Scottish Court of Session Decisions

The Free Church of Scotland, pursuers, brought an action of count, reckoning, and payment against Hugh Martin and others, the sole trustees, original and assumed, acting under the trust-disposition and settlement of the late Alexander Edward Macknight, advocate, Edinburgh, dated 22nd June 1896, and codicils thereto dated respectively 13th July 1896 and 13th May 1898, and all registered in the Books of Council and Session on 13th June 1899, as such trustees and also as individuals, defenders, concluding for decree against the defenders to account for their intromissions with the free annual income of the trust estate in their hands.

By codiril to his trust-disposition and settlement, dated 13th May 1898, the late Mr A. E. Macknight, who died on 8th June 1899, directed his trustees, the defenders, “to expend the free annual income of my estate in manner after mentioned for the promotion of one or other or both of the following missions, the residue of my estate to form a capital fund for the same, viz—(1) The Mission to the Miners of Scotland promoted or being promoted by the Reverend Doctor James Hood Wilson of Edinburgh, and (2) the Home Mission in connection with the Free Presbyterian Church of Scotland …: Declaring that it shall be in the power of my trustees to engage Free Church missionaries, or in their discretion other workers, including laymen and lady missionaries or workers being members of the Free Church, in the promotion of the above missions or either of them in such a way as they may think proper either through the Church or independently of it, such missionaries or other workers receiving suitable remuneration, or my

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trustees may, should it be deemed by them more expedient. pay over the free annual income of my estate to the respective treasurers of said missions or one or other of them to be applied to the purposes foresaid: Declaring further that should the said Mission to the Miners of Scotland be now or become non-existent the whole of the said income shall be applied to the promotion of the said Home Mission.”

In an action of multiplepoinding it was decided on 4th July 1901 that the Home Mission in connection with the Free Presbyterian Church of Scotland was to be interpreted as meaning the Home Mission of the Free Church of Scotland. At the date of that decision questions had arisen as to who were the Free Church of Scotland, and until it was decided on 1st August 1904 by the House of Lords in the case of the Free Church General Assembly v. Lord Overtown, 1904, 7 F. (H.L.) 1, 41 S.L.R. 742, that the pursuers herein were the Free Church of Scotland, the defenders did not apply the free annual income of the trust estate in their hands to any of the trust purposes. Thereafter in the beginning of 1905 the defenders began to apply the income independently of the pursuers, by appointing and paying out of it a licensed probationer and ordained preacher and member of the Free Church of Scotland to conduct a mission at Bathgate. The defenders continued to do so until, by Allocation Orders Nos. 1252 and 1253, both dated 10th November 1909, under the Churches (Scotland) Act 1905 (5 Edw. VII, cap. 12), the fund administered by the defenders was as from 30th October 1900 allocated to the pursuers. The defenders, however, continued to devote the income to the Bathgate Mission. The pursuers then brought an action of declarator against the defenders, in which it was decided that the discretionary powers of the defenders herein as trustees to administer the trust estate independently of the pursuers were superseded by the Churches (Scotland) Act and the orders thereunder— Free Church of Scotland v. Macknight's Trustees, 1913 S.C. 36, 50 S.L.R. 55. The defenders thereafter paid over the income to the pursuers. The pursuers now raised the present action, alleging that the expenditure upon the mission in Bathgate was ultra vires of the defenders. This was denied by the defenders.

The pursuers further alleged that the defenders had negligently failed to recover the income tax levied upon them (which they were entitled to recover) until their attention was called by the pursuers to the fact that the tax was recoverable. The defenders admitted that the tax had not been recovered and denied negligence, and stated that payment was made on the demand of the Inland Revenue authorities.

On 26th June 1914 the Lord Ordinary ( Ormidale) repelled the objections by pursuers to the accounts lodged by the defenders and dismissed the action.

Opinion.—“With regard to the point first argued, viz., Whether on a sound construction of Mr Macknight's settlement the administration of the trustees was within their power up to the date of the allocation order, it appears to me that that question has already been considered and determined in the action Free Church of Scotland v. Macknight's Trustees. 1913 S C. 36, 50 S.L.R. 55. The observations made by the Court with reference to the course followed by the trustees down to the date of the allocation order cannot fairly be described as obiter dicta. The Court obviously took into consideration the hitherto administration of the trustees. I note particularly that the contention of the Free Church ‘that the mission which is held in Bathgate can in no sense be held to be a mission in connection with their Church,’ which is just the contention which was advanced before me, was referred to in terms by the Lord President at p. 47 of 1913 S.C., and that the declaratory clause under which the trustees justified and maintained their right to continue their administration of the fund independently of the Free Church is recited by his Lordship at p. 48. Having these before him the conclusion to which his Lordship came was ‘that as the trust stood originally there is no question that the action of the trustees would have been well within their powers.’ The question, however, raised in the case, his Lordship went on to say, was—Whether the trustees' position ‘is really now in accordance with what may be called the law of the case.’ Later on, at p. 49, his Lordship again deals with the discretionary power conferred upon the trustees, and says that while not in one sense superseded, it has become inapplicable in the present circumstances, ‘for although there could be independent action at the time when Mr Macknight made his trust there cannot be independent action now in the case of money which is allocated by Act of Parliament for a particular thing which must be done by the Church itself.’ As he afterwards describes it, it was an administrative right workable in connection with the old trust purposes, but not workable in connection with the new trust purposes, which are the parliamentary purposes and supersede the old.

Lord Cullen, after describing the power conferred upon the trustees by Mr Macknight ‘as an administrative power to expend the money themselves in Home Mission work as an alternative to paying it into the Home Mission Fund,’ goes on to say ‘the trustees have so far exercised this power.’

Accordingly it is out of the question for me to put a different construction upon the codicil to that put upon it by the Judges of the First Division, even if I thought there was any ground for my so doing. But if I may respectfully say so, I quite agree with the views expressed in the Inner House. Taking this view, it is not necessary for me to deal with the argument founded on the case of Andrews v. Ewart's Trustees, 13 R. (H.L.) 69, 23 S.L.R. 822, so far at any rate as the period prior to the date of the allocation order is concerned, but it does seem to me that a case like the present

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is not one to be dealt with—to use Lord Watson's words—‘as depending upon the ordinary rules which govern the liabilities of trustees to beneficiaries under a private trust,’ and that the dictum of Lord Kinloch in Lamond's Trustees v. Croom, 1871, 9 Macph. 662, 8 S.L.R. 412, is not in point. I should not be prepared to hold the trustees liable to repay out of their own pockets moneys which in good faith and in the honest discharge of their duty as they reasonably understood it they had expended on purposes in no essential particular differing from those on which, prior to the allocation orders, the Free Church would itself have been bound to expend them. It is entirely different from the case of a private beneficiary who challenges the administration of trustees on the ground that they have put into another person's pocket money which according to the express direction of the truster should have gone into his.

Accordingly, so far as the administration of the trustees down to the date of the allocation order is concerned, I think the objections to their accounts under Branch I fall to be repelled.

A more difficult question arises in connection with the administration of the fund for the period between November 1909 and August 1911, for by the allocation order the trustees, on a sound construction of it, were notified that their undoubted discretionary right to promote the Bathgate Mission in accordance with the truster's settlement had ceased. By these orders and the Act of Parliament they were certiorated that the trust purposes had been superseded by parliamentary purposes which required to be carried into effect not independently of but through the Free Church. Now if all that had been written large on the face of the order, so that he who ran might read, the trustees in my opinion by continuing their administration under the original settlement must have done so at their own risk, and would have been liable personally for the exptenditure of the trust fund on wrong purposes. But the effect of the Act of Parliament and the allocation order was far from being clear. A wrong start to the right understanding of them had been given by the letter of the secretary of the Commissioners dated 16th February 1909, for it gave, as the event has proved, a much too limited effect to the intended allocation, and as I read the correspondence between parties the Free Church as well as the trustees remained, until very shortly before the action to which I have referred, under a misapprehension as to their true meaning and effect. At the same time it appears to me that the letter of 11th November 1910 was a distinct intimation to the trustees that their administration was challenged. The attitude taken by the Free Church as notified in that letter appears to me to have been a fair and reasonable one. They proposed not to go back on the matter of disbursements effected prior to the date of the order, and they further proposed that the trustees' reluctance to act without some direction from the Court should be met by having the question at issue determined by a special case. That course commended itself to Mr Sutherland Mackay, one of the trustees, but he was outvoted in the matter of its adoption by his co-trustees. Now if the trustees—or rather the majority of them—had persisted for an undue length of time after the letter of 11th November 1910 in continuing their administration thus challenged, I would have had great difficulty in relieving them of personal liability for the funds expended by them. But they brought it to an end in August 1911 after a lapse of nine months, and I observe that the payments amounting to about £100 made by them during that period were mainly in connection with the Free Church missionary's salary, and the rent of the hall in which the mission services were I understand conducted.

In the whole circumstances, keeping in view the novelty of the situation created by the Act of Parliament and the allocation order, and the difficulty in ascertaining their true meaning and effect, I observe that the Court described the question raised in the action as a fair question to try—and the fact that in relation to Mr Macknight's trust no individual private beneficiary has suffered in the very least by the action of the trustees, they should not in my judgment be held personally liable to replace the funds expended by them even during the period or a part of the period subsequent to the date of the allocation order.

The second question is as to the failure of the trustees to recover the income tax paid by them during the earlier years of their administration. Now as trustees I see no ground for holding the defenders liable. In that capacity they cannot in my opinion be held responsible as for breach of trust because of a failure to know that the tax was not payable on income applied for religious purposes. They appointed law agents as it was their right, and in a trust like Mr Macknight's probably their duty, to do. It is the fact that Mr Martin has been, either as an individual or in partnership with Mr Sutherland Mackay and Mr Wright, the law agent of the trust from its commencement. Now if a law agent receive remuneration for acting as such and as factor, it may be that he is liable in ordinary circumstances for an act of omission like that in question, but then his liability must be ascertained in an actio in which he is duly cited as lawagent. In the present action, which is one of accounting, the defenders are called only as trustees and not as law agents, and they are not called upon to assign to the pursuers their right to recover from their law agent or law agents the money said to have been lost to the trust estate by the negligence of their law agent or law agents. If not cited to do so, I cannot hold that they are bound as a condition of avoiding personal liability as for breach of trust to offer so to assign. In my judgment the failure to recover the income tax in question is not so flagrant an omission as might at first sight appear. In the Scots case of

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Baird's Trustees, 15 R. 682, 25 S.L.R. 533, it was held that there was no right to recover the tax on income applied to religious purposes; and while in 1891, in the case of Commissioners of Income Tax v. Pemsel, [1891] AC 531, the decision in Baird's case was upset, and the word ‘charitable’ was held to include religious purposes, obviously the matter was one of difficulty. The law agents and factors' accounts were audited by accountants of eminence and by the Auditor of the Court, and the omission was not brought to their notice. But whether it is a well-founded claim or not against the law agents, it cannot in my judgment be dealt with in an action of accounting against trustees for recovery from them of moneys improperly paid away, but can only be recovered in an action against the law agents and factors as a claim of damages for loss occasioned to the trust estate by the fault of these law agents— Raes v. Meek, 16 R. (H.L.) 31, 27 S L.R. 8.

[ His Lordship then dealt with a question which is not reported.]

I shall accordingly repel the whole objections of the pursuers to the accounts of the trustees”

The pursuers reclaimed. Counsel for the respondents were not c died upon to reply with regard to the question of ultra vires.

Argued for the reclaimers—(1) On the question of ultra vires—The trust funds had never been properly applied at all. There could be no benevolent construction of the actings of the defenders, as they were not trustees for the public generally but for a definite beneficiary— The Magistrates of Aberdeen v. The University of Aberdeen, 1877, 4 R. (H.L.) 48, 14 S.L.R. 490. If so, they were bound to repay money paid away in error no matter their bona fides— Lamond's Trustees v. Croom, 1871, 9 Macph. 662, 8 S.L.R. 412. Further, in any event, they were fixed with knowledge of the proper objects and purposes of the trust by the judgment in the multiplepoinding referred to, and of the fact that the beneficiaries did not acquiesce in their administration, and it was for them to show bona fides (which they had not done) if they were to be entitled to claim a benevolent construction— Andrews v. Ewart's Trustees, 1886, 13 R. (H.L.) 69, 23 S.L.R. 822. Such bona fides meant that their actings must have conformed to the general purposes of the trust, which was not the case here—M'Laren, Wills, ii, 917–947; Lewin, Trusts (12th ed.), 1210–1212; Attorney-General v. Corporation of Exeter, 1826, 2 Russ. 45; Attorney-General v. Dean of Christ Church, 1826, 2 Russ. 321; Attorney-General v. Mayor of Newbury, 1834, 3 My. & K. 647. They had not expended the money on the trust purposes and must repay— Cochrane v. Black, 1855, 17 D. 321. (2) On the recovery of income tax.—Religious trusts were charitable trusts in the sense of the Income Tax Acts— Commissioners of Inland Revenue v. Pemsel, [1891] AC 531. The defenders had negligently failed to recover an asset of the trust which pursuers were entitled to under the allocation orders. If they administered the trust themselves they must show diligentiam quam in suis, which they had not done. Pemsel's case was cited in ordinary income tax handbooks—Murray and Carter, Guide to Income Tax, 1911 ed., p. 472—and the pursuers could recover from the present trustees though the fault was of prior trustees— Sommerville's Trustees v. Wemess, 1854, 17 D 151. There was no averment that a factor or law agent was employed by the defenders, but a factor or law agent if employed by the defenders spondet peritiam and ignorance of Pemsel's case was negligence on his part which would entitle the trustees to recover from him— Simpson v. Kidstons, Watson, Turnbull, & Company, 1913, 1 S.L.T., 74; Frame v. Campbell, 1836, 14 S. 914, affd. M'L. & R. 595. There was no question of the application of the income, for it was all ear-marked for charitable purposes. In any event it was for the defenders to plead any defences they had.

Argued for the respondents—On the recovery of income tax—There was no relevant averment of negligence, for the record did not state who was negligent; further, the position of the trust funds was different at different periods, and no recovery might have been possible from 1900 to 1905, for the income was not then applied to charitable purposes but merely applicable— Pemsel's case ( cit.); The King v. Special Commissioners of Income Tax, [1911] 2 KB 434; Maughan v. Free Church of Scotland, 1893, 20 R. 759, 30 S.L.R. 666. In any event the question of recovery was open to reasonable doubt. Baird's Trustees v. Lord Advocate, 1888, 15 R. 682, 25 S.L.R. 533, was decided in the contrary sense to Pemsel's case. This was not a case where the trustees were liable— Carruthers v. Carruthers, 1896, 23 R. (H L.) 55, 33 S.L.R. 809. Simpson's case and Frame's case were not in point, for there the law agent was employed to do a particular thing.