Scottish Court of Session Decisions

Mrs Helen Morrison Hardy or M'Leod and others, testamentary trustees of the late Norman M'Leod, who died on 7th January 1912, acting under his trust-disposition dated 27th April 1905, and two codicils dated 5th and 6th January 1912, parties of the first part, and the said Mrs Helen Morrison Hardy or M'Leod, the testator's widow, party of the second part, brought a Special Case to settle in what way were to be treated, so far as regarded the liferent of the second party, sums received in respect of shipping shares forming part of the trust estate.

The trust—disposition conveyed to the first parties the testator's whole estate, and, inter alia, provided—“5. Whereas I have invested as part of my own estate sums which truly belong to my sister Miss Eliza Coates M'Leod, or of which she is entitled to the liferent, and whereas I have regularly paid her interest on the said sums, and contributed in addition a regularly monthly sum for the more comfortable maintenance of my said sister, I direct my trustees to continue the said monthly payments to my sister during her lifetime at the rate of not less than One hundred pounds a-year, which payment shall include all interest due by my estate on sums held by me on loan which may belong to my said sister, or of which she may have the liferent, and whereas it is my desire that my said sister should continue to be maintained in comfort, I direct my trustees in any year in which the free income of my estate, after making proper provision for depreciation on my shipping investments, exceeds six hundred pounds to increase the allowance to my said sister to such extent as my trustees may think proper, but so that the same may not in any event exceed the sum of fifteen pounds per month, the said allowance always to include any interest to which my said sister may be entitled from my estate in her own right; and in the event of the said sums held by me on loan being withdrawn from my estate the allowance to my sister hereinbefore directed to be paid to her shall be diminished by the proportion of interest payable on the sums so withdrawn

7. I direct my trustees to hold the residue of my estate for behoof of my said wife in the event of her surviving me so long as she shall survive and remain unmarried, and to apply the income thereof and if necessary the capital as hereinafter directed, for her maintenance and support, she being bound to maintain and educate such of our children as may not be in a position to support themselves. And in respect that a large part of my estate consists of investments in ships which are managed by the firm of Donaldson Brothers, of which I am a partner, and that the income from these investments is of a very fluctuating nature, I direct my trustees to pay over to my said wife, so long as she shall survive and remain unmarried, the free income of said residue in such way as may be found to be most convenient as an alimentary provision which shall not be assignable by her nor attachable by the diligence of her creditors, and the said alimentary provision shall be paid to her with a minimum in each year of four hundred and fifty pounds and a maximum of one thousand pounds, free of income tax in each case—that is to say, if in any year the free available income of my estate, after providing for reasonable and proper depreciation on my shipping investments, is less than four hundred and fifty pounds, and there is no balance of accumulated income at the credit of the revenue reserve fund hereinafter directed to be constituted, my trustees shall draw upon the capital of my estate for that year in order to make up my said wife's income to the said sum of four hundred and fifty pounds, and in the event of the capital of my estate being drawn upon in any year in order to make up my said wife's income as aforesaid, my trustees shall replace the sums so withdrawn as soon as they are in a position to do so out of future income of my estate in excess of four hundred and fifty pounds, it being my desire as far as possible to maintain the capital of my estate intact consistently with the comfortable maintenance of my wife and the maintenance and education of my children. And in the event of its appearing to my trustees necessary in any year in which the free available income of my estate shall not exceed four hundred and fifty pounds to increase my said wife's income beyond that sum on account of exceptional expenditure which she may require to incur, my trustees are hereby empowered to increase her income for that year out of capital to such extent as they may consider necessary but not exceeding six hundred pounds, on the footing that the sums so withdrawn from capital shall be replaced as soon as possible out of income as hereinbefore provided; and, subject to the

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foregoing provision as to the minimum income of my said wife, my trustees shall pay over to her the free available income of my estate, but not exceeding one thousand pounds in any year; and if in any year the said free available income after providing for depreciation as aforesaid exceeds one thousand pounds, any balance of income in excess of said sum of one thousand pounds shall for a period of twenty-one years from the date of my decease, provided my said wife shall so long survive and remain unmarried, be placed to a revenue reserve fund which shall be formed for the purpose of equalising my said wife's income, and so long as any balance remains at the credit of the said reserve fund my trustees shall draw on the said fund in order to make up my said wife's income to one thousand pounds in any year in which the free available income of my estate payable to her shall fall short of that sum, and on the expiry of twenty-one years from the date of my death, in the event of my said wife being then alive and in the enjoyment of the alimentary provision hereinbefore conferred upon her, I direct my trustees to divide the surplus revenue of my said estate over one thousand pounds amongst my children and their issue in the same way as is hereinafter provided with regard to the fee of the residue of my estate, and the balance at the credit of the said revenue reserve fund, in so far as the same may not be required to make up my said wife's income as hereinbefore provided, shall form part of the residue of my estate. And in the event of my said wife entering into a second marriage the said alimentary provision in her favour shall immediately cease and determine, and in place of the said provision I direct my trustees to pay my said wife as and from the date of such second marriage an annuity of £250, and that half-yearly at Whitsunday and Martinmas by equal portions, which annuity shall be payable to my said wife on her own receipt alone, and shall be enjoyed by her as an alimentary provision not assignable by her nor attachable by the diligence of her creditors, and the same shall be exclusive of the jus mariti or right of administration of any husband whom she may marry.…

I particularly authorise and empower my trustees to retain my shipping investments and to dispose of these in such way and manner as my trustees in their absolute discretion may consider most for the benefit of my estate, declaring that my trustees shall be in no way responsible for any loss which may arise to my estate in consequence of their continuing to hold my shipping or other investments after my decease.”

The codicil dated January 6, 1912, provided—“I revoke and recal the whole provisions in. the seventh place contained in the said trust-disposition and settlement, and in place of the said provisions I direct my trustees to hold the residue of my estate for behoof of my wife Mrs Helen Morrison Hardy or M'Leod in the event of her surviving me, and to pay her the free income thereof so long as she shall survive and remain unmarried, in such way as may be found to be most convenient, as an alimentary provision which shall not be assignable by her nor attachable by the diligence of her creditors, and in the event of my said wife entering into a second marriage the said alimentary provision in her favour shall immediately cease and determine, and in place of the said provision I direct my trustees to pay my said wife as and from the date of such second marriage an annuity of two hundred and fifty pounds.…”

The Case stated—“… 2. The testator by his settlement conveyed his whole estate to the first parties, the main purposes of the trust consisting of certain liferent provisions to his widow and the distribution of the residue of the estate among his children. His estate was valued for Inland Revenue purposes at £29,929, 7s. 11d., and of this a large proportion, valued at £9378, consisted of interests in ships and shipping companies.…

5. The details of the shipping interests which belonged to the testator and passed to the first parties are set forth in the following: table:—

These Steamers were incorporated as single ship companies.	Ship.	Holding at Date of Death.	Original Value and subsequent additions.			Reduced Value the Testator's Kooks as at 31st Dec. 1911 by writing off depreciation.
“Indrani”	2/64	£1482	6	3	£399	0	0
“Kastalia”	2/64	1480	12	8	324	0	0
“Lakonia”	2/64	2C02	8	3	567	0	0
“Marina”	2/64	2724 17	7	858	0	0
“Orthia”	2/64	1350	1	9	260	0	0
“Tritonia”	2/64	1935	0	6	468	0	0
“Salacia”	2/64	1406	5	0	370	0	0
“Parthenia”	28 Shares of £100 each	2800	0	0
	Debenture Bond originally £2800 but reduced at the date of the testator's death by payments to account to £1023, 8s	2800	0	0	1955	0	0
“Arthenia”	15 Shares of £100 each	1500	0	0
Debenture Bond originally £1500 but similarly reduced to £315	1500	0	0	1826	0	0
“Cassandra”	25 Shares of £100 each	2500	0	0	Debenture Bond originally £2500 but similarly reduced to £987, 10s.	2500	0	0	2880	0	0
“Almora”	1 Share of £100	100	0	0	100	0	0
“Saturnia”	44 Shares of £100 each	4400	0	0	4400	0	0

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6. … In terms of the power conferred upon them, the first parties held the whole of before-mentioned shipping investments until 30th September 1913, other than the interest in the ‘Salacia,’ which ship was sold in February 1912.

7. Prior to the testator's death the earnings arising from the employment of the ships referred to in the foregoing table were distributed as follows:—In the case of the ships which were individually owned the net earnings were distributed by the managers among the owners as profits without any provision for depreciation. In the case of the ships ‘Parthenia,’ ‘Athenia,’ and ‘Cassandra,’ “which were owned by singleship companies, the original cost was provided one-half from subscriptions on shares and one-half from the issue of debenture bonds which carried no interest, each shareholder taking bonds to an amount equal to his share sulbscriptions. In each of these companies, as there was cash available from accumulated earnings the managers distributed this amongst the holders of debenture bonds pro rata, and the debentures were cancelled to the extent of the payments made. An annual balance-sheet and profit and loss account was prepared, and any profit shown therein, in so far as it was not carried forward to the following year, was shown as applied in payment and cancellation of debenture bonds held by the shareholders. In the following year's accounts the amount so applied was shown as written off the value of the ship. In the case of the ship ‘Saturnia,’ which was also owned by a single-ship company, the original cost was provided one—half from subscriptions on shares and one-half from a loan advanced by a third party. This loan was made on the footing that the earnings of the ship were to be applied in repayment of the advance before any distribution was made to the shareholders. An annual balance—sheet and profit and loss account was prepared, and any profit shown therein was written off the value of the ship as ‘depreciation,’ the cash available being applied in reduction of the loan. In the case of the ship ‘Almora,’ which was owned by a singleship company called the Glasgow and Newport News Steamship Company, Limited, there was no debt to be provided for. An annual balance—sheet and profit and loss account was prepared, and any profit shown therein was applied by resolution of the company partly in forming a depreciation and reserve fund and partly in payment of a dividend on the shares. The investments representing the depreciation and reserve fund appear on the credit side of the balance-sheet.…

8. The testator during his lifetime dealt in his books with the sums received by him in respect of his interests in the various ships in the following way:—(1) As regards the ships in which he held 2/64th shares he wrote off depreciation at the rate of 10 per cent annually on the value of the investments in each individual ship as standing in his investment book at the end of the previous year, and treated the balance of the sums received as income. (2) As regards the three steamers the ‘Parthenia,’ ‘Athenia,’ and ‘Cassandra,’ in which the testator's holding was represented by shares and debentures originally of the same amount, although the sums received by him were paid by the companies in redemption of debenture debt they were treated by the testator in the same way as in the case of the ships in which he held 2/64th shares—that is to say, he wrote off depreciation at the rate of 10 per cent, annually on the sum at which the investment stood in his books and treated the balance of the sums receiverd as revenue. (3) In the case of the’ Saturnia no sums ‘were received by the testator, the whole profits having been applied as above explained in payment of the loan over the ship. Accordingly the testator wrote no depreciation off his investment in this ship, the investment standing in his books at the date of his death at its original amount of £4400. (4) In the case of the ‘Almora’ the investment also remained standing at the original amount of £100.

9 From the date of death of the testator to 31st December 1912 the first parties received several payments on account of his interests in the above—mentioned ships detailed as follows:—

“S.S. ‘Indrani’	. £177	10	11
‘Kastalia’	. 130	17	11
‘Lakonia’	. 299	10	10
‘Marina’	. 261	1	7
‘Orthia’.	202	5	10
‘Tritonia’	. 115	16	3
	£1187	3	4
‘Parthenia’ S.S. Co., Ltd.	£252	0	0
‘Athenia’ S.S. Co. Ltd.	675	0	0
‘Cassandra’ S.S. Co. Ltd.	912	10	0
‘Saturnia’ S.S. Co. Ltd.
Glasgow & Newport News S.S. Co. Ltd.
	1839	10	0
	£3026	13	4

payments receiverd receiveu by the first parties from the ‘Parthenia’ S.S. Company, Limited, and the ‘Cassandra’ S.S. Company, Limited, were made by the respective companies in reduction of the debenture debt affecting these ships, and accordingly in the books of the companies the debentures held by the testator stood reduced by the amounts of the payments so made. Of the sum received from the ‘Athenia’ S.S. Company, Limited, £315 was paid by that company towards extinguishing the debenture debt affecting that ship, the debenture debt being then fully paid off. During the same period no profits were received from the Saturnia ‘S.S. Company, Limited, these being usually applied in reduction of the loan to that company. The proportion of the profits so applied effeiring to the trustees' interest in this ship was £2532, 9s. 4d.

10. From 1st January to 30th September 1913 the first parties received no payments in respect of any of the ships though the vessels had been continuously trading, voyages had been completed, accounts had been

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made up, and the profits of the voyages ascertained. The reason for this was the contemplated transference of the ships to a company called the Donaldson Line, Limited, which transference was duly carried out as at 1st January 1913. That company subsequently paid a dividend of 5 per cent. in respect of the year 1913. As part of the above arrangement the loan over the ship ‘Saturnia’ was paid off as at 31st December 1912, and a new loan to the Donaldson Line, Limited, was substituted.

11. In September 1913 the first parties disposed of their interest in the ships as from 30th September 1913 for the sum of £17,250. This sale included the profits earned by the respective ships and not distributed. The following table shows the proportion of profits earned but not distributed by the respective vessels which would have fallen to the first parties had a distribution of profits been made for that period:—

	Proportion of Undistribut Profits.
“S.S. ‘Indrani’	£184	8	3
‘Kastalia' …	69	16	3
‘Lakonia’	108	8	0
‘Marina’	133	11	2
‘Orthia’
‘Tritonia' …	102	4	8
	£598	8	4
Less—loss on ‘Orthia	26	4	2
	£572	4	2
‘Parthenia’ S.S. Co. Ltd.	687	11	5
‘Athenia’ S.S. Co. Ltd.	565	0	6
‘Cassandra’ S.S. Co. Ltd.	244	16	6
‘Saturnia’ S.S. Co. Ltd.	906	17	9
Glasgow & Newport News S. S. Co. Ltd.	9	0	7
	£2985	10	11

These undistributed profits were at the date of sale standing at the credit of a steamer's revenue account in the books of the managing owners.

12. The parties hereto are not agreed (1) as to the extent of the interest of the second party in the sums received by the first parties on account of or applied in reduction of debt out of the earnings of the ships for the period from the date of death, 7th January 1912, to 31st December 1912; (2) as to whether or not the sum received by the first parties from the sale of the ships, which includes profits from 1st January 1913 to 30th September 1913, must be treated as capital or should be apportioned between capital and revenue; and (3) in the event of apportionment of the sum received by the first parties for their interest in the ships being necessary, on what principle it must be made.

13. The first parties maintain (1) that the sum received by them on account of debentures over ships are payments of capital, and fall to be treated as such; (2) that shares in ships being of the nature of wasting securities the earnings derived therefrom are not income, but consist partly of income and partly of capital, and that they are entitled to deduct therefrom such a sum as will in their discretion safeguard the capital from depreciation, and to pay only the balance to the liferentrix; and (3) that the whole price received by them in respect of the sale of the ships falls to be treated as capital, or alternatively, in the event of its being decided that the price falls to be apportioned between capital and revenue, no apportionment falls to be made in respect of the earnings of vessels which are burdened with debentures, or for loans which are repayable prior to a division of profits.

14. The second party maintains—I. With regard to the sums received by the first parties for the period to 31st December 1912–1. That the whole of the said sums being paid out of profits earned by working the ships in which the trust estate was interested are free income of the trust estate within the meaning of the settlement and fall to be paid to the second party. 2. Alternatively, and on the footing that some apportionment falls to be made between capital and income—(1) That no allowance should be made for depreciation out of sums paid to the first parties as profits or dividends; (2) that the sums received by the first parties in payment of debentures cannot be treated exclusively as capital in respect that they represent the return on an investment which consisted partly of share capital and partly of a loan, and that the value of the share capital was increased by the precise amount by which debt was paid off; (3) in any case, that the rule of apportionment followed by the testator should not be exceeded. II. With regard to the price received by the first parties in respect of the sale of the ships—1. That the whole of the undistributed profits referred to in article 11 of this case fall to be. paid to the second party as income. 2. That in any event there should be some apportionment to income of the profits earned, including profits earned by ships burdened with debenture debts or loans. 3. Further, that in the case of the ship ‘Saturnia’ the price received was enhanced not only by the profit earned from 1st January to 30th September 1913, but also by the profit of £2532, 9s. 4d. which had been earned for the period up to 31st December 1912, and which had been applied in reduction of debt over the vessel. The second party is entitled to an apportionment in respect of the last mentioned profit. …”

The questions for the judgment of the Court were—“1. Is the second party entitled, in virtue of the provisions in her favour in the testator's trust-disposition and settlement, to payment in full of the whole sums received by the first parties in respect of said shipping investments for the period to 31st December 1912? 2. If question 1 is answered in the negative, ( a) Is the second party entitled to payment of all sums paid to the first parties for the said period as profits or dividends, or ( b) must part of the said sums be apportioned to capital in respect of depreciation? 3. If question 1 is answered in the negative, ( a) Are the first parties entitled to treat exclusively as capital the sums received by them for the said period in repayment of debenture debt, or ( b) must part of the said sums be apportioned to income? 4. If either

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question 2 ( b) or question 3 ( b) is answered in the affirmative, ( a) Are the first parties entitled and bound to exercise their own discretion as to the rule of apportionment, or ( b) are they bound to follow and continue the practice of the testator in regard to depreciation? 5. ( a) Does the price received by the first parties from the sale of the shipping investments fall to be treated wholly as capital, or ( b) should the price be apportioned between capital and income? 6. In the event of question 5 ( b) being answered in the affirmative, ( a) Should the basis of apportionment be to credit revenue with a percentage arrived at on the past average earnings of the respective ships, or ( b) should the earnings actually made by the respective ships form the basis of apportionment? 7. Do the earnings of the ‘Cassandra,’ ‘Parthenia,’ and ‘Saturnia,’ standing at the steamers' revenue account in 1913, fall to be treated as income, or are the said earnings to be considered as capital in respect of their liability to be attributed to the repayment of debt due on capital account.”

Argued for the first parties—If a testator left his estate invested in trust securities his trustees could continue to hold the funds in that form, and a bequest of the income of the trust funds was a bequest of the income in specie; but if a testator left his estate invested in other securities, there was necessarily an implied power in his trustees to convert his estate into trust securities, and consequently a bequest of the income was not a bequest in specie. But in the case of wasting securities, as the investments were in this case, the rule in Howe v. Lord Dartmouth, 1802, 7 Ves. 137, applied to the effect that the truster was not to be presumed to have meant the rights of the beneficiaries to be affected by the nature of the investments, and that unless a contrary intention appeared the bequest of a liferent was not until conversion took place to be regarded as a bequest in specie, but was to be regarded as subject to deduction in respect of the annual wastage of the capital. Here there was no such contrary intention, for the trust was a trust for conversion, for the trustees were to hold and dispose of the shipping investments, not to hold or dispose of them. Further, the testator had supplied his own interpretation of the “free income” which was given to the second party, for the fifth purpose of his settlement showed that free income meant income minus a sum to cover depreciation, and the testator himself had so treated the income. The case was therefore on all fours with Brown v. Gellatly, 1867 L.R., 2 Ch. App. 751; Strain's Trustees v. Strain, 1893, 20 R. 1025, 30 S.L.R. 906; Ferguson v. Ferguson's Trustees, 1877, 4 R. 532, 14 S.L.R. 377. Where and in so far as the profits were treated by the shipowners as capital, the above did not apply, and the profits as between the liferentrix and fiars were capital or interest according as they were so treated by the owners— In re Barton's Trust, 1868, L.R., 5 Eq. 238; Bouch v. Sproule, 1887, 12 A.C. 385; Cunliff's Trustees v. Cunliff, 1900, 3 F. 202, 38 S.L.R. 134; Gunnis's Trustees v. Gunnis, 1903, 6 F. 104, 41 S.L.R. 69; Howard's Trustees v. Howard, 1907 S.C. 1274, 44 S.L.R. 952. But when there was no such earmarking the income was to be actuarily treated and allowance made in favour of the fiars in respect of depreciation, and the testator's own practice should be followed. Bade v. Nicholson, [1909] 2 Ch 111, was distinguished, for there there were both power to retain and power to convert. Mein's Trustees v. Mein, 1901, 3 F. 994, 38 S.L.R. 714, was not in point, for there there was power to delay conversion and a special destination to a beneficiary pending conversion— Green v. Britten, 1863, 1 De Gex, Jones, & Smith, 649. Hay's Trustees v. Hay, 1903, 11 S.L.T. 306, was distinguished, because the trustees had power to hold in specie, and the Court inferred therefrom that payment was to be in specie. As regards the proceeds of the sale Donaldson v. Donaldson's Trustees, 1851, 14 D. 165; Cameron's Factor v. Cameron, 1873, 1 R. 21, 11 S.L.R. 1; Gardiner Baird, 1907, 15 S.L.T. 25; and MacDougall's Factor v. Watson, 1909 S.C. 215, 46 S.L.R. 172, were decided without a citation and consideration of the English authorities, which were to the contrary— Bulkeley v. Stephens, [1896] 2 Ch 241. The liferentrix should not get a share in the proceeds of the sale, for she would have profited by a purchase, and to so treat her avoided all the difficulties involved in apportioning. Further, the liferentrix could only share in the profits after capital charges had been deducted from them.

Argued for the second party—It was the plain intention of the testator that his trustees should continue to hold his shipping investments; he gave them power to do so expressly, and he chose men of the shipping business as his trustees. Further, it was plain that if the trustees continued to hold the shipping investments the widow was to get so much of the profits as were not earmarked for capital charges by the shipping companies, free of all deductions for depreciation. The testator gave her the free income; if he had meant a deduction to be made therefrom for depreciation he would have so expressed himself, as he did in the fifth purpose and also in the provision which he revoked by the codicil in question— Campbell v. Wardlaw, 1883, 10 R. (H.L.) 65, 20 S.L.R. 748; Davidson's Trustees v. Ogilvie, 1910 S.C. 294, 47 S.L.R. 248; Robinson v. Fraser's Trustees, 1880, 7 R. 694, 17 S.L.R. 524, 1881, 8 R. (H.L.) 127, 18 S.L.R. 740. Consequently there was no trust for conversion, and the cases quoted for the first parties were distinguished. This case came within the ratio decidendi of the cases of Hay's Trustees ( cit.), Nicholson ( cit.), and Lean v. Lean, 1875, 32 L.T. 305. Brown v. Gellatly ( cit.) was distinguished, for in it there was a trust for conversion and delay in executing it, and the Court dealt with the funds as if conversion had taken place ab initio. As regards the ships upon which there were debenture bonds, the payments received were revenue— Blyth's Trustees v. Milne, 1905, 7 F. 799, 42 S.L.R. 676.

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