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Hardie v. Wales & Anor [2003] ScotCS 85 (25 March 2003)

OUTER HOUSE, COURT OF SESSION
CA195/01	OPINION OF LORD MACKAY OF DRUMADOON in the cause MRS CATRIONA HARDIE, Executrix Dative of the late Ian Dougal Hardie Pursuer; against JOHN LEWIS WALES and COLIN DAVID WALES, the surviving partners of the firm of Whale Engineering Defenders:   ________________

 

 

Act: Mure, Q.C.; Jardines

Alt: McBrearty; Beveridge & Kellas

26 March 2003

Introduction

1. This action arises out of a most unfortunate dispute between the pursuer, who sues in her capacity as executrix of her late husband, Ian Dougal Hardie, and the defenders, John Wales and Colin Wales, who are the surviving partners of a firm, Whale Engineering, in which Mr Hardie was also a partner. Mr Hardie and John Wales first met in the 1970s, when they were both employed by the same employer. They became friends. In the early 1980s they went into partnership together, setting up a firm known as Whale Engineering. In due course, John Wales' son, Colin Wales, became an employee of Whale Engineering.
2. In the late 1980s, the original partnership between Mr Hardie and John Wales was dissolved. A new partnership was formed, in which Mr Hardie, John Wales and Colin Wales became the three partners. The new partnership was also known as Whale Engineering. It was a partnership at will. There was no written partnership agreement. Mr Hardie, John Wales and Colin Wales were all equal partners in the firm. Throughout the period with which this action is concerned, all three of the partners were married. The partnership came to an end on 4 October 1997, upon the death of Mr Hardie. I heard no evidence to suggest that prior to Mr Hardie's untimely death the three partners had worked together in anything other than an entirely amicable manner.
3. Whale Engineering was a light engineering business. It also owned certain properties, some of which it occupied and some of which it rented to third parties. As far as the firm's light engineering business was concerned, John Wales carried out the drawing and estimating work that was required. He also took charge of the office side of the business. Colin Wales carried out work on site. That mainly involved the erection of prefabricated steel. Mrs John Wales acted as bookkeeper for the firm and worked in the firm's office. Mr Hardie, for his part, ran another business, known as "Doorcraft", which was a partnership in which he and John Wales were the two equal partners.
4. Whale Engineering and Doorcraft operated from neighbouring premises in Eldon Industrial Estate, Loanhead. Both firms were run on a fairly informal basis. They had the same bankers and chartered accountants. John Wales and Mr Hardie were in daily contact with each other, although no formal partnership meetings ever took place. Colin Wales, for his part, normally worked out on site. He spoke to his father on a daily basis, about the work being undertaken by Whale Engineering. He saw Mr Hardie from time to time. If the partners of Whale Engineering wished to discuss anything out of the ordinary, such as the purchase of a new vehicle or some new equipment, their practice was to get together for a joint discussion. Such meetings took place every three months or so. No written records of such meetings were kept. The partners invariably agreed on the course of action they wished to follow. Whale Engineering's Annual Accounts were prepared by the firm's accountants, Scott & Paterson, a firm of chartered accountants of which Lindsay Wilson, C.A., was the senior partner. The Annual Accounts were prepared from Whale Engineering's ledgers and bank statements and other records that were made available by the firm to their accountants.

The dispute between the parties

5. The present dispute between the parties relates to the proceeds of three insurance policies, which were taken out over the life of Mr Hardie. Those policies were taken out in 1991, in circumstances that I will detail in due course. Before I do that, however, it is necessary to say something further about the premises occupied by Whale Engineering and Doorcraft. Their premises were two units, out of a total of nine, which had formed parts of an old abattoir building in Loanhead. All nine units had formerly been owned by Mr Hardie and John Wales. Sometime prior to 1991, Mr Hardie and John Wales decided to convey all those properties to a company known as Cheltenham Management Limited, a company which they had incorporated and of which they were both directors and shareholders. A third individual also became involved in the project, as a director of Cheltenham Management Limited. I understood from the evidence I heard that the original plan was that the company would invest in the properties, develop them, and then lease them at commercial rents. For reasons that were never fully explained during the evidence, Mr Hardie and John Wales went cold on the project. Having discussed the matter with their accountant, Lindsay Wilson, it was decided, during 1991, that the firm of Whale Engineering would buy all the properties from Cheltenham Management Limited. That transaction required to be financed, in part, by a loan of £60,000 from Whale Engineering's bankers, the Bank of Scotland. Colin Wales was aware of these proposals, but left the implementation of them to Mr Hardie and his father.
6. In the early part of 1991 Mr Hardie and John Wales approached the Bank of Scotland to discuss the required loan. Although all the documentation relating to that loan was not lodged in process, and although the treatment of the loan in Whale Engineering's Annual Accounts left a great deal to be desired, it is relatively clear what happened around the time that the loan was applied for, approved by the Bank of Scotland and made available to Whale Engineering. Mr Hardie and John Wales met with an official of the Bank of Scotland in March/April 1991. At a subsequent meeting they were informed of the security that the Bank would require in respect of the proposed loan. That was the granting of a standard security, by Whale Engineering, over the heritable property owned by the firm, together with the assignation to the Bank of life insurance policies over the lives of Mr Hardie and John Wales. The Bank recommended that Variation Protection Plan life insurance policies should be taken out in respect of Mr Hardie and John Wales. In Mr Hardie's case, there were to be three whole life policies for £20,000 each, with the Standard Life Insurance Company ("the Hardie policies"). In John Wales' case, it was recommended there be five whole life policies for £12,000 each, again with the Standard Life Insurance Company ("the Wales policies"). Mr Hardie and John Wales agreed to provide all the security required by the Bank and in return the Bank agreed to make available to Whale Engineering a loan of £60,000 for a term of ten years, with specified monthly repayments, which the Bank would debit from Whale Engineering's current account. It was a condition of the loan that Whale Engineering could repay the loan early.
7. During April 1991, both the Hardie Policies and the Wales policies were taken out. The necessary proposal form for the Hardie policies was signed by Mr Hardie and that for the Wales policies by John Wales. In each instance the policy documents stated that the person assured and the life assured were the same person. In April 1991, Mr Hardie and John Wales also authorised that the premiums payable in respect of the insurance policies should be paid by direct debit from one of Whale Engineering's bank account with the Bank of Scotland. The premiums payable in respect of the Hardie policies and the Wales policies were different in amount, on account of the fact that the two men were of different ages. It was a matter of agreement between the parties that until the death of Mr Hardie, all the premiums payable in respect of all eight policies had been paid to Standard Life, by direct debit from one of Whale Engineering's Accounts with the Bank of Scotland. It was also a matter of agreement that in accordance with the Bank of Scotland's requirements, Mr Hardie and John Wales had assigned to the Bank of Scotland the insurance policies over their respective lives. Those Assignations had been granted in terms of pro forma Assignations provided by the Bank of Scotland. The loan of £60,000 was made available to Whale Engineering around May 1991. On 21 December 1993, the outstanding balance of the loan was repaid by Whale Engineering. Following repayment of the loan, the Bank of Scotland did not retrocess any of the insurance policies to either Mr Hardie or John Wales. On the date when Mr Hardie died, all of those polices remained assigned to the Bank of Scotland.
8. The productions lodged included a copy of a letter dated 25 April 1991, which the manager of the Bank of Scotland at 95 Clerk Street, Loanhead, had addressed to the partners of Whale Engineering (No.7/32 of Process). The terms of that letter required the three partners to sign and return a duplicate copy of the letter, which had attached to it a schedule for signing by each of the three partners. Neither John Wales nor Colin Wales had any recollection of having signed the duplicate copy of the letter and no signed copy of the letter was lodged. Senior counsel for the pursuer suggested that meant that the Hardie and Wales policies were distanced from the loan itself and had only been intended to back up the personal liability of Mr Hardie and John Wales. As against that, however, the terms of the Assignation signed by Mr Hardie (No. 7/3 of Process) clearly indicates that it was granted in security of sums that may become due to the Bank of Scotland by Whale Engineering or Mr Hardie himself. The Assignation signed by John Wales (No. 7/29 of Process) is in similar terms.
9. Following Mr Hardie's death, Standard Life paid the proceeds of the three policies in respect of his life to the Bank of Scotland. The Bank, having no right to those proceeds, then paid them to the solicitors who act for Mrs Hardie, the pursuer, in her capacity as executrix of the deceased. Those proceeds have been held on deposit, pending the outcome of the dispute between the parties. The dispute between the parties is focused in this way. In the action that she has raised, the pursuer, as executrix of her late husband, seeks declarator in the following terms:

"1. For Declarator that the proceeds of the Standard Life Policy of Assurance No 31123245 belong beneficially to the estate of the late Ian Dougal Hardie and that the pursuer is entitled to distribute these to those persons entitled to succeed to his estate.

2. Alternatively, esto said policy represents property of the partnership between the late Ian Dougal Hardie and the defenders, for declarator that a one-third share of the proceeds thereof is due and payable beneficially to the pursuer."

In passing it should be noted that although those conclusions refer to only one policy, there are in fact three policies, each of which bears the same reference number together with a suffix "A" or "B" or "C". Put shortly the pursuer contends that at the date of her husband's death the Hardie policies had been his personal property. In the alternative, the pursuer claims that, were I to hold that the Hardie policies had been partnership property, her late husband's estate is entitled to one third of the share of the proceeds. The defenders, for their part, conclude in their counterclaim for declarator that the proceeds of the three Hardie policies belong to them, as the surviving partners of the firm of Whale Engineering, and that the pursuer is not entitled to intromit with the proceeds of those policies. The defenders have a second conclusion for payment of the proceeds of the Hardie policies, together with interest.

10. I should record that the parties' pleadings, and the evidence I heard, were entirely silent as to what has happened, in respect of the five policies over John Wales' life, since the date of Mr Hardie's death. In particular, the pursuer, in her capacity as executrix of Mr Hardie, does not in the present proceedings seek any share of whatever value the policies in respect of John Wales' life may have had, whether on the date of her late husband's death or at any subsequent date.

The issues to be determined

11. The nature of the claim and the counter-claim require me to determine a number of issues. These include whether the policies taken out in respect of Mr Hardie's life became partnership property on their inception, back in 1991. If so, whether there was any change in that position when Whale Engineering repaid the loan to the Bank of Scotland in December 1993? If not, whether there was any change in that position, following upon a meeting between the three partners, which the defenders contended took place early in 1994?

Evidence

12. The defenders had been ordained to lead at the proof. They both gave evidence. They also led the evidence of Lindsay Wilson, the senior partner of Scott & Paterson, the firm of chartered accountants that acted for Whale Engineering, and the evidence of Professor A B McDougall, C.A., who gave evidence as an expert witness. On the basis of that evidence I was invited to hold that the three policies over Mr Hardie's life became partnership property on their inception. I was also invited to hold that at a meeting in January 1994 the three partners of Whale Engineering had reached an agreement to the effect (a) that the premiums payable in respect of both the Hardie policies and the Wales policies should continue to be paid, (b) that the Hardie and Wales policies should remain assigned to the Bank of Scotland and (c) that, in the event of the death of either Mr Hardie or John Wales, the proceeds of the policies in question would be available to be used by the surviving partners to pay to the widow of the deceased partner, the deceased partner's share in the capital of Whale Engineering. On the assumption that I was prepared to find that such an agreement had been entered into in January 1994, I was also invited to hold that on Mr Hardie's death the two defenders, as the surviving partners, had become entitled to the whole proceeds of the three Hardie policies, irrespective of how much those proceeds amounted to and irrespective of the extent of Mr Hardie's share in the capital of Whale Engineering, at the date of his death.
13. The pursuer did not give evidence herself. She led the expert evidence of R M Downie, C.A., a partner of Mazars Neville Russell, a firm of chartered accountants in Glasgow. The principal submission of counsel for the pursuer was that I should hold that the three Hardie policies had been the personal property of Mr Hardie from the date of their inception to the date of his death. In the alternative, I was invited to hold that if the three Hardie policies became partnership property when they were first taken out, then they had remained as such up until the date of Mr Hardie's death. On that alternative basis, I was invited to grant decree in favour of the pursuer in terms of the second conclusion of the summons.
14. Before I turn to deal with the detail of the evidence and the conclusions that I have reached, on the basis of that evidence, it might be helpful if I made clear that I found both James Wales and Colin Wales to be truthful witnesses. Nevertheless, their recollection of the events relating to the policies between 1991 and 1997 was in certain respects incomplete and unreliable. I have no doubt, however, that both witnesses were doing their best to give honest answers to the questions that they were asked. When listening to the evidence of both witnesses, my clear impression was that neither of them fully understood the concept of partnership property or the structure of the Annual Accounts that had been prepared for Wale Engineering by Scott & Paterson. For those reasons I do not think that either of the witnesses fully understood the technical implications of some of the questions that they were asked by counsel.
15. I regret to say that I was much less impressed by the evidence of Lindsay Wilson. As I shall require to detail in due course, the Annual Accounts prepared by Scott & Paterson, the firm of accountants of which he is the senior partner, contained a number of serious mistakes. Those were mistakes of which Mr Wilson had been well aware long before he came to give evidence. During the course of his evidence it became apparent that the professional services that Scott & Paterson had provided to Whale Engineering had been defective in a number of respects. Mr Wilson admitted that. My impression was that Mr Wilson had taken few steps to prepare for the giving of evidence, such as researching his own firm's files and working papers and making available to the defenders' solicitors all of the documents that might have been relevant to the Hardie and Wales policies and the treatment of those policies and the relevant premiums in Whale Engineering's Annual Accounts. Whilst Mr Wilson was giving evidence, he gave the impression that he was a witness whose main priority was to seek to explain away his own professional shortcomings, on occasion by blaming Mr Hardie, who was obviously not available to respond to any critical comments. That is not to say that I reject everything that Mr Wilson said as having been either incredible or unreliable. What it does mean, however, is that I have required to proceed with great care in deciding which parts of Mr Wilson's evidence can be relied upon.
16. As far as the evidence of the two expert witnesses is concerned, I had absolutely no doubts at all as to their credibility and reliability. They are both highly experienced chartered accountants, who were clearly doing their best to assist the Court on the basis of the Annual Accounts of Whale Engineering and the other information that had been placed before them. The evidence that they gave was very helpful in illustrating how the Annual Accounts of Wale Engineering ought to have been prepared, including how the accounts should have been laid out, which entries they ought to have contained and, very importantly, which questions ought to be asked of, and what instructions ought to have been sought from, the partners of Whale Engineering, before that firm's Annual Accounts were finalised. Whilst there were certain differences between the two witnesses as to the opinion evidence they gave, the evidence of both of them firmly reinforced the impression I had already formed as to the inadequacy of the accounts prepared and the professional services rendered by Scott & Paterson. In the event, however, I have not found the expert opinion evidence given by Professor McDougall and Mr Downie to be of much assistance to me in determining the issues between the parties that are before me for resolution. That is for two reasons. In the first place, neither witness had the opportunity of hearing the evidence as to fact given by John Wales, Colin Wales and Lindsay Wilson. Secondly, and very importantly, certain of the conclusions they included in their respective reports, and were asked to speak to during the course of their evidence, trespassed, to some extent at least, into expressing concluded views on the issues which it is for me to determine.
17. Against that background I turn to look at the evidence I heard as to what happened, and what the partners of Whale Engineering intended should happen, when the Hardie and Wales policies were taken out in 1991. In Mr Hardie's case, the relevant proposal form was signed by him on 2 April 1991, the proposal was accepted by Standard Life on 11 April 1991, the policies were issued on 24 April 1991, the assignation of the policies was executed by him on 31 May 1991 and acknowledged by Standard Life shortly thereafter. As I have already explained, both the Hardie policies and the Wales policies were whole life policies. In each instance the policy provided that the premiums were payable during the lifetime of the life assured.
18. I have already mentioned, in outline, the background as to how the policies came into existence. They were specified by the Bank of Scotland as part of the security required, if the Bank was to grant a term loan of £60,000 to Whale Engineering. The Bank made no similar requirement that the life of Colin Wales should be insured for £60,000. In his evidence John Wales explained why the firm of Whale Engineering required to borrow £60,000. When that need arose, he and Mr Hardie went to the Bank together. The Bank subsequently sent a representative to see them and that representative advised Mr Hardie and John Wales as to the policies that the Bank required them to take out. Mr John Wales explained that both he and Mr Hardie had gone along with the advice that the Bank gave. They had signed all the documentation placed before them by the Bank's officials. They had given no separate consideration as to whether the policies requested were appropriate ones. The documents they had signed included a Bank of Scotland Customer Investment Advice Form, in which Whale Engineering was named as the customer, the customer's investment objectives were recorded as being "to instigate an appropriate form of life cover to secure proposed bank term loan" and the recommendations to the customer stated to be "Variable Protection Plan for each partner covering £60,000 invested in With Profits Fund". The Advice Form, which was signed by Mr Hardie and John Wales, also records that the customer's instructions to the Bank of Scotland were to proceed as required. Mr Hardie's and John Wales also signed the mandates placed before them by the Bank, which authorised that the monthly premiums in respect of the Hardie and the Wales policies should be debited from one of the Whale Engineering's accounts with the Bank of Scotland.

[19] A number of matters in respect of the Hardie policies were the subject of agreement between the parties. The Hardie policies had been taken out in respect of the life of Mr Hardie. In terms of the three policy documents the payee is Mr Hardie or his executors. In the three policy documents there is no reference to the interest of any other party, whether beneficial or otherwise. Throughout their currency, the three Hardie policies had surrender values reflecting the premiums paid, with a possible enhanced value in the event of death.

19. The parties were also agreed that in the Profit and Loss Accounts in the firm's Annual Accounts, relating to the years between 1 January 1991 and 31 December 1997, no entries were included bearing to represent the cost of the premiums in respect of the Hardie and Wales policies. Likewise it was agreed that in the Balance Sheets in those accounts the values of the Hardie and Wales policies were not included as assets of the firm.
20. John Wales said in evidence that he considered that all of the policies belonged to the firm of Whale Engineering, rather than to Mr Hardie and himself as individuals. He considered that the expense of the premiums for the eight insurance policies was being paid by Whale Engineering out of the firm's money, which the firm had earned, rather than being paid for by Mr Hardie and himself as individuals. He had no recollection of any discussions with Mr Hardie about the payment of the premiums, when the policies had been taken out. He had been aware, at that time, that the premiums in respect of the policies over his own life were higher, because he was older than Mr Hardie was. He gave evidence that Lindsay Wilson knew that the insurance policies had been taken out. He had expected Lindsay Wilson to deal with the policies "in a proper manner" in the Annual Accounts. John Wales said that he had no recollection of having had any discussions, whether in 1991 or at any subsequent date, with the chartered accountants and, in particular with Lindsay Wilson, as to how the premiums or the policies themselves should be reflected in Whale Engineering's Annual Accounts. The firm had not received any advice on those matters from Lindsay Wilson. Nor had it been suggested to him by Lindsay Wilson that if the three partners had wished the Hardie and Wales policies to be partnership property, the premiums ought to have been divided three ways, between the three partners. The fact that the premiums had not appeared in the Profit and Loss Account, within the firm's Annual Accounts, meant nothing to him. He explained that he did not fully understand the Annual Accounts that were placed before him for signature, by the accountants. Although he and his other partners had had the opportunity to discuss those Annual Accounts with the accountants, they had never done so. They had relied on their chartered accountants and had merely signed the Annual Accounts prepared for them. It was only subsequent to Mr Hardie's death that he had discovered that the premiums in respect of the eight policies had been added together and the annual totals of the premiums then halved, with one half of each total being debited, initially in the drawings account of each of Mr Hardie and himself and subsequently, in error, in the drawings accounts of each of Colin Wales and himself.
21. John Wales explained that the loan of £60,000 from the Bank of Scotland was repaid within its term. As I have indicated, the final balance was cleared on 21 December 1993. John Wales gave evidence that some weeks thereafter the partners discussed whether to keep the life policies in existence. He explained that he and Mr Hardie discussed this matter informally, on a number of occasions, and that all three of the partners then discussed it at a meeting held in Whale Engineering's premises during January 1994. John Wales explained that sometime prior to January 1994, he had been informed by a man called Ted Sills about certain problems, which Mr Sills had experienced, when it had proved necessary for Mr Sills to pay out the widow of his deceased business partner. Mr Sills carried on a business, known as Eden Grange, from one of the properties owned by Whale Engineering. John Wales explained that, in light of what Mr Sills had said, Colin Wales, Mr Hardie and himself had discussed whether to keep the insurance policies in existence. They had done so lest anything happened to either Mr Hardie or himself.
22. John Wales explained that the partners had appreciated they could have saved money by stopping to pay the premiums on the Hardie and Wales policies. They decided, however, that the 'company' would keep the policies in existence. Mr Wales explained the agreement they reached was that the 'company' would continue to pay the premiums to safeguard the firm in the event of the death or one or other of Mr Hardie or John Wales. He explained they envisaged that, in the event of the death of either Mr Hardie or himself, the proceeds from the relevant policies would have come into the 'company', because the policies had remained assigned to the Bank of Scotland, and that those proceeds would be used to pay the surviving widow her share of the firm's capital or would at least assist in doing so. When asked whether anything had been done to provide against the possibility of the death of Colin Wales, John Wales explained that Colin Wales had been young enough and they had not thought it necessary to have similar cover to pay out his wife. No record had been kept of that meeting.
23. During the cross-examination John Wales confirmed that the partners had not taken advice from anyone at the time those discussions had taken place. Nor had they spoken to the Bank. The meeting in January 1994, involving the three partners, had not been mentioned to Lindsay Wilson until after Mr Hardie's death. John Wales explained that he thought that if the proceeds of the policy had exceeded what was required to pay out the surviving widow, the balance would have gone to the firm. If, on the other hand, the proceeds had not been sufficient to pay out the surviving widow, the firm would have required to pay the balance.
24. When he gave evidence Colin Wales explained that he knew very little of the circumstances in which the insurance policies had been taken out. He had been aware that it was necessary for Whale Engineering to obtain a loan from the Bank of Scotland, to finance the purchase of property from Cheltenham Management Limited. That loan had been arranged by Mr Hardie and John Wales. He knew nothing about the conditions upon which the loan had been obtained. All he knew was that after Whale Engineering had obtained the necessary loan from the Bank of Scotland, the heritable property had been acquired from Cheltenham Management Limited.
25. Colin Wales explained that he never had any need to look at the firm's bank accounts. He had no responsibility for the firm's book-keeping or the firm's Annual Accounts. He made no input into the preparation of the Annual Accounts. He never scrutinised them and merely signed them because his father had told him to do so. Colin Wales also stated that he had had no knowledge as to how the premiums for the Hardie and Wales policies were paid. Although at one stage in his evidence he suggested that he had not become aware of the insurance policies, until after Mr Hardie's death, that was clearly an error on his part. He subsequently gave evidence that he did recollect becoming aware of the policies around the end of December 1993 or the beginning of January of the following year, by which time the loan had been repaid. He gave evidence that he recalled attending a meeting with Mr Hardie and his father, at which the three of them had discussed keeping the insurance policies going. By that stage he had learned that there were such policies in existence over the lives of Mr Hardie and his father. He said he had been aware that Ted Sills has struggled for a number of years to pay out the widow of his deceased business partner. The concern had been that the same thing might happen to their firm. It had been agreed that Whale Engineering would keep the policies going, so that the death of either Mr Hardie or Mr Wales would not cripple the firm. He explained there had been no similar concern about his dying, because the chances of his falling ill had been more remote.
26. Colin Wales was asked whether anything was said at the meeting about how the premiums were being paid. He stated that he had no recollection of that matter having been mentioned. He had assumed that the firm had been paying the premiums prior to the meeting and that they would continue to do so after the meeting. During cross-examination he indicated that he had no understanding of what the partners' drawings accounts were. He confirmed that no written record had been kept of what had been discussed at the meeting. He stated he had no understanding of what was intended should happen if the proceeds of the policies exceeded what was necessary to pay out the surviving widow.
27. Lindsay Wilson gave evidence of having been aware that Whale Engineering had required to take out a loan from the Bank of Scotland to finance the purchase of a heritable property from Cheltenham Management Limited. Although he had been advised of the conditions in which the term loan had been made available to Whale Engineering, he stated that when his firm made up the Annual Accounts for Whale Engineering they had not received any documentation relating to the loan. He stated that he first became aware of the insurance policies, when it was drawn to his attention, by one of his staff, that insurance premiums had been debited from one of Whale Engineering's bank accounts. The payment of those premiums had shown up in the bank statements which his firm had been given. Mr Wilson stated that he had discussed the payment of those premiums with both John Wales and Mr Hardie. He said that he considered the cost of the premiums to be an expense on behalf of Whale Engineering, because he had understood from his discussions with John Wales and Mr Hardie that if the policies had come to fruition, Whale Engineering would have received such of the proceeds that had not gone to the Bank of Scotland.
28. Mr Wilson was questioned whether he had asked either or both of John Wales and Mr Hardie about how the premiums should be treated in the Annual Accounts. He said that he had been instructed that they should be treated as an expense of Whale Engineering and that they should be allocated equally between the drawings of John Wales and Mr Hardie. John Wales had, of course, denied taking part in any such discussions with Lindsay Wilson. No written records or correspondence involving Scott & Paterson, whether contemporaneous or otherwise, were produced to support Lindsay Wilson's claimed recollection of such discussions with Mr Hardie. Furthermore, Lindsay Wilson agreed that his evidence he had received instructions to aggregate the premiums, and to split them equally between Mr Hardie and John Wales, was inconsistent with his understanding that the proceeds of the policies (if not payable to the bank) would go to the firm of Whale Engineering. Mr Wilson agreed that if he had received such instructions, the partners of Whale Engineering ought to have been given advice by him as to that inconsistency.
29. It is a matter of agreement between the parties that as set out in a Personal Drawings Record of the firm between 1991 and 1997, prepared by Scott & Paterson (Pro. 7/20), the premiums paid in respect of the Hardie and Wales policies were in fact aggregated and allocated by Scott & Paterson, equally to the drawings of Mr Hardie and John Wales, when they prepared Whale Engineering's Annual Account. That is, of course, subject to the qualification that it is also a matter of agreement that in certain of those years the shares of the premiums Scott & Paterson intended to be allocated to Mr Hardie's drawings were allocated, in error, to the drawings of Colin Wales. That reflects the factual position as to what Scott & Paterson did, when calculating the partners' drawings, in the course of preparing the Annual Accounts. The Annual Accounts prepared by Scott & Paterson, however, make no reference to the Hardie and Wales policies nor to the premiums payable in respect of those policies. As a matter of fact, therefore, anyone reading those Accounts, even if they were aware of the existence of the Hardie and Wales policies, would learn nothing as to how the premiums in respect of those policies had been dealt with in the Accounts. That is borne out by the fact that, prior to Mr Hardie's death, the partners were unaware of the erroneous allocation of a share of the premiums to Colin Wales.
30. When Mr Wilson began giving evidence he referred to the Hardie and Wales policies as being term policies. On it being pointed out to him that the policies had been whole life policies, his response was that when he had been preparing the Annual Accounts for the year to 31 December 1991, he had been advised by his clients that the policies were term policies. John Wales had not spoken to any such discussion. I am not satisfied that it took place. Mr Wilson was also asked by both counsel a number of questions as to the treatment of the Bank of Scotland loan in the firm's Annual Accounts. He explained that the loan was not shown separately in the Annual Accounts for the years to 31 December 1991 and 31 December 1992. He further explained that a balance of the loan had been shown outstanding in the Accounts for the years to 31 December 1993, 31 December 1994 and that the Accounts for the year to 31 December 1995 indicated that the bank loan had been cleared during that year. The bank loan had, of course, been cleared on 21 December 1993, which meant that the Accounts for the subsequent two years had included entries relating to a loan stated to be outstanding to the Bank of Scotland, but in respect of which no bank certificate to that effect existed. Quite how those errors had occurred in the Annual Accounts was far from clear. At one stage Mr Wilson suggested there had been some difficulty in obtaining information from Mr Hardie, when he had been ill, but any such difficulty falls far short of a proper explanation for the serious errors that occurred. To be fair to Mr Wilson, he did accept full responsibility for the errors that had been made and had subsequently been corrected. What the occurrence of those errors does suggest, however, is that Mr Wilson's firm did not operate an effective system for recording the further information they sought and received from the partners of Whale Engineering. Whale Engineering, for their part, operated a fairly basic system of book-keeping, involving ledgers maintained by John Wales' wife. When those ledgers, bank statements and other vouchers were passed to Scott & Paterson to enable that firm to prepare the Annual Accounts that Whale Engineering required, it was obviously important that an accurate record be kept as to what passed between the client and accountants. I saw no evidence to suggest that had occurred. On the contrary the Annual Accounts prepared and certain letters written by Lindsay Wilson to firms of solicitors after Mr Hardie's death, when taken with the evidence Lindsay Wilson gave, point in quite the opposite direction. The terms of the correspondence, in particular, are very confused. They contain a number of factual errors, for example, that the insurance policies were term policies and that the premiums paid had been included in the Annual Accounts under the heading "Insurance". When pressed as to the contents of parts of the correspondence, Lindsay Wilson was quite unable to explain certain things he had written. Putting the matter shortly, I found the evidence given by Lindsay Wilson very confused as to how the Hardie and Wales policies had been treated by Scott & Paterson in preparing the Accounts and as to how the premiums ought to have been treated. The unsatisfactory nature of his evidence was such that I have reached the view that I am not prepared to accept his evidence that he was instructed by either or both of Mr Hardie and John Wales to aggregate the premiums paid out of the firm's bank account and allocate one half of the total to each of the drawings account of John Wales and Mr Hardie. The fact that such aggregation and allocation only occurred for a couple of years, before an error occurred and one half of the premiums was debited to the drawings account of Colin Wales, reinforces my view that Mr Wilson's evidence on this whole matter should be rejected as unreliable.

Decision

Whether the Hardie policies became partnership property on their inception in 1991?

31. Section 21 of the Partnership Act 1890 provides that unless the contrary intention appears, property bought with money belonging to a firm is deemed to have been bought on account of the firm. In my opinion, that is the starting point for considering whether the Hardie policies, and indeed the Wales policies, became partnership property when they were first taken out. Right from the outset, the premiums payable in respect of the Hardie policies were paid by being debited from funds held in one of Whale Engineering's bank accounts. That was the position up until the date of Mr Hardie's death. In these circumstances the provisions of Section 21 apply. The Hardie policies are deemed to have become partnership property, unless the contrary intention appears.
32. As the defenders were ordained to lead at the proof, however, I have also thought it helpful to approach my assessment of the evidence I heard on the basis that it is for the defenders to establish that the partners intended that the Hardie policies should become partnership property, rather than the personal property of Mr Hardie. Counsel for the defenders submitted that for a variety of reasons, the intention that the policies should be partnership property emerges from the evidence led. There was the overall context in which the policies came into existence. Whale Engineering required a bank loan. That loan was required to enable the firm to purchase heritable property that the firm would own. The loan was obtained from Whale Engineering's bankers, the Bank of Scotland. The cost of servicing the loan was to be met by Whale Engineering. The Bank had required their customer, Whale Engineering, to provide security for the loan. That security included a requirement that two of the firm's partners, Mr Hardie and John Wales, should assign to the Bank insurance cover over their respective lives that was acceptable to the Bank. The Bank advised Whale Engineering what level of cover required to be taken out and recommended which policies should be taken out. Both Mr Hardie and John Wales went along with the requirements of and recommendations made by the Bank. They made no independent assessment as to which policies should be taken out. They signed all the documentation placed before them. The policies were taken out. They were assigned to the Bank, in terms of forms of assignation provided by the Bank. Mr Hardie and John Wales authorised that the premiums in respect of all the policies should be debited from one of Whale Engineering's bank account. John Wales' understanding at that time had been that the premiums should be regarded as a partnership expense. At that time, he had also understood that the proceeds of the policies would go to Whale Engineering, rather than to the individual estates of Mr Hardie or himself. Counsel for the defenders submitted that all of that pointed to the Hardie policies being partnership property from their inception and that having been the intention of both Mr Hardie and John Wales.
33. As I have indicated Colin Wales had no detailed knowledge about the terms upon which Whale Engineering obtained the bank loan in 1991. He did not become aware of the policies until late 1993. His evidence does not therefore provide any real assistance on this issue.
34. I have already summarised Lindsay Wilson's evidence in relation to the Hardie policies and the premiums payable in respect of those policies. As that evidence to a large extent related to the actings of his firm in preparing the Annual Accounts of Whale Engineering, it is convenient that I discuss it under reference to those Accounts. Before I do so, however, I should deal further with the terms of the policies themselves and of the assignation granted by Mr Hardie.
35. Senior counsel for the pursuer submitted that the case was a competition between the documentary evidence, consisting of the policies, the assignation and the Annual Accounts, on the one hand, and the evidence of John Wales and Lindsay Wilson, on the other. I was invited to reject their evidence as being unreliable.
36. Senior counsel for the pursuer founded on the fact that the policy documents relating to the Hardie policies (No. 7/4 of Process) refer only to Mr Hardie. That is correct and it is a matter of agreement that those documents do not contain any reference to the interest of any other party, whether beneficial or otherwise. The Assignation, on the other hand, whilst running in the name of Mr Hardie, also refers to it being granted in consideration of the Bank of Scotland giving credit and/or banking facilities to Whale Engineering. In my opinion, the terms of those documents, even when viewed in the context of the joint and several obligations that the Bank required Mr Hardie and John Wales to sign up to, are not such as to establish that when the Hardie policies were taken out it was the intention of Mr Hardie as a individual, or of the partners as a whole, that the Hardie policies should be his personal property, rather than partnership property.
37. The position relating to the Annual Accounts is much more confused. As I have indicated the evidence of the two expert witness was of considerable assistance in confirming the view that the preparation and indeed the structure of those accounts left a great deal to be desired. It is clear that none of the Annual Accounts contains any entry in the Balance Sheet showing the Hardie policies as a partnership asset. Nor are the premiums in respect of the Hardie policies shown as being a deduction in the Profit and Loss Account. It is certainly arguable, as Mr Downie indicated in his Report and his evidence, that if the Hardie policies were partnership property, the Annual Accounts should have contained such entries. That is particularly so, in view of the fact that the Hardie policies, being whole life policies, had a cumulative investment content, that increased from the date of their inception to the date of Mr Hardie's death. To that extent, it is easy to understand Mr Downie's opinion evidence that, in both respects, the terms and contents of the Annual Accounts are inconsistent with the assertion that the Hardie and Wales policies were partnership property from the date of their inception to the date of Mr Hardie's death, but are consistent with those policies having been the personal assets of Mr Hardie and Mr Wales throughout.
38. Such expert opinions, however, beg the question as to whether the Annual Accounts were properly prepared by Scott & Paterson. In relation to that, the evidence of Lindsay Wilson is clearly relevant. For the reasons I have already given, I am not prepared to accept and rely on the evidence Mr Wilson gave to the effect that he was instructed by one or other of Mr Hardie and John Wales to aggregate, and to allocate equally between them, the premiums in respect of the Hardie and Wales policies. Whilst it is a matter of agreement that those premiums were aggregated and allocated, initially between Mr Hardie and John Wales and then between John Wales and Colin Wales, there is no evidence before me upon which I am prepared to hold that prior to the date of Mr Hardie's death any of the partners had given instructions as to the aggregation and allocation of the premiums or were aware as to how those premiums were being allocated to certain of their drawings accounts. On the contrary the evidence I heard points firmly in the opposite direction.
39. The schedule of the personal drawings of the individual partners, cover the period covering the years to 31 December 1991-97, was prepared by Scott & Paterson after Mr Hardie's death. That schedule merely sets out an analysis of the figures which the accountants proceeded upon, when calculating the lump sum figures entered in the Annual Accounts for the years to 31 December 1991-1997 as the drawings of the individual partners. Neither that schedule nor the bank reconciliations, upon which the schedule was based, were available to the partners of Whale Engineering prior to Mr Hardie's death. The aggregation and allocation undertaken by Scott & Paterson could not be worked out by studying the Annual Accounts themselves. Nor did I hear any evidence to suggest that the aggregation and allocation would have been obvious from any of the ledgers kept by Mrs Wales, whose absence from the witness box was criticised by senior counsel for the pursuer. It is certainly correct that none of the contemporaneous ledgers and very few of the working papers on which the Annual Accounts had been based were lodged as productions. But the absence of documentation, that might have been produced, does not lead me to the view that the defenders are unable to establish that the Hardie policies became partnership property on the date of their inception.
40. During the course of their submissions both counsel referred to Forrester and Others v Robson's Trustees (1875) 2 R 755. That authority illustrates factors that can be of relevance, when an issue arises as to whether a life insurance policy belongs to a firm or an individual partner of that firm. Those factors can include whether the insurance policy was part of a loan transaction and by whom the premiums were payable. But the authority also illustrates that if, when an insurance policy in respect of an individual partner is taken out, the partners of the firm do not specifically address what should happen to any surplus proceeds of the policy, after its original purpose has been satisfied, then those surplus proceeds fall to be divided among the parties to whom the policy belonged.
41. Although what happened subsequently in 1994 has no direct bearing on what took place in the early months of 1991, the very fact that the three partners met together, to discuss whether the Hardie and Wales policies should be kept in existence (as I am prepared to hold that they did), is entirely consistent with the view that all of the partners considered those policies to be partnership property.
42. In my opinion, accordingly, there was force in the submissions of counsel for the defenders that the evidence he sought to rely on points clearly in the direction of the Hardie policies having become partnership property on the date of their inception. In particular, I accept that the evidence of John Wales that was his intention. Having regard to the fact that Mr Hardie and John Wales dealt with the Bank together, back in 1991, and acted in an almost identical manner in respect of the policies over their respective lives, I see no basis for holding that Mr Hardie's intention was different. I do not view this case as being a competition between the documentary evidence, on the one hand, and the evidence of John Wales and Lindsay Wilson on the other. As far as the documentary evidence, dating back to 1991, is concerned, it is, in opinion, entirely reconcilable with the evidence of John Wales. For the reasons, I have explained, I am not persuaded that the contents of the Annual Accounts for the years to 31 December 1991-97 cast doubt on the acceptability of John Wales' evidence. I also take the view that the convening of the meeting in January 1994 supports the view that Mr Hardie and John Wales both considered that all the policies belonged to the partnership. Furthermore, on the assumption that the provisions of Section 21 of the Partnership Act 1890 apply, the presumption is that the policies became partnership property on their inception. No contrary intention, whether on the part of individual partners, or the partners as a whole, appears from the evidence before me. On the basis of that evidence, I have reached the clear view, that Mr Hardie and John Wales intended that both the Hardie policies and the Wales policies should be partnership property. In the whole circumstances, I am quite satisfied that the Hardie policies became partnership property on the date of their inception.

Whether the ownership of the Hardie policies changed, on the Bank of Scotland loan being repaid in December 1993?

43. This question can be dealt with shortly. In my opinion, the repayment in full of the £60,000 had no bearing on which party owned the Hardie policies. Following the repayment of the loan, the Hardie policies remained partnership property.

Whether the partners reached any agreement in January 1994 resulting in a change on the ownership of the Hardie polices?

44. Senior counsel for the pursuer did question whether I should hold that the three partners of Whale Engineering had met in January 1994 to discuss the Hardie and Whale policies. In doing so, senior counsel founded on the absence of any written record of any such meeting and on the fact that in a number of letters, which Lindsay Wilson had written to the pursuer's solicitors, following Mr Hardie's death, no mention had been made of a 1994 Meeting or of anything decided at any such meeting. He also pointed out that although Lindsay Wilson had claimed in evidence that he had learnt about the partners' decision to keep the policies in existence, Mr Wilson had been unable to offer any explanation for certain of the terms of that correspondence, some of which was entirely inconsistent with what the defenders now claimed to have been decided at the meeting. Senior counsel also founded on the fact that no mention was made of the 1994 meeting in the accounts that Scott & Paterson had prepared for the year to 31 December 1997, which covered the date of Mr Hardie's death.
45. Despite those submissions by senior counsel for the pursuer, my decision, as to whether to hold that such a meeting took place, ultimately involved my deciding whether I am prepared to accept the evidence of John Wales and Colin Wales. I am prepared to accept the evidence of John Wales and Colin Wales that such a meeting took place and that it took place against the background of the loan having been repaid in December 1993 and John Wales' discussions with Ted Sills. What happened and what was decided at that meeting are separate issues, to which I now turn.
46. Counsel for the defenders accepted that the onus was on him to prove what happened at the meeting in January 1994, a meeting which took place after the loan from the Bank of Scotland had been repaid. I was invited to hold that at the meeting the three partners had decided that the firm would keep all the Hardie and Wales policies in existence, which involved, of course, the payment of the premiums being continued. Secondly, I was invited to hold that the partners had agreed that the policies should remain assigned to the Bank. Thirdly, I was invited to hold that the partners had agreed that in the event of the death of Mr Hardie or John Wales the proceeds of the relevant policies would be available to the surviving partners to pay to the widow of the deceased's partner, the share of the partnership capital due to that deceased partner's estate.
47. There is no dispute that the Hardie and Wales policies continued in existence and that the necessary premiums were paid right up until the death of Mr Hardie. In these circumstances, having regard to the evidence I heard, I have no difficulty in holding that the partners agreed at the meeting in January 1994 that the Hardie and Wales policies should continue in existence and that the necessary premiums should be paid.
48. It is, however, a much more complicated issue as to whether the defenders have proved that during the meeting in January 1994 the three partners agreed that in the event of the death of one or other of Mr Hardie or John Wales the proceeds of the relevant policies would become the property of the two surviving partners and would be available to be used by them to pay out the deceased's partner's share of the partnership capital. The background to any such agreement included, of course, not only the repayment of the bank loan and the problems experienced by their neighbour Ted Sills, it also included the fact that all of the policies were partnership property, in which they had equal shares.
49. It was in relation to this chapter of the case that I had the strongest impression that John Wales and Colin Wales did not fully understand the implications of the questions they were being asked. That lack of understanding may not be surprising, in view of the fact that the partners took no professional advice, before they held their meeting in January 1994. During his examination in chief, John Wales said that they had decided to keep the policies on, because the proceeds of the policies would help the company to pay off its debts. Thus, after Mr Hardie had died, he had thought that the proceeds of the Hardie policies would come to the "company" and be used to pay Mrs Hardie her husband's share of the capital. Under cross-examination he stated he had understood the agreement they had reached meant that if the proceeds of the Hardie policies had been more than was required to be paid to the pursuer, then the balance would have gone to the "company". On the other hand, he had thought that if the proceeds of the policies were not enough, then the "company" would have required to pay the rest.
50. Colin Wales gave evidence that at the meeting, held in January 1994, he had learnt about the policies and the partners had spoken about keeping those policies going. I have already summarised his evidence and need not refer to all the detail of it again. Suffice it to say, however, that he gave evidence that the partners had decided to keep the policies going, so that, if there was a death, the insurance policies would pay off the widow and the firm would not be crippled. Under cross-examination, he stated that he had no idea what would have happened to any surplus, if the proceeds of the policies had exceeded what required to be paid to a surviving widow.
51. Although Lindsay Wilson was not present at the meeting, he gave evidence that he had learnt of the decision to keep the policies in force, notwithstanding the fact that the bank loan had been repaid. During the earlier stages of his evidence he said that he had understood that the policies were being continued in force in case a death took place and the proceeds could act as a payment to account of the deceased partner's capital account. He claimed such an understanding on the basis of his discussions with one or both of Mr Hardie and John Wales. He could not remember with whom his discussions had taken place. He said he had no idea as to what would happen, in the event that the proceeds of the policies had exceeded what required to be paid. He had no recollection of any specific discussions as to the payment of the premiums, after the loan had been repaid. Subsequently, however, after he had been referred to the terms of his correspondence with the pursuer's solicitors, Mr Wilson's position altered. He stated that he had understood the £60,000 payable in respect of the Hardie policies would have come back into the firm and increased the capital accounts of all three partners, with £20,000 going into Mr Hardie's account and £40,000 available for the survivors. When, during re-examination, the evidence that John Wales and Colin Wales had given on this matter was put to him, Lindsay Wilson stated that his understanding of the agreement reached by the three partners appeared to be different to those of John Wales and Colin Wales. He explained that because he had considered the Hardie policies to be partnership property, he had understood that the proceeds of those policies would increase the assets of the partnership, to the benefit of all the partners, and would not have been available in their entirety to pay out the pursuer.
52. On the basis of the evidence I have heard, I am not prepared to hold that at their meeting in January 1994 the three partners agreed that, in the event of the death of either Mr Hardie or John Wales, the whole of the proceeds of the relevant policies would belong to the surviving partners and be available to them, to pay to the widow of the deceased partner his share of the partnership capital. I am not satisfied that at the meeting in January 1994 the partners did any more than agree that the policies should continue in existence, so that if Mr Hardie or John Wales died the proceeds of the relevant policies would be available to the firm. Subject to the assignations in favour of the Bank of Scotland, that would, of course, have been the position, had either Mr Hardie or John Wales died prior to the meeting in January 1994.
53. I have reached those conclusions for a number of reasons. Firstly I am not satisfied that the detail of the evidence given by either John Wales and Colin Wales fully supports the conclusion of an agreement, such as the defenders claim. Secondly, I am not satisfied that in the January 1994 John Wales and Colin Wales fully understood what the rights of the individual partners would be, in the event that their partnership came to an end, whether by the death of one of their number or for any other reason. Thirdly, I am not satisfied that before the meeting got underway any of the partners fully understood what would happen to the proceeds of the relevant policies, in the event that Mr Hardie or John Wales died. Focusing this point in practical terms, I am not satisfied the partners had thought through that, in the event that either Mr Hardie or John Wales was to die, before the partnership came to an end, the proceeds of the relevant policies would fall into firm's capital, rather than belong to the surviving partners, because the policies were partnership property. If that was not thought through, it may be open to question whether the three partners intended to reach an agreement of the detail now claimed. And finally, I take account of the fact that Lindsay Wilson's understanding as to what had been agreed by the partners appears to be different from that spoken to by John Wales and Colin Wales. That understanding may have been informed, to some extent, by his discussions with Mr Hardie. For all these reasons, I have reached the view that the defenders have not proved that during the meeting in January 1994 the partners reached an agreement that had the effect of altering the ownership of either the Hardie policies or the Wales policies or otherwise providing that, if the Hardie or Wales policies matured, the proceeds would be payable to the surviving partners and not into the capital of the firm.
54. In the whole matter, therefore, I repel the first plea in law in the summons for the pursuer, sustain the second plea in law in the summons for the pursuer, grant decree in terms of the second conclusion of the summons, repel both of the defenders' pleas in law in the defences, repel the defenders' pleas in law in the counterclaim and dismiss the counterclaim.