Scottish Court of Session Decisions

This action was raised at the instance of Messrs W. & R. Graham & Company, merchants, Glasgow, against four sets of defenders, viz., (1) Messrs Raeburn & Verel, shipowners, Glasgow; (2) the Bank of Scotland; (3) James Bain, assistant manager of said bank; and three other members of the committee of the shareholders of the Steamship “Bonnington” Company, Limited, of which committee Mr Bain was also a member; (4) the “Bonnington’ company.

The first conclusion of the summons was for payment by the defenders “jointly and severally, or severally, or in such proportions as shall be ascertained in the

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course of the process to follow hereon” of the sum of £3181.

The first defenders were the managers of the steamship “Bonnington,” of which the fourth defenders were owners.

The pursuers averred—“(Cond. 1) Under the articles of association of the company as formed in 1883 there were no directors, and this being found to be a defect, special resolutions were passed in July 1885, and the said committee thereafter exercised all the powers of directors of a limited company, and they managed and controlled the financial arrangements of the company, Messrs Raeburn & Verel as managers taking their instructions from said committee in the disposal of the funds or profits passing through their hands. The Bank of Scotland were represented by the said James Bain on the said committee as being already interested in the said company, and particularly as creditors of the same, or of the steamship ‘Bonnington.’ In their character as the leading creditors of the Steamship Company, the said James Bain was their agent and nominee, deputed by them to protect their interests. (Cond. 2) On 17th July 1889 the pursuers offered, at the request of the defenders Messrs Raeburn & Verel, who acted on behalf of the Steamship “Bonnington” Company, and the said committee of said company, to lend to the said company the sum of £15,000 in cash on the following conditions, as expressed in a letter from the pursuers to Raeburn & Verel:—‘(1) The ‘Bonnington’ s.s. to be mortgaged by the said company to us in security therefor; … (5) All profits earned by the steamer to be paid to us towards reducing the said loan till the loan shall have been reduced to £10,000; (6) after the loan shall have been reduced to £10,000, the company shall, if possible, repay to us at least £1500 per annum till the amount on loan shall have been all repaid.’ … The said offer was accepted on or about 22nd July 1889 by letter signed by the defenders Raeburn & Verel on behalf of the Steamship ‘Bonnington’ Company, Limited, and, as stated in said letter, on the express authority of the other defenders who formed the committee of the company, subject to the following modifications:—That instead of all the profits being paid to the pursuers till the mortgage was reduced to £10,000, they should be paid at the rate of £2000 per annum until then, and £1500 thereafter as per the sixth condition above mentioned. The pursuers agreed to this modification, and the transaction was arranged on that footing.”

A mortgage of the steamer, afterwards authorised by a special resolution of the shareholders, was granted to the pursuers' company, and the money was advanced. The “Bonnington” Company made no payment to the pursuers out of the profits of the steamer till January 1891. when they paid £500 to account, which was all they ever gave towards repayment of capital. They continued, however, to pay the interest on the loan until February 1892, after which date it fell into arrear.

In September 1894 the pursuers took possession of the steamer, and in November a resolution was passed by the shareholders to voluntarily wind up the “Bonnington” Company, Mr Raeburn being appointed liquidator.

During the years 1890, 1891, and 1894 the company, by their steamship, earned profits amounting to £3181, which, with the exception of £500 above mentioned, they paid to certain prior unsecured creditors, including the Bank of Scotland.

In regard to the payments above mentioned, the pursuers maintained that “the defenders, in breach of their agreement with the pursuers and in breach of their duty to the pursuers, had paid the earnings or profits of the steamer, which were specifically appropriated to the pursuers, to other parties, and that Messrs Raeburn & Verel and the committee had acted in breach of their duty to them in paying other creditors out of the profits.” They maintained accordingly that these defenders were personally liable for the amount so paid away as for a breach of trust. They maintained further that the defender Mr Bain, assistant manager of the bank, who was a member of the committee, had obtained payment of the bank's debt acting in their interest, and in breach of his duty to the pursuers. They averred that two payments of £780 and £1000 had been thus wrongfully made to the bank, and maintained that the bank were bound to repay the amounts thus received.

The defenders pleaded that the pursuers' averments were irrelevant, and on 14th June 1895 the Lord Ordinary ( Low) sustained this plea for all the defenders so far as regards the first conclusion of the summons, and quoad that conclusion dismissed the action.

Note.—[ After narrating the agreement under which the loan was granted and the grounds of action]—“The contract, according to pursuers' construction, was that the company should pay the profits to them to the amount of £2000 a-year until the mortgage was reduced to £10,000. I think that it is at all events doubtful whether that is the true construction of the contract. The letters by which the contract was made are not in process, and I am dealing only with the pursuers' averments. But upon their own statement I am inclined to think that the fifth condition in Raeburn & Verel's letter was altogether departed from, and that the modification proposed by the company and agreed to was, that instead of the profits being paid to the pursuers, the company should pay to them £2000 a-year until the debt was reduced to £10,000, and £1500 a-year thereafter. But assuming that the contract was that the profits should be paid to the pursuers to the extent of £2000 a-year until the debt was reduced to £10,000, I am of opinion that the pursuers have not stated a relevant case.

The pursuers' argument, as I understand it, is that the contract (as construed by them) involved a ‘special appropriation’ of the profits as they were earned in each

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year to the amount of £2000 to payment of their debt; that the shareholders, in approving of the action of the committee, authorised and directed the committee and Raeburn & Verel to hold the profits for and pay them to the pursuers to the extent of £2000; that the pursuers thereby acquired a jus quæsitum entitling them to demand that Raeburn & Verel and the committee should account to them for all the profits earned; and it is no defence to the claim that the money was paid to other creditors of the company.

Now, if an agent receives money from his principal to pay a particular debt of the latter, and applies it to a different purpose, it may well be that the creditor would have a direct action against the agent, especially if the principal had become bankrupt— Stewart v. Bisset, M. App. Compensation, No. 2.

But I do not think that a case of that description is averred here. It was not part of the contract that the profits should be set aside or ear-marked for the pursuers in any way, and as matter of fact that was not done. There was only, at most, an obligation on the part of the company to pay the pursuers £2000 a-year out of the profits. It therefore seems to me to be impossible to hold that the profits as they accrued became the property of the pursuers. But if they were not the property of the pursuers—if the pursuers had not the jus in re—I think that their case fails. Take, for example, the case against the bank. The bank have done no more than obtain payment from their debtor of a debt which was due to them. I therefore do not understand how the bank can be asked to repay the money to the pursuers, unless it belonged to them before it was paid to the bank. Again, upon what ground is the claim against Raeburn and Verel and the committee rested? It cannot be rested upon contract, because there was no contract between the pursuers and these parties. Nor is it a claim of damages. There is no statement of a claim of damages in the record. The claim is obviously rested entirely upon what the pursuers call ‘special appropriation’ of the profits. That is a familiar expression in connection with payments of money, but I am not sure what it means in a case of this sort. If it merely means that the company were under obligation to pay the pursuers £2000 out of the profits, that will not entitle the pursuers to sue parties with whom they did not contract. If it means that the money was set apart and held as a specific sum for the pursuers, then upon their own showing no such thing was ever done.

It seems to me that notwithstanding the contract with the pursuers, the profits remain the property of the company, the pursuers being only the creditors in the personal obligation of the company. I think, therefore, that a creditor of the company could have used arrestments, for example, of freight in the hands of Raeburn & Verel, and if the profits had been still extant, I think that the other personal creditors of the company in the liquidation would have been entitled to participate in them. But if that is so, the claim of the pursuers for £3181 necessarily fails, because that claim is entirely based upon the supposition that that sum belonged to the pursuers and did not belong to the company.

I am therefore of opinion that the action must be dismissed as regards all the defenders so far as the first conclusion is concerned.”…

The pursuers reclaimed.

Argued for pursuers—The meaning of the agreement was, that the profits were specifically appropriated for the purpose of repaying their loan, and the application of the profits to the payment of other unsecured debts was in breach of this contract. (1) The defenders Messrs Raeburn & Verel, from the circumstances under which the loan was negotiated, were put in a fiduciary relation to the pursuers. They may have merely acted as agents for the company in gathering in the profits, but when they had collected them they held them in trust for the pursuers, and were accordingly personally liable for breach of trust in having applied them to other purposes— Gas Light Improvement Company v. Tenell, May 31, 1870, L.R., 10 Eq. 168; wilmott v. London Celluloid Company, November 26, 1886, 34 Ch. Div. 147. (2) Mr Bain as one of the committee was aware of the specific appropriation of the profits, but acting in the interest of the bank he paid their debt, thus breaking the agreement which as one of the committee he had made with the pursuers. The bank was accordingly bound to restore the amount— Taylor v. Forbes & Company, December 14, 1830, 4 W. and S. 449.

Argued for defenders Messrs Raeburn & Verel—(1) The breach of trust averred by the pursuers depended on there being a specific appropriation of the profits of such a quality as to confer upon them a jus in re. Here there was not even an obligation on the part of the company to specifically appropriate the profits, but merely a personal obligation to pay the debt out of profits. Even if the agreement had constituted an obligation to appropriate specifically, the profits never had been appropriated so effectually as to bar other creditors. They had not been set aside or “earmarked” in the way contended by the pursuers, whose case therefore must fail—See Baird v. Murray's Creditors, January 4, 1744, M. 7737, for the test of specific appropriation. (2) In any case these defenders were not personally liable for breach of duty to the pursuers. They had been dealing with the pursuers under the instructions of the committee, and the parties had been treating at arm's length, so they could not be said to stand in any fiduciary relation to the pursuers. (3) The action was irrelevantly laid, conclusions being asked against all the defenders indiscriminately.

Argued for defenders the Bank of Scotland—The payment to the bank was the act of the company, and the fact that their assistant manager was a member of the company's committee in no way disentitled

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them from receiving payment of a debt due to them. The pursuers to gain their case would have to show that the money was trust-money, and that there had been a breach of trust in paying it to the bank, and they were unable to show that.

At advising—