Scottish Court of Session Decisions

At advising on 8th January 1981, the opinion of the Court was delivered by the Lord President.

LORD PRESIDENT (Emslie).—The first parties sold bricks to the second parties ("the Company"). The value of the bricks sold amounted to £4,985.62. The sale was subject to inter alia condition 11 (b) in the Contract which was in the following terms—"In the event of the buyer reselling or otherwise disposing of the goods or any part thereof before the property therein has passed to him by virtue of Clause 11 (a) hereof then the buyer will, until payment in full to the seller of the price of goods, hold in trust for the seller all his rights under such contract of resale or any other contract in pursuance of which the goods or any part thereof are disposed of or any contract by which property comprising the said goods or any part thereof is or is to be disposed of and any money or other consideration received by him thereunder."

The company used the bricks sold in carrying out building works as subcontractors under a number of sub-contracts. In terms of these subcontracts the Company received from time to time interim payments for the work they had done. These payments consisted of the value of the materials incorporated in the buildings concerned together with time charges and other elements including profit. In the case of each of the sub-contracts the amount of the interim payments was much greater than the value of the bricks sold to the Company. As each such payment was received it was paid by the Company into its current account with the Bank of Scotland Ltd. That account was at all times in credit. The first parties were not informed of the receipt of any of these payments by the Company. From time to time sums were transferred by the Company into another account with the same bank, which was always overdrawn.

On 24th November 1976 the Company went into creditors' liquidation. As at that date the balance standing to their credit in their current account was £24,573.71. The bricks sold to the Company by the first parties had not been paid for. In these circumstances the first parties contended to the liquidator that the interim payments which found their way into the Company's current account before the date of liquidation were held by the Company as trustees for behoof of the first parties until such time as the price of the bricks sold had been paid. These sums did not accordingly form part of the Company's assets. Upon this contention the first parties claimed payment from the liquidator of the sum of £4,985.62 in full. The liquidator rejected this contention and this claim, and ranked the first parties as ordinary creditors in the liquidation. As ordinary creditors they will recover nothing.

In this Special Case the relevant questions for answer are these—

"1. Were the Company obliged to hold the sums paid under contracts in which the first parties' bricks were used in trust for the first parties ?

2. Does the Company hold, under the administration of the liquidator, the sums paid under contracts in which the first parties' bricks were used in trust for the first parties ?"

As will be apparent from what we have said so far the contention of the first parties involves that the Company must be seen as a truster who has made himself a trustee of his own property. As our law has developed there is no doubt that it is perfectly competent for a person to make himself a trustee of his own property. In order to do so, however, he must do something equivalent to delivery or transfer of the trust subjects or fund to himself as trustee and something to demonstrate the irrevocable character of the trust (vide Allan's Trustees v. Lord Advocate 1971 SC (HL) 45). In such a case the creation of an irrevocable trust may be demonstrated in various ways. The person in question can, for example, execute a deed or declaration of trust over defined trust subjects in favour of his intended beneficiary and proof of a validly created trust will be complete when he has done something which can be regarded as equivalent to the delivery of the subjects of the trust which would be required to constitute a valid trust with a third party as trustee. Intimation to the beneficiary of the execution of the deed or declaration of trust and of its terms, would clearly suffice for this purpose. In each case, however, it will be a matter of circumstances whether the truster has done enough to establish the necessary constructive delivery of the trust subjects to himself as trustee of an irrevocable trust.

Against this background of the general law which both parties accepted, the submission for the first parties which ought to be examined first—notwithstanding its first appearance in the speech of their senior counsel—was that the contract by which the bricks were sold to the Company falls to be construed as a declaration of trust by the Company, in the terms of condition 11 (b) over defined trust subjects which include all their rights under each of their sub-contracts and all money to be received and received by them thereunder. The first parties, the beneficiaries of the trust set out in condition 11 (b) were parties to the Contract and in these circumstances—at least from the time the Company accepted the bricks under and in terms of the Contract—a valid trust had been created. There was no need, in this case, for any other act, on the part of the Company, to complete the creation of a valid trust. All that was necessary to demonstrate the necessary constructive delivery under an irrevocable trust was done by the Company when they agreed to take and did take the bricks upon, inter alia, condition 11 (b) of the Contract.

In our opinion this submission falls to be rejected for the reasons advanced by senior counsel for the second parties. Condition 11 (b) cannot, we think, be read as containing any declaration of trust by the Company. It is, rather, a condition which imposes upon the Company a contractual obligation to hold certain alleged "trust" subjects in "trust", in accordance with its precise terms. It cannot, therefore, by itself, in the context of the Contract as a whole, demonstrate that a trust was ever created in terms of the obligation. But there are more formidable objections than this to the submission of the first parties. Even if we assume, contrary to the opinion we have expressed, that condition 11 (b) could fairly be read as containing a purported acceptance by the Company of an alleged trust over their own property, corporeal and incorporeal, the question is whether there can be identified any true trust in accordance with the law of Scotland. The alleged trust is to hold "for the seller" (the first parties) all the rights and all the moneys to come under all contracts not yet entered into in which any of the bricks sold are used, until the price of the bricks has been paid in full. It is at once obvious that the value of the alleged "trust" subjects might be (and as it proved in the event to be) infinitely greater than the price to which the first parties were entitled under the Contract with the Company. Yet according to the submission for the first parties all had ceased to be part of the Company's own estate and could not be released from the fetters of the trust unless and until such time as the Company's debt was paid, in full, presumably out of funds which were not burdened by any trust. What is really significant here is, of course, that in the so-called trust no beneficial interest whatever in the subjects thereof is or was conferred upon the alleged beneficiaries, the first parties. All they were entitled to receive was the price of the bricks. It is not provided that they should be entitled to have recourse to any part of the "trust" fund for this purpose. Properly construed, what condition 11 (b) purports to do is to secure the freezing of the defined subjects, regardless of their value, under an alleged trust which gives no beneficial interest therein to the supposed "beneficiary," until they receive the price of the bricks which they sold to the Company. In our opinion the essential ingredients of a trust are entirely lacking and condition 11 (b) can be seen for what it really is—as no more than an attempt, under the guise of an alleged trust, to keep valuable assets of the Company out of the hands of its other creditors, at least until the first parties have themselves received payment in full of the price of the bricks sold to the Company. Before leaving this submission we ought to say two things. The first is that, even if the Company had on receipt of the various interim payments gone through the exercise of executing and intimating declarations of "trust" in the exact terms of condition 11 (b) in relation to these payments, the essential ingredients of a trust would still be absent and the position of the first parties could not have been strengthened thereby. The second is that if a condition such as condition 11 (b), designed only to freeze assets of a debtor and to keep them out of other creditors' hands until a particular creditor's debt is paid in full, were to be regarded as constituting a proper trust in accordance with the law of Scotland, and were to be adopted widely by sellers of goods, the damage which would be done to the objectives of the law of bankruptcy and of liquidation would be incalculable. Other interesting complications can easily be figured, and a person creating more than one such "trust" in favour of his creditors could readily find himself in trouble under the criminal law.

This leaves for consideration the alternative argument submitted by the first parties. The argument was presented on the assumption that the terms of the contract between them and the Company were at least habile to impose on the Company an obligation to create a true trust in favour of the first parties. It was therefore necessarily implicit in this submission that the first parties could be and were beneficiaries in such a trust, a submission which we have already rejected. On the assumption that the contract could be so construed as at least sufficient to impose an obligation on the Company to set up a trust in such a form as effectually to confer beneficial rights on the first parties, it becomes necessary to examine somewhat more closely than in the case of the first parties' primary submission the development and the present state of the law as to the requirements for setting up a trust where truster and trustee are one and the same person. The legal possibility of the setting up of such a trust is referred to by Lord Kyllachy in his dissenting judgment in the case of Cameron's Trs. v. Cameron 1907 S.C. 407 at p. 415 where he said "…I know of no principle of trust law which prevents the constitution or bars the subsistence of a trust in which the truster is (or becomes) himself the sole trustee…In the next place, however, I quite acknowledge that in the case of a sole trustee—as in the case of a body of trustees—the trust until it is accepted is only inchoate; and also that in the case of a sole trustee who is himself the truster, the acceptance may require to be signified by something more than the mere possession of the deeds creating the trust, or even the execution by the trustee of a minute or other writ of acceptance which he keeps in his own hands. In that case it may well be that there is required in addition some overt extraneous and ostensible act which involves acceptance of the trust and marks definitely the character of the trustee's possession."

The matter was taken up in a brief sentence in Menzies on Trustees, 2nd ed., 1913, p. 30, when the author, without citing the opinion of Lord Kyllachy, said "The truster may himself be one of the trustees, or even the sole trustee," while Mackenzie Stuart in his work on Trusts says at pp. 8–9:

"Delivery may be made by a third party on the truster's instructions, or it may be by the donor as truster to himself as trustee…Where there is no delivery there must be its equivalent. This must be something done by the truster to take the subject effectually out of his control and to put it into the control of the trustee or beneficiary."

For this proposition the learned author cites Cameron's Trustees v. Cameron and the opinion of Lord Kyllachy and goes on to say at p. 12:

"Where the granter has appointed himself sole trustee, delivery in the ordinary sense is impossible, and equivalents to it are more easily presumed than in the case of the trustees being independent of the granter. But there must be something equivalent to delivery so as to operate divestiture."

This passage was quoted with approval by Lord Reid in Allan's Trs. v. Lord Advocate 1971 SC (HL) 45 at p. 54 where he said "I think that we can now accept the position, as a reasonable development of the law, that a person can make himself a trustee of his own property, provided that he also does something equivalent to delivery or transfer of the trust fund." But will a mere expression of intention to create a trust fund or even acceptance of a contractual obligation to create one, by itself, be sufficient or effective to create a trust and operate divestiture in cases where proposed or presumptive truster and trustee are one and the same person ? The contention that it will was summarily rejected by Lord Reid in Allan's Trs. at p. 54. The clearly expressed opinion of Lord Fraser in Kerr's Trs. v. Inland Revenue 1974 S.L.T. 193 at p. 200 makes it abundantly clear that in a case where it is intended that the truster and trustee should be identical, neither expression of intention to a proposed or prospective beneficiary nor acceptance of a contractual obligation to set up such a trust will suffice to provide the necessary equivalent to delivery and consequent divestiture. There must, in addition to prospective beneficiary and truster and trustee, be in existence an asset, be it corporeal or incorporeal or even a right to acquirenda, which can form the subject matter of the trust and can therefore be the subject of delivery or its sufficient equivalent. The limits of the precise form or terms of such equivalent have not been defined in the three most recent cases, Allan's Trs., Clarks Trs. v. Inland Revenue 1972 S.C. 177, and Kerr's Trs. or in the earlier text writers. What, however, has been and can be accepted as sufficient equivalent is intimation to a beneficiary—even if there should be more than one, as would appear to follow from the ratio of the decision in Allan's Trs. No doubt all three cases cited were directly concerned with liability of trust estates to estate duty and the possible aggregation of insurance policy monies on policies taken out by deceased persons who are alleged to be trusters and trustees in their own persons, but the principle on which they were decided stemming from the development of the law noted by Menzies and Mackenzie Stuart was not suggested to be applicable only to such factual circumstances.

The result of this analysis of the ruling authorities is that in order to complete the successful constitution of a trust recognised as such by our law, where the truster and trustee are the same persons, there must be in existence an asset, be it corporeal or incorporeal or even a right relating to future acquirenda; there must be a dedication of the asset or right to defined trust purposes; there must be a beneficiary or beneficiaries with defined rights in the trust estate; and there must also be delivery of the trust deed or subject of the trust or a sufficient and satisfactory equivalent to delivery, so as to achieve irrevocable divestiture of the truster and investiture of the trustee in the trust estate. In the case of Allan's Trs. it was decided that intimation to a beneficiary of the taking out of the policy and of the benefits which she and other named beneficiaries were to enjoy was a sufficient equivalent to delivery producing the requisite consequence. But what neither Allan's Trs. nor the subsequent cases of Clark's Trs. and Kerr's Trs. decided was that such intimation was the only equivalent to delivery.

The argument of the first parties as presented by junior counsel rested on the submission that the equivalent to delivery of the monies represented by each interim payment as and when they fell into the Company's hands was to be found in the Contract between them and the Company and in particular clause 11 (b). There was an immediately prestable obligation, prestable against the Company to hold in trust certain monies—acquirenda if you will—as trustee for the benefit of the first parties. This contractual obligation, it was said, fell to be regarded as a continuing intimation that so soon as any of the relevant monies reached the hands of the Company they would be held thereafter in trust in implement of the obligation. The existence of this continuing intimation constituted by the contractual obligation itself was therefore equivalent to an intimation of the creation of a trust over each payment, at or after it was received by the Company, and was, accordingly, in the circumstances of this case a sufficient equivalent to delivery.

The argument as presented had a certain apparent persuasiveness but on examination fails to meet the minimum requirements of the law as to effective constitution of a trust where truster and trustee are the same person. The language of the relevant clause is directed to future acts. An obligation to "hold in trust" implies that there will be a fund, a trust deed, a divestiture by the truster and an investiture of a trustee.

If these things are done, there is created in favour of the beneficiary an irrevocable trust, otherwise there is no trust. What on this argument is said to be "equivalent to delivery" is not intimation of action taken in relation to existing assets or rights in favour and for the benefit of the beneficiary, but the acceptance of an obligation to hold in trust certain monies which may be paid to the assumed truster at some unspecified, and at the time unknown, date. This, however, is far from being "some overt extraneous and ostensible act which involves acceptance of the trust and marks definitely the character of the trustee's possession" in the words of Lord Kyllachy. As Lord Fraser made clear in the case of Kerr's Trs., a contractual obligation to constitute a trust does not by its own vigour have the effect of constituting a trust in favour of one of the contracting parties, particularly in a case in which the party undertaking the obligation is himself to discharge the office of both truster and trustee. Here there is such a contractual obligation but the mere acceptance of the obligation is not equivalent to its discharge nor of its own does it operate an automatic discharge. In these circumstances it is necessary to look beyond the contract for something which in the admitted facts could otherwise be held to provide, at or after the time when the subjects of the trust came into existence, the necessary equivalent to delivery, requisite to complete the constitution of an irrevocable trust, and divestiture of the truster in favour of himself as trustee. There is nothing to which counsel for the first parties could or did point and therefore this alternative submission must fail.

The questions in the case should be answered 1 and 2 in the negative and the remainder superseded as unnecessary, as both the principal submissions for the first parties fail.