Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION
	[2014] CSOH 76
A657/13	OPINION OF LORD MALCOLM in the cause GLASGOW CITY COUNCIL Pursuers; against THE BOARD OF MANAGERS OF SPRINGBOIG ST JOHN'S SCHOOL AND ANOTHER Defenders: ________________

Pursuers: The Dean of Faculty, Duthie; Glasgow City Corporate Services

Defenders: Clancy QC; McSparran McCormick

27 March 2014

[1] The pursuers, Glasgow City Council, have raised an action for payment of £4.7 million, or thereby, against the Board of Managers of Springboig St John's School and Monsignor Peter Smith, the sole remaining member of the board (the defenders). The board is an unincorporated association. Until 2010 it operated and managed Springboig St John's as a specialist school in Glasgow on a charitable basis. The school provided residential care and education for troubled young people who were placed there by local authorities, the authorities paying fees in return. Many of the board were senior clerics within the Roman Catholic Church Archdiocese of Glasgow. They were joined by lay people, councillors and others nominated by the pursuers. The chair of the board and all the managers were appointed by the Ecclesiastical Superior of the Archdiocese, who also appointed a firm of solicitors to provide administrative and legal support to the board. All the managers, apart from Monsignor Peter Smith, resigned in May 2013.

[2] By disposition dated 4 January 1962 the pursuers' predecessors conveyed heritable subjects consisting of land and existing school buildings to the then members of the board of managers; to the Ecclesiastical Superior; and to the members of the finance board of the Archdiocese, and to their successors in the said respective offices (the trustees), all in trust for the religious and educational purposes of the Archdiocese of Glasgow.

[3] The subjects were then operated as Springboig St John's School by the board of managers. The school was demolished in 2010 and the site is now known as 1190 Edinburgh Road, Glasgow. The pursuers aver, and it is admitted, that the subjects were dedicated to the said trust purposes under the auspices of the board on behalf of the trustees. Monsignor Peter Smith is sued as the sole remaining member of the board of managers of the school and as one of the trustees.

[4] The pursuers seek payment from the board of a sum in excess of £4.7m. The background is that the pursuers administer a local government pension scheme in terms of certain regulations of 2008. The scheme is the successor to a superannuation fund operated by the pursuers' predecessors in terms of an Act of 1953. The board of managers were an admission body in terms of the regulations and earlier schemes, meaning that its employees could join the pension scheme. An admission agreement between the then board and the then administering authority was completed in 1964. Thereafter certain of the board's staff participated in the pension scheme. As employer, the board was liable in respect of contributions and other payments arising by reason of the participation by its employees in the fund.

[5] In 2009 the school received an unsatisfactory report following an inspection by the Care Commission. By 30 June 2010 (the cessation date) the school had closed down and the remaining employees were made redundant. As a result the admission agreement ended. The pursuers aver that the defenders became liable to make a cessation payment to reflect the value of its prospective liabilities under the fund in respect of its former employees. This liability has been assessed in terms of the regulations at the sum sued for. Invoices have been issued but remain unpaid. In the board's audited accounts for the year to 31 March 2011 it is stated: "The charity ceased to provide services on 30 June 2010 but continues in existence whilst the managers attempt to realise its assets and pay off its liabilities."

[6] The pursuers aver that the former managers of the board as at the cessation date are also liable, but as yet they have not been conjoined to the action. This is because the pursuers are still attempting to obtain their full names and addresses. The Edinburgh Road site is the only remaining significant asset of the board. It is estimated that it is worth in excess of £1m. The defenders deny that the subjects are an asset of the board. They aver:

"The subjects are owned by the trustees under the trust created by the disposition who are a separate juristic entity from the defenders. The assets of the trust are not vulnerable to diligence on the dependence of this action or in execution of any decree granted against the defenders."

The defenders also contend that "since the defenders do not own the subjects they will not be entitled to the proceeds of sale and will not have the right to apply the proceeds of sale." The background to this is that the trustees intend to market and sell the Edinburgh Road site.

[7] The pursuers' averments include various passages concerning assets and liabilities which have appeared in the board's accounts, the general purpose being to rebut the proposition that the defenders had and have no interest in the former school. The pursuers aver:

"The subjects were dedicated to the said trust purposes impressed upon the subjects by the disposition and implemented under the auspices of the first defenders and the managers, including the former managers, thereof on behalf of the trustees. In accordance with their obligations as trustees, the trustees are obliged to apply the assets of the said trust, including the subjects or the proceeds arising on any disposal of the same, to discharge the liabilities incurred by them or on their behalf by the defenders, including the cessation obligations incurred in the course of or in furtherance of the said trust objects."

[8] The pursuers sought a warrant for inhibition and arrestment on the dependence of the action on the basis that there is a real and substantial risk that enforcement of any decree would be defeated because the board is insolvent or is verging on insolvency. It is averred that there is a real and substantial risk that enforcement would be defeated by reason of the defenders disponing the subjects at Edinburgh Road. Under reference to section 15E(2) of the Debtors (Scotland) Act 1987, it is contended that such diligence would be reasonable and proportionate. The defenders' response is again to aver that they do not own the site, hence its sale would not prejudice the pursuers.

[9] On 17 December 2013 warrant was granted for inhibition on the dependence of the action. On 21 March 2014 I heard an opposed application by the defenders for recall of that warrant, the purpose being to allow the sale of the subjects. Mr Clancy QC appeared for the defenders. The Dean of Faculty (Mr Wolffe QC) and Mr Duthie appeared for the pursuers. The onus is on the pursuers to satisfy the court as to the criteria set out in section 15K of the 1987 Act, otherwise the warrant must be recalled. It quickly became apparent that the outcome of the application depends upon whether the pursuers have presented a prima facie case that the site of the former school is caught by the inhibition. In other words, is it available to the pursuers in satisfaction of the debt claimed in the action? There was no real issue as to the defenders' insolvency, and while Mr Clancy did question whether the pursuers had presented a prima facie case as to the alleged cessation liability under the admission agreement and the pension scheme regulations, I have no qualms on that matter.

Counsel's submissions

[10] On the key issue, Mr Clancy repeated the proposition contained in the defences, namely that the heritable subjects are held by "a separate juristic entity", namely the trustees under the 1962 disposition, which is separate in law from the board of managers. While Monsignor Peter Smith is sued as the remaining member of the board and as a trustee, none of the other trustees have been conjoined or even called for any interest they may have. In terms of the third criteria in section 15K, Mr Clancy submitted that, given the involvement of all the trustees in the trust property, it would be unreasonable to continue the warrant for inhibition. The board has no interest in any other heritage, thus the inhibition would prevent the trustees selling the property with no beneficial result for the pursuers since, according to Mr Clancy, the site is not available to satisfy the pursuers' claim.

[11] On behalf of the pursuers, the Dean of Faculty observed that the board of managers are absolutely insolvent. He stressed that the subjects were dedicated to trust purposes. They were put under the management of the board, whose members were trustees under the 1962 disposition. The objects of the board were to operate and maintain the school as a residential establishment providing care and education for the residents. The managers were appointed by the Ecclesiastical Superior of the Archdiocese. The sole function of the board was to fulfil the trust purposes. The Dean submitted that, in the whole circumstances, the board having incurred a liability to the pursuers in respect of its management of the school, the trust property is available in satisfaction of the liability. Reference was made to certain passages in some of the board's accounts. It was claimed that they demonstrate that the trustees placed the trust property in the hands of the board of managers and charged them with fulfilling the trust purposes. In the course of that, the board entered into the admission agreement with the pursuers' predecessors. That agreement is the origin of the present claim.

[12] The Dean made reference to the concept of the dual patrimony of a trustee as discussed by Professor Gretton in The Law of Inhibition and Adjudication at pages 77 and 82. The author states that a trustee may be inhibited for a trust debt, thereby affecting the property of the trust, but not assets in the trustee's personal patrimony. My attention was drawn to the Scottish Law Commission's discussion paper on the Nature and the Constitution of Trusts (October 2006). The suggestion is that much of our law can be explained on the basis of a trustee acquiring a patrimony, which is separate from his personal patrimony, consisting of the trust fund and any obligations incurred in the proper administration of the trust. The paper states: "If, as will usually be the case, there are two or more trustees, the trust patrimony is owned by them jointly." It is noted that Professor Reid has expressed the view that "a private creditor must claim from the private patrimony and a trust creditor from the trust patrimony". At paragraph 2.22 the Commission observes that "where obligations have been incurred in the trust patrimony, for example by the trustee in the course of the administration of the trust, the claims of the trust creditors have to be satisfied before the trust purposes can be fulfilled." It is part and parcel of this that personal claims against a trustee can only be satisfied from his personal patrimony, that is from the assets which he owns as an individual.

[13] The Dean noted that there was no plea of all parties not called, otherwise he would have convened all the trustees. There had been no suggestion from Mr Clancy that he was without instructions as to the interests of the trustees. Indeed Mr Clancy was seeking recall to allow the trustees to sell the site. As I understand it, in essence, the Dean of Faculty's submission came to this. In the whole circumstances, this was a debt incurred on behalf of the trust, hence the pursuers are trust creditors, and the trust property is attachable in satisfaction of the claim.

[14] In reply, Mr Clancy explained some of the entries in the board's accounts on the basis that the board borrowed a large sum of money from the Allied Irish Bank in order to erect new classrooms and a residential unit on the site. Those buildings were demolished along with the rest of the school, leaving a substantial debt to the bank. Mr Clancy's information is that the intention of the trustees is that the proceeds of any sale will be used to repay part of the debt to the bank. Before the loan was made, the trustees provided a letter of comfort, signed by Monsignor Peter Smith, to the effect that the board could continue to occupy and operate the school until the facility was repaid. Mr Clancy stressed that the board had no lease or equivalent right in respect of the school. He noted that the Dean had said that he could offer no direct authority in support of his position. In the work cited, Professor Gretton was not addressing the circumstances of the present case. According to Mr Clancy, the liability falls within the board's patrimony, whereas the school site is part of the patrimony of the 1962 disposition trustees. The board has the liability, the trustees have the asset. It is the board which is liable for the debt, thus the inhibition should be recalled.

Discussion and decision

[15] The question before the court differs from that arising after a procedure roll debate on full pleadings, or after a proof before answer. I have to decide whether the pursuers have satisfied the criteria in section 15K of the 1987 Act and, in particular, given the circumstances of this case, whether they have presented a prima facie case that the site at Edinburgh Road is vulnerable to use in satisfaction of the claim. I am not deciding the point one way or the other, but simply determining whether the pursuer has put forward sufficient cause for inhibition on the dependence, all under the now well understood statutory rules. I refer, for example, to the discussion in Gillespie v Toondale Ltd 2006 SC 304 in the opinion of the Extra Division at paragraph 13.

[16] At the outset I note that a trust is not a separate juristic entity. It is not a legal person. Only the trustee or trustees can make contracts or incur debts, and only the trustee or trustees can own the trust property. In the case of a plurality of trustees, they own the trust property jointly. In my view, the notion of a trustee's dual patrimony is helpful and can assist in an understanding of many of the implications and consequences of our law of trusts. It has been described by Professor Gretton as an "organising concept" which can be employed to the extent that it is useful. I refer to an essay entitled Trust and Patrimony in a volume dedicated to the memory of the late Professor W A Wilson, and named Scots Law into the 21^st Century.

[17] Trust property is immune to and cannot be attached in respect of a trustee's personal debt, not because it is owned by the trust, but because the trustee owns it qua trustee; which is another way of saying that it falls into his trust patrimony, not his personal patrimony. We all have a bundle of rights and liabilities, in the broadest sense; but a trustee gains an additional and separate bundle, which can be regarded as his trust patrimony. That trust patrimony may include both trust property and trust liabilities incurred to trust creditors.

[18] It is unlikely that the various managers of the school over the years considered that they were undertaking a personal liability to the pension scheme administered by the pursuers and their predecessors. As I understand the instance of the summons, Monsignor Peter Smith is being sued, not as an individual, but as the sole remaining manager in office and as a trustee under the 1962 disposition trust. Again, to borrow the earlier phraseology, the pursuers are aiming at the trust patrimony, hence they say that the trust property is a legitimate target. They can do this if they are to be regarded as trust creditors, not personal creditors of the board members. The other trustees under the 1962 trust might well be convened to the action, or at least called for their interest, and I was given a copy of a draft minute of amendment which, if and when moved, would be presented for that purpose.

[19] Our law recognises that a party may contract with a trustee on the understanding that the trustee incurs no personal liability. The pursuers' predecessors granted the 1962 disposition. It is reasonable to assume that at the time of the admission agreement, they had full knowledge of the role and function of the board of managers as a group of trustees authorised by the full body of trustees to operate the trust asset for the trust purposes. The trustees as a whole would have understood that, from time to time, the board would incur liabilities to third parties. No doubt it was expected that the income gained from local authorities would meet those obligations, but plainly that could not be guaranteed. In essence, the Dean is presenting a case to the effect that the board of managers were, in effect, authorised representatives of the trustees as a whole. They were the embodiment or manifestation of the working out of the trust purposes laid down in the 1962 disposition in respect of the asset conveyed by that deed. I am satisfied that the pursuers have presented at least a prima facie case that the trust estate is liable for the debt said to have been incurred by the board of managers, and that there is sufficient cause for the inhibition on the dependence of the action.

[20] In Lumsden v Buchanan (1865) 3M (HL) 89, Lord Cranworth said at page 96: "The true question to be resolved in every case is whether the circumstances do fairly shew that the contracting parties were dealing only as trustees and were not intending to incur liability beyond the amount of the trust funds." Similar sentiments were expressed by Lord Cairns, the Lord Chancellor, in Muir and others v City of Glasgow Bank (1879) 6R (HL) 21, at page 22, where his Lordship said:

"Whether in any particular case the contract of an executor or trustee is one which binds himself personally or is to be satisfied only out of the estate of which he is the representative is, as it seems to me, a question of construction to be decided with reference to all the circumstances of the case, the nature of the contract, the subject matter on which it is to operate, and the capacity and duty of the parties to make the contract in the one form or in the other."

These decisions demonstrate that there will be cases where a trust creditor will have an additional remedy against the personal estate of a trustee if the trust estate is unable to meet the obligation. In other words, the trustee might incur personal liability for the trust debt. The reverse is not allowed. A personal creditor can never proceed against the trust property. This is because it is owned by the debtor qua trustee. The trust patrimony is protected from the trustee's personal creditors. It is, however, sufficient for the disposal of the defenders' application for recall of the warrant, to conclude that there is a prima facie case that the pursuers can look to the trust property, namely the Edinburgh Road site, in partial satisfaction of the alleged debt. It is not necessary to address the question of whether any shortfall can be recovered from the personal assets of the trustees.

[21] While I do not rely upon these factors, I note that there are entries in the board's accounts and other surrounding circumstances which are supportive of the view that the board was given authority to incur liabilities and acquire assets on behalf of the trustees as a whole; for example, the apparent willingness of the trustees to use any proceeds of sale of the site to settle, at least in part, the debt incurred by the board to the Allied Irish Bank.

[22] I repeat that I am far from deciding the merits of the matter in favour of the pursuers. To do so would require a more extensive discussion of the facts and the issues than occurred at the motion roll hearing, and a more rigorous analysis than I have offered in this brief opinion. However, I am satisfied that the three criteria in section 15K of the Act are met. I shall refuse the motion for recall of the inhibition.