that his role was to support decisions taken to
this end by his brother.
[43] As I have
said, I can accept that such a relationship, combining dislike which reliance,
antipathy with trust, is possible. But having seen both Andrew and Raymond in
the witness box, albeit 33 years on from the events with which this action
is concerned, it did not seem to me that that reflected the true relationship
between them. It did not seem to me that Andrew's attitude to Raymond was as
nuanced as that. He may well have regarded Raymond as the one who knew about
business and could deal with trust matters, but in my judgement his dislike of
Raymond would not have allowed him simply to sign blank pieces of paper or to
sign completed documents without reading them or asking about their contents. Had
he done so once, in special circumstances, that might be one thing; but it is
quite another thing to do so on numerous occasions. It is particularly
difficult to accept that he knew nothing about the documents which he signed in
the presence of solicitors or at their offices.
[44] Much of the
day‑to‑day correspondence lodged in process is between the
solicitor (whether Mr Cuthbertson or Mr Marr) and Raymond, the
assumption of the solicitor being that Raymond is speaking with the approval
and authority of his co-trustees. In some cases the solicitor sends documents
to Raymond so that he will obtain signatures, suitably witnessed, from the
other trustees. I have no reason to doubt that this was what the solicitors
intended and understood was happening. Nor have I any reason to doubt that
Raymond did in fact obtain the informed consent of his co-trustees. Had
Raymond wished to keep his co-trustees away from the solicitors, for example
because he was hoping to obtain their signatures to documents without giving
them a chance to read them, then it is difficult to see why he did not always
obtain the signatures himself and send the completed documents back to the
solicitor. Yet on a number of occasions, particularly in connection with the
sale of 478, despite this course being suggested to him by Mr Cuthbertson,
Raymond in fact arranged that the documents be signed at the solicitors'
office. That is puzzling if Raymond was trying to keep the other trustees in
the dark about what was going on.
[45] When Mr Marr
came to give evidence he had not seen his files for some 30 years. He was
giving evidence by reference to his own recollection of events that happened a
long time ago. Such recollection as he had was necessarily influenced by what
he would expect to have done in the course of his practice. Nonetheless, he
was to my mind a candid witness who was doing his best to assist. He thought
that when he first took over the case from Mr Cuthbertson in the first
part of 1980, he met both Raymond and Andrew together. That is contrary to
Andrew's evidence, which was to the effect that he had no idea that Mr Marr
was becoming involved at all. On this issue I prefer the evidence of Mr Marr.
Mr Marr said that he did not recall meeting the three trustees as a group
and did not think that they attended his offices as a group. But he was
certain that he met both Andrew and Raymond. He met them together at the first
meeting. After that, he could not be certain whether he met them together or
separately. But the importance of his evidence on this point is that it is in
direct contradiction of Andrew's evidence. To my mind, Andrew's version of
events, in which he was wholly unaware of Mr Marr's involvement, cannot be
accepted.
[46] Andrew made
the point in his evidence that in many cases he did not think that there had
been a meeting of the trustees at all. I accept that that is probably
correct. A case in point is the minute of 12 June 1980. The first
paragraph of that minute records that it was unanimously agreed to accept an
offer to purchase 476 at a price of £14,000. In fact, the offer to purchase
that property for that price had been accepted by Mr Marr on behalf of the
trustees on 5 June 1980, some seven days before the date of the alleged
meeting. That was a qualified acceptance which was in turn accepted on behalf
of the purchaser on 11 June 1980. The bargain was thereby concluded. On
that basis, the minute of 12 June comes too late. But Mr Marr
explained what was going on in a manner which I found entirely satisfactory.
He would have obtained instructions from the trustees by phone. Whether that
came through Raymond or by speaking to one of the other trustees he could not
say, but he accepted that it was well‑established that Raymond took the
lead in relaying instructions and liaising with the other trustees. He drafted
a minute to record formally the instructions which he had been given. He had
in fact sent a draft of the minute to Raymond on 5 June 1980 when he gave the
qualified acceptance of the offer. The minute was signed by the three trustees
and the date of 12 June 1980 added in manuscript after the bargain was
concluded. But this did not matter, since he was in no doubt about his
instructions. There is, to my mind, nothing untoward or suspicious about
this. I accept Mr Marr's evidence that this is a normal way in which
instructions can be recorded. There is no reason why the solicitor should not
act on the oral instructions given earlier and then seek to have them recorded
in a document such as a minute of this sort.
[47] I should
mention two further points. The first is that on one occasion in connection
with signing one of the documents, Raymond said to Andrew: "if this is a
success, you will get some of it". This is averred by Andrew on record and
accepted by Raymond. Whatever else might be taken from this, it is evidence
that Raymond was talking about a situation where he was using the money for his
own purposes and promising Andrew some benefit if things went well. It does
not fit well with Andrew's account that he did not know that Raymond was going
to be borrowing money from the trust.
[48] The second
matter relates to Mrs De Fazio's agreement to waive her entitlement to the
£10,000 in the event of the sale of one of the properties. Raymond's evidence
was that he went to the other trustees, his mother and his brother, asking for
a loan for his business. This was to do with opening up a new shop. His
mother agreed to lend money on the condition that he, Raymond, employed Andrew
in the shop. There is no doubt on the evidence that Raymond did employ
Andrew. He said he was a good salesman. Andrew accepted that he worked for
Raymond. This provides some support for Raymond's account and, again, suggests
that Andrew's evidence that he knew nothing about what was going on cannot be
relied upon.
[49] For all
these reasons I am persuaded that Andrew knew full well what was going on and
knew both what he was signing and the effect of what he was signing. It
follows that I find it to be proved that Andrew (and his mother) knew of and
agreed to Raymond borrowing from the trust amounts totalling £42,000.
The loans were never
repaid
[50] It is a necessary part of the pursuer's claim in this case that the
sums borrowed by Raymond from the trust were not in fact repaid by him. Except
for the point concerning the £5,000 borrowed from Lynpark (which raised the
question of whether the trust had ever borrowed the money or been called upon
to pay out in respect of Raymond's borrowings), this was not in dispute and,
for the avoidance of doubt, I find it to be established.
The effect of this in
law
[51] In
presenting his submissions on behalf of the pursuer, Mr McShane indicated
that his primary motion was that the court should sustain the pursuer's sixth
plea in law, repel the defender's second to seventh pleas in law, and grant
decree in terms of the second conclusion (a conclusion for payment). His
alternative motion was that the court should sustain the pursuer's fourth plea
in law, repel the defender's pleas in law and grant an order for accounts to be
rendered.
[52] I mention
this simply to identify a measure of uncertainty in the way in which the claim
is put. The second conclusion is for payment by the first defender to the
pursuer of the sum of £21,000, together with interest thereon at the judicial
rate prevailing from time to time since 14 January 1977 compound it with
annual or monthly rests from that date, or in the alternative with simple
interest thereon at the judicial rate prevailing from time to time. The sum of
£21,000 represents one half of the total amount which the pursuer says was
loaned, in breach of trust, to the first defender. In other words, the second
conclusion is framed on the basis that the action is by the pursuer as
beneficiary. Had he been suing as trustee, he would have sought to recover for
the trust the full amount of the sums loaned, and not merely one half thereof.
However, the pursuer's sixth plea in law states that "the pursuer as a Trustee
of the Trust on behalf of which he brings this action and as an individual,
having suffered loss through the first defender's breach of Trust, is entitled
to reparation therefor from him". That appears to instruct a case brought by
the pursuer as trustee, albeit possibly also as a
beneficiary ("as an individual").
[53] Ultimately
this uncertainty does not matter. Had I been minded in principle to find in
favour of the pursuer, I would not have allowed this uncertainty to stand in
the way of his succeeding. It would be unnecessarily cumbersome to grant
decree in favour of him as trustee, acting on behalf of the trust, for payment
to the trust of a sum which, when received, would then be divided equally
between the pursuer and the defender - much better simply to grant decree in
favour of the pursuer for payment of one half of the sum loaned to the
defender. There is, of course, no difficulty in a beneficiary bringing an
action against a trustee in his own name and on his own behalf for his share:
see, for example, Raes v Meek
(1889) 16R (HL) 31 and Croskery v Gilmour's Trs (1890) 17R 697.
[54] The form of
the action does, however, highlight the true nature of the pursuer's claim in
this case. Although he can (and possibly does) sue as a trustee on behalf of
the trust, complaining about the allegedly wrongful acts of a co-trustee, his
real claim is as a beneficiary who has lost out as a result of those allegedly
wrongful acts.
[55] Mr McShane
made a number of submissions about the duties of trustees. Under reference to Gloag
and Henderson (13th Ed) at para 41.09, he submitted that their
primary duties were to ingather the estate, administer it and distribute it in
accordance with the truster's wishes. He went on to submit that none of the
trust estate was distributed to the pursuer, whether in accordance with the
truster's wishes or at all. The reason for that was that it was denuded by
loans made to the defender which were never repaid. He submitted that unless
there was a power to make a loan to a trustee contained in the trust deed
itself - and there was no such power so far as concerned Raymond, the only
express power being to advance a loan to Mrs De Fazio and there being in
consequence no scope for any implied power to advance to the other trustees -
loans to trustees were prohibited, even where the trustee receiving the loan
gave security. The prohibition was absolute. That was made clear in Perston
v Perston's Trs (1863) 1Macph 245 and later in the Opinion of the Lord
President in Croskery v Gilmour's Trs at p.700:
"The lending of trust money by trustees to one of their own number is unquestionably an illegal proceeding. It is much more than a mere breach of trust in the ordinary sense ... But to lend trust money to one of their own number is an absolutely illegal proceeding. ...
It is therefore fixed in our law that it is absolutely illegal for trustees to lend trust funds to any of their own number. No circumstances will justify such a proceeding, as it is quite ultra vires of any body of trustees so to act. ...
That being so, the question comes to be whether the parties who are guilty of such a proceeding are not jointly and severally liable, and in solidum, as having committed an act of the nature of a delict, and I am of opinion very clearly that they are. It is not a question of breach of contract at all. It is not a question as to whether there is a violation of any particular article of a contract or of any particular provision in the trust-settlement, nor is it a question of circumstances whether the security offered is sufficient. It stands upon the common law principle that such a loan is absolutely illegal, and that anyone acting contrary to it is committing a delict, or, as it is sometimes called, a quasi-delict, not, indeed, involving the doer in criminal responsibility, but only in serious civil liabilities."
Lord Shand gave a concurring opinion (at p.701) emphasising that in such a case there was "a violation of the duty which they owe to the beneficiaries". This is because of the long established rule that a trustee must not be auctor in rem suam, i.e. does not place himself in a situation in which his interest as an individual may conflict with his duty as a trustee: Gloag and Henderson (13th Ed) at para 41.15.
[56] I have no
difficulty in accepting that general proposition. However, those cases do not
say anything about a case where the loan to a trustee is sanctioned by the
beneficiaries. I agree with Mr Stalker that that additional factor makes
all the difference. As Lord Shand said in Croskery, the duty is
owed to the beneficiaries. If all the beneficiaries consent to trust money
being loaned to one of the trustees, then they cannot subsequently claim that
the trustee has acted in breach of a duty owed to them. That is made clear in the
decision of the House of Lords in Raes v Meek. That case
concerned a marriage contract empowering the trustees, who included the two
spouses, Mr and Mrs Rae, to lend trust money on heritable securities or
personal securities or obligations, with a provision that the trustees should
not be answerable for errors, omissions, negligence, insufficiency of
securities or insolvency of debtors. The trustees loaned money on the security
of buildings in the course of erection which were part of a speculation which
ultimately failed completely. The sums loaned on that security were lost to
the trust. As well as being trustees, Mr and Mrs Rae were
beneficiaries of the trust while, during their lifetime, their children had a
contingent interest therein. The children sued the law agent to the trust, but
it was held that they had no claim against him - there was no direct
relationship, contractual or otherwise, between him as law agent and the
beneficiaries (as opposed to the trustees). They also sued Mr Meek, one of the
trustees who had sanctioned the loan, for breach of duty in handling the
affairs of the trust. That claim succeeded. In delivering judgment, Lord Herschell
considered the position of Mr and Mrs Rae, if they (both as trustees
participating in the decision to lend and as beneficiaries affected by the
breach of trust) had sued Mr Meek. He observed (at p.33) that:
"It is clear that neither Mr nor Mrs Rae could obtain any relief against the defender Meek, for if there has been a violation of duty they were as much parties to it as he was. They cannot claim to have sums lost replaced, to be held on the trusts of the marriage-contract so far as those trusts are for their benefit."
That was because they as trustees had been party to the decision to lend the money. Because of that they had no claim. That case, therefore, supports the proposition that if a beneficiary consents to a trustee taking a particular course of action, then he cannot subsequently complain that what has been done with his consent amounts to a breach of duty.
[57] Raes
v Meek is cited in Wilson and Duncan, Trusts, Trustees and Executors (2nd
Ed) at para 28-10 for the proposition that:
"Beneficiaries who, as trustees, were parties to the breach of trust cannot hold their co-trustees liable."
Gloag and Henderson (13th Ed) at para 41.15 express much the same view. In the context of discussing the rule that a trustee must not be auctor in rem suam, they add:
"The trust deed or the beneficiaries may, however, authorise acts in breach of the auctor in rem suam rule." (emphasis added)
One explanation for that is that if the act is done with the consent of all the beneficiaries (or of all the beneficiaries and trustees together) no breach of trust is committed. Another is that there is a breach of trust, but that makes the transaction not void but voidable at the instance of interested beneficiaries (or of the trustees, seeking to protect trust assets for the benefit of the beneficiaries): see Callander v Callander 1975 SC 183, Colquhoun's Trs v Marchioness of Lorne's Trs 1990 SLT 34. Another way of looking at the problem is by way of personal bar; see Reid and Blackie, Personal Bar at para 9-22, who discuss the position of individual beneficiaries, clearly contemplating the possibility that in some circumstances each and every one of the beneficiaries might be barred and that therefore the trustees could not be held to account for what would otherwise have been a breach of trust.
[58] Ultimately I
do not think that it matters which route one takes: all roads lead to Rome. In
Callander v Callander at p.191-2, Lord Maxwell expressed the
principle in this way:
"On general principles by our law a beneficiary's right is a mere right in personam against the trustee (Mackenzie Stuart Trusts 1.) of which he can deprive himself by consenting to breach of trust (Gray v. Gray's Trustees 1877 4 R 378, Lord Gifford at 383, Earl of Lindsay v. Shaw and Others 1959 S.L.T. (Notes) 13, Mackenzie Stuart op. cit . 187). For these purposes a donee of a power is a trustee as regards the exercise of the power (Mackenzie Stuart op. cit . 35). In a case such as the present it matters not whether one looks at it as a consent by a beneficiary to the breach by the donee or a consent to the distribution by the trustee in pursuance of a fraudulent exercise of his power. On either approach the beneficiary's consent precludes his challenge. Counsel put the matter in, as it were, two stages. He said that, first, the consent by the pursuer precluded his challenge and, second, in any event, since it is now apparent, the two children having survived, that all possible beneficiaries have consented, the breach of trust is "ratified" on the view that, if all possible beneficiaries consent "the Court will not interfere to prevent the sole and unlimited proprietors doing what they like with their own." (Gray v Gray's Trustees sup. cit., Lord Gifford). I do not think that there is any need to make this distinction into two stages, the principle being in my opinion no more than this, that if one beneficiary consents he cannot challenge and therefore if all beneficiaries consent no one can challenge.
The pursuer's counsel did not counter the general proposition that a beneficiary consenting to a breach of trust cannot afterwards challenge it and I do not see how that proposition could be challenged. Inter alia it is the whole basis of trust variation procedure under the Trusts (Scotland) Act 1961. (Re Cohen's Settlement [1965] 1 WLR 1229 , Stamp J at 1234, Re Suffert's Settlement [1961] Ch 1). Pursuer's counsel however submitted, first, a broad argument that the principle did not apply in the case of a "fraudulent" exercise of a power at least where the "fraud" consisted of a benefit to the donee of the power and, second, a narrower argument that in any event the principle did not apply where the fraud on the power arose out of a bargain between parent and child by which the parent, the donee of the power, obtained a benefit at the expense of the child, the object of the power. He maintained that in the first, and in any event the second class of case the law would treat the transaction as a nullity and wholly disregard it, so that consent is of no significance. Indeed as regards the second and narrower class of case, if his proposition is right, consent cannot restore what would otherwise be null since, the "bargain" which, he says, the law will not recognise necessarily involves consent of the child. If there is no such consent there is no bargain.
In my opinion neither of the contentions of counsel for the pursuer is in accordance with the law of Scotland."
Lord Maxwell's decision was upheld in the Inner House and his exposition of the law clearly approved. I need cite only from the opinion of Lord Cameron at pp.211‑213:
"The pursuer however maintained that assuming against his principal argument, a fraud of the type with which this case was concerned was not per se void, the consent of all beneficiaries concerned would be necessary to validate it. In my opinion this is not so and certainly not so in the present case having regard to the conclusions on which the action is now based. The pursuer here claims nothing but damages, that is, reparation for the loss which he avers that he himself has personally sustained. His claim is therefore essentially personal, and that element in the case is pointed by the fact that he does not seek to have the deed set aside or the transaction itself reversed. If then his claim is purely personal, I can see no reason in principle why such a personal claim may not be successfully and relevantly met by a plea founded upon the pursuer's own consent to the transaction allegedly giving rise to his loss, if the consent were given freely and in full knowledge of those facts and circumstances which should have been available to him at the time of his decision."
Here, of course, we are not concerned merely with consent by one of the beneficiaries barring a claim by him, though that would be sufficient to defeat the pursuer's claim in this case. Rather we are concerned with the transactions having been approved by all three beneficiaries. That, to use Lord Cameron's language, not only bars the claim but "validates" the transactions.
[59] There is
some discussion in the books about the different concepts of, on the one hand,
consent and, on the other, of homologation or personal bar: see Reid and
Blackie, Personal Bar at para 9-24 and 9-25, McLaren, The Law of Wills and
Succession (3rd Ed) at para 1843. That distinction is said to be
important from the point of view of what is required to be shown, though in the
reported cases the two concepts are often run together: see e.g. Taylor
v Hillhouse's Trs (1901) 9 SLT 31, Callander v Callander
1975 SC 183. Reid and Blackie, Personal Bar say at para 9-25 that where it is
alleged that express consent has been given, "issues of fairness and knowledge
on the part of the consenting party are relevant only to consideration of
whether the consent was vitiated as a result of error or through being obtained
by inappropriate behaviour, such as undue influence." On that basis, since the
conclusion for reduction of the minutes signed by Andrew, supported by the
pursuer's third plea in law to the effect that they were infiltrated by
facility and circumvention or undue influence, is no longer insisted upon, I
agree with Mr Stalker that the consent evidenced by those documents must
stand.
[60] It seems to
me that that is the correct way of looking at the matter. In each case there
is sufficient evidence of consent having been given in advance of the loans
having been made. That is certainly the case as regards the loan of £17,000 in
June 1980, where the relevant minute was, on any view, signed prior to the
cheque being handed over by Mr Marr to Raymond. But it is also the case,
on my assessment of the evidence, in respect of the two earlier loans. The
minute evidencing the agreement that Raymond would have the benefit of the
£7,000 borrowed ultimately from Lynpark is couched in terms which make it clear
that at that time it was still uncertain whether the money would come from
Lynpark or from Georgian Finance or from some of the lender. It clearly
predated the actual loan from Lynpark and the agreement therefore predated the
receipt of the money. The issue of the £20,000 loan is less clear‑cut.
It appears from the minute of July 1979 that that was merely a
consolidation of sums borrowed before that time. Two in particular were the
£10,000 or £15,000 advanced after the sale of 478 and the £7,000 borrowed via
the loan agreement with Georgian Finance. While there was no specific evidence
of the co-trustees having agreed to lend Raymond those sums prior to them
having been borrowed by him, the terms of the July minute do not suggest that
it had only just been discovered that the £20,000 had been borrowed by Raymond
or that the other trustees were reluctantly agreeing to something which had
already taken place without their consent. Standing the remainder of the
evidence in this case and standing the terms of the minute of July 1979
confirming that the £20,000 could properly be borrowed by him, I infer that
there were discussions prior to the loans being made in which Mrs De Fazio
and Andrew, both as co-trustees and co-beneficiaries, consented to Raymond
borrowing those sums.
[61] On that
basis the issue is one of consent rather than personal bar. However, even if
the proper analysis was one of personal bar or homologation, it is still my
view that the evidence demonstrates that the pursuer homologated the loans with
full knowledge of all relevant circumstances and is personally barred from now
complaining that they amounted to a breach of trust. I have come to this view
without any great reluctance on the evidence. As I have already made clear, I
do not accept the pursuer's evidence that he was wholly ignorant of the terms
of the trust or what it entailed. It is well-established that a person who
undertakes the role of trustee is bound to know what his duty requires: see,
for example, Ferguson v Paterson (1900) 2F (HL) 37, 40 (per
Lord Halsbury LC). Andrew was a trustee. What is relevant here, of
course, in the context of consent is his role as a beneficiary, but it is
artificial in the extreme to try to separate out his knowledge as a trustee
from his knowledge as a beneficiary. I see no reason to doubt that he was
aware of his duties as trustee and his rights as a beneficiary. Nor, as I have
already indicated, do I have any reason to doubt that he knew full well that he
was agreeing to loans from the trust estate being made available to Raymond.
He would have understood that any loan involved the risk that it would not be
repaid, whether through wilful refusal to repay or, perhaps more likely,
because of financial difficulties or insolvency. I see no reason to doubt that
he had the relevant knowledge so as to justify the conclusion that he is barred
from now complaining that the loans to Raymond were made in breach of trust.
[62] Earlier in
this opinion I noted a complaint made by the pursuer that the minutes signed by
him were not minutes of actual meetings - he says that the trustees never sat
down as a body, with an agenda, to discuss trust matters or any of the matters
covered by the minutes. I accept that in certain circumstances that may be
important. But the minutes here are not relied on to show generally that the
trustees conducted trust business in a particular manner, holding periodic
meetings to discuss matters which had been notified in advance by circulation
of an agenda or the like. They are relied on only to show that the pursuer
appended his signature to documents recording the agreement of the trustees to
a number of matters, including the loans to Raymond under discussion here. By
signing the documents, Andrew has indicated clearly that he agrees to such
matters, including the loans. The conclusion for reduction of those documents
is no longer insisted upon. In those circumstances the documents stand as
evidence of his agreement. So too do the deeds in favour of Georgian finance
and Lynpark, signed by all three trustees, in terms of which they all agreed to
guarantee Raymond's borrowings and provide security therefore. There never was
any conclusion for reduction of those deeds. Taking these matters as a whole,
they constitute written agreement by Andrew to trust funds being lent to
Raymond. Absent reduction, that agreement stands and is effective to bar
Andrew from contending that Raymond has acted in breach of trust.
[63] Mr Stalker
pointed out that if Raymond was in breach of trust by making a loan to himself,
so also was Andrew in agreeing, as trustee, that such a loan could be made.
That is, of course, correct: see, for example, Croskery v Gilmore's
Trs. On the assumption that both trustees are liable, then the obligation
to make good the shortfall to the trust lies on both. An equal apportionment
of that liability would result in both being liable to make good one half of
the sums loaned. They would both then be entitled to receive from the trust
one half of the replenished estate. On that basis the action would fail, in
principle at least - both would get out what they were obliged to pay in, and
neither would be better off. However, I do not think that that would be the
right way of approaching this matter. It begs a number of questions. It
assumes that the apportionment of liability would be on an equal basis, whereas
in circumstances where the loans were made wholly for the benefit of Raymond a
court might not regard that as the fair way of resolving that issue. So I do
not decide the case on this basis.
Other matters
[64] Having come to the view that the defender cannot be held liable to
the pursuer for breach of trust, that makes it unnecessary for me to decide
certain other matters which are argued. I should simply mention them in case
the case goes further. The first was as to the calculation of the loss. I do
not see a problem with this. The starting point is that £42,000 was borrowed
from the trust assets and not returned. The loss suffered by the trust is prima
facie £42,000, and the loss suffered by the pursuer is prima facie
half of that sum. It is irrelevant to consider what would have happened had
the trust had that money in it until the date of vesting in the beneficiaries.
I see no reason not to suppose that the loss is properly calculated at that
sum.
[65] The
question of interest was raised. The pursuer sought compound interest at the
judicial rate with either annual or monthly rests. It seemed to me, as I think
I told parties at the time, that this question would be more appropriately
addressed
at a hearing after I had given judgment in this case. The basis of a finding of liability would be relevant to the exercise of discretion. In addition, the court would wish to be informed of how the judicial rate compared from time to time with the bank rate or lending rate available to small borrowers. Whilst it may be that the judicial rate is the appropriate rate to use where one is considering an award of simple interest (c.f. Farstad Supply AS v Enviroco Ltd 2013 SC 302), it does not follow that that is the appropriate rate for the award of compound interest.
[66] The
question of prescription was argued before me. I propose to say nothing about
this. Nor do I propose to say anything about the plea of mora, taciturnity
and acquiescence which was also argued.
Disposal
[67] For all the reasons set out above, I shall assoilzie the defender
from the conclusions of the summons. I shall reserve all questions of
expenses.