Burnett's Trustee v Grainger & Anor [2004] UKHL 8 (4 March 2004)

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United Kingdom House of Lords Decisions

You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Burnett's Trustee v Grainger & Anor [2004] UKHL 8 (4 March 2004)
URL: http://www.bailii.org/uk/cases/UKHL/2004/8.html
Cite as: [2004] UKHL 8, 2004 SCLR 433, 2004 GWD 9-211, 2004 SC (HL) 19, 2004 SLT 513, [2004] 11 EG 139, [2004] 11 EGCS 139

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Judgments - Burnett's Trustee (Respondent) v Grainger and another (Appellants)

HOUSE OF LORDS

SESSION 2003-04
[2004] UKHL 8

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Burnett's Trustee (Respondent)

Grainger and another (Appellants)

THURSDAY 4 MARCH 2004

The Appellate Committee comprised:

Lord Bingham of Cornhill

Lord Hoffmann

Lord Hope of Craighead

Lord Hobhouse of Woodborough

Lord Rodger of Earlsferry

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Burnett's Trustee (Respondent) v. Grainger and another (Appellants)

[2004] UKHL 8

LORD BINGHAM OF CORNHILL

My Lords,

I have had the privilege of reading in draft the opinions of my noble and learned friends Lord Hope of Craighead and Lord Rodger of Earlsferry. For the reasons which they have given I also would make the order which Lord Rodger proposes.

LORD HOFFMANN

My Lords,

I have studied carefully the opinions of my noble and learned friends Lord Hope of Craighead and Rodger of Earlsferry and they have satisfied me that the interlocutor pronounced by the Extra Division was in accordance with the law of Scotland. The appeal must therefore be refused.

I am however by no means satisfied that this state of the law is either desirable or a necessary consequence of fundamental principles of Scots law. In Heritable Reversionary Company Ltd v Millar (1892) 19 R (HL) 43, 52 Lord Macnaughten began his opinion with the words:

In the present case, I do feel compelled to uphold the decision of the Extra Division but share the view of its consequences which Lord Macnaughten expressed with such studied understatement. It results in the creditors of Mrs Burnett being unjustly enriched at the expense of the Rev. and Mrs Grainger and I can see no compelling ground of logic or policy which justifies such a result.

The unjust enrichment arises from the fact that the mistake of the Graingers in failing to record the disposition in their favour before the permanent trustee means that they are not only unable to assert title to the flat (a consequence which might have been reasonable if the contract had remained uncompleted) but that the permanent trustee is also entitled to keep the money they paid. To say that this is a consequence of their own fault is in my opinion no answer. Mistake is generally regarded as a ground for relief against unjust enrichment, not a reason why the victim should have to suffer the consequences of an error which has caused no prejudice to anyone else.

Two reasons of policy and principle are put forward to justify the rule; the strict division in Scots law between real and personal rights and the importance of maintaining the integrity of the register. But both of these principles have in the past been compromised in cases in which justice was thought to require it. The right of recovery of an owner whose property has been obtained by fraud and the right of a beneficiary under a trust are personal rights, but Scots law has had no difficulty in holding that a disponee of heritable estate takes subject to such rights.

As for the conclusiveness of the register, it is said that unless the title acquired by the trustee in sequestration defeats the claims of a purchaser who has paid for the property and received an executed disposition, no purchaser from a trustee could know for certain that property in his name was not subject to a prior unrecorded disposition to a purchaser. So be it. But neither can he know whether it was subject to a prior declaration of trust, and for more than a century it has been settled that trust property does not pass to the trustee in sequestration, even if he has recorded a notice of title. No one seems to have found this a great inconvenience. Indeed, Mr Hodge for the respondent accepted that the position would have been altogether different if the disposition to the Graingers had included the words "And pending the recording of this disposition, I hereby declare myself trustee of the subject hereby disponed for the purchasers absolutely." Such a declaration, accompanied by delivery of the disposition to the purchasers, would appear to me to satisfy the requirements of a declaration of trust stated by Lord Reid in Allan's Trs v Lord Advocate 1971 SC (HL) 45, 54. But the existence of the declaration would be equally unknown to any subsequent purchaser from the trustee in sequestration. It is a strange form of conclusiveness that can be so easily defeated.

I agree with my noble and learned friends that the decision in Sharp v Thomson 1997 SC (HL) 66 is distinguishable. But, for the reasons I have given, I think it would have been better if it had not been necessary to distinguish it.

LORD HOPE OF CRAIGHEAD

My Lords,

I have had the advantage of studying in draft the speech which has been prepared by my noble and learned friend Lord Rodger of Earlsferry. I am in full agreement with it. In view of the importance of the case however, I should like to add a few words of my own to explain why I too would affirm the order of the sheriff granting decree in terms of the second crave of the initial writ.

This exceptional and troublesome case presents itself at first sight as a competition between two parties only. On the one hand there are the appellants, to whom in implement of missives of sale a disposition of the subjects was delivered by Mrs Burnett's solicitors in exchange for the payment of the purchase price. On the other there is the respondent, the permanent trustee. He was aware that the subjects had been disponed to the appellants. But he seeks to rely on the fact that when he recorded his notice of title to the subjects, for which he paid nothing, he came first in the race to the register. This simple view of the case tends to suggest that the situation in which the appellants now find themselves is unfair. They paid the price for the subjects to which they obtained entry in exchange for delivery of the disposition on the date of settlement. They are now being told that the subjects are vested in the respondent and that they can no longer acquire a good title to them. In the result they have been deprived of their right to become the owners of the subjects, and they have lost the price which they paid for them. This is not something that could have happened while Mrs Burnett remained solvent. Why then, it is asked, should the respondent be able to deprive them of that right in his capacity as the permanent trustee in Mrs Burnett's bankruptcy?

This view of the case however is only one part of a much more complex story. The full details have not been revealed to us. We know little of the background. But we do know that the permanent trustee acts under the statute for each and every one of Mrs Burnett's creditors, not for himself as an individual: Stewart v Jarvie, 1938 SC 309, 316, per Lord Moncrieff. So the contest is more accurately seen as one between the appellants and the general body of Mrs Burnett's creditors. It is on their behalf that the respondent is claiming to be entitled to the subjects which the appellants bought from her. And it seems likely that the creditors, or some of them, were already active in seeking to protect their position before the date of sequestration. They were entitled to do this by means of diligences against her moveable and heritable property, unaffected by any personal obligations that she may have entered into subsequently. One of the effects of a sequestration is to equalise the rights of creditors who have executed diligence: section 37 of the Bankruptcy (Scotland) Act 1985. Another is that it places the permanent trustee, on behalf of all the creditors, in the position of an adjudging creditor with respect to the debtor's heritable property: section 31(1)(b) of the 1985 Act. Accordingly a more complete picture of the contest, and a guide to its resolution in a way that is consistent with Scots property law, may be obtained by examining the range of remedies that are available to creditors in general before the ultimate remedy of sequestration is resorted to and the way in which, in the event of a sequestration, the Act seeks to protect their rights as creditors.

The passing of ownership: the real right

At the heart of Scots property law, as Professor Burns points out in the opening sentence of the chapter on infeftment in his Handbook on Conveyancing, 5th ed (1938), p 160, lies the maxim traditionibus, non nudis pactis, transferuntur rerum dominia. The adoption of this rule of the Roman law as part of Scots law can be traced at least as far back as Stair, The Institutions of the Law of Scotland (1693 edition), III ii 5. He accepts that some kind of possession is needed to accomplish real rights, so that thereby they may be "more manifest and sure". Erskine, An Institute of the Law of Scotland (Nicholson's edition), II i 18 too acknowledges the need for "greater certainty" and for the delivery of possession, or at least some public act, "by which it may appear that the former proprietor has given up his right." A statutory exception to what is required to transfer property in corporeal moveables applies in the case of sale. The property in goods passes by force of the contract of sale independent of delivery: Sale of Goods Act 1979, sections 17 and 18. But the rule that delivery is required to transfer ownership has always applied, and continues to apply, to all transactions relating to heritable property. Burns, using language appropriate to the feudal system of land tenure with which he was familiar, explains at p 160 how the principle operates:

Section 1 of the Abolition of Feudal Tenure etc (Scotland) Act 2000 is, as its name indicates, will abolish the system of feudal tenure with effect from the appointed day. There is to be introduced instead the new system of ownership of land which is described in section 2. Prior to the appointed day entry with the feudal superior, known as infeftment, will still be required to vest the real right to the purchaser. This is the system which was in force when the appellants entered into their contract to purchase the subjects from Mrs Burnett. The methods by which infeftment is achieved have been amended step by step by the conveyancing statutes. The earlier methods depended on symbolical delivery. Physical occupation of the subjects was not required, nor was physical occupation sufficient to constitute infeftment with the superior. By section 1 of the Infeftment Act 1845 however it was provided that it was no longer to be necessary to proceed to the lands in which sasine was to be given but that sasine could be obtained and infeftment given by recording an instrument of sasine in the General Register of Sasines. The process of registration was simplified by section 15 of the Titles to Land Consolidation (Scotland) Act 1868, which provides that an instrument of sasine is no longer necessary and that it shall be competent and sufficient to record the conveyance or deed itself in the appropriate register. It was further simplified by section 4 of the Conveyancing (Scotland) Act 1924, which provides that a person having a right to property by a title which has not been completed by recording may complete his title by recording a notice of title deducing his title from the person who was last infeft.

When section 4 of the 2000 Act comes into force, ownership of land will pass on registration in the Land Register of Scotland where a transfer the land is registrable under the Land Registration (Scotland) Act 1979, or in any other case on the recording of a conveyance of land in the General Register of Sasines. The new system is, in effect, the same as the old after stripping out from it the feudal element. In modern practice, when there is a sale of heritable property, the disposition is the deed by which the subsisting interest in the land is transferred from the old to the new heritable proprietor. Registration in the Land Register of Scotland under the Land Registration (Scotland) Act 1979 has taken the place of the final step, which it was always necessary to take to transfer the real right, of symbolical delivery of the land by sasine and the recording of a notarial instrument or its modern equivalents in the General Register of Sasines. Section 3(1) of the 1979 Act provides that registration shall have the effect of vesting in the person registered as entitled to the registered interest a real right in the land in so far as the right is capable of being vested as a real right. It preserves the rule that delivery of the disposition does not of itself transfer the real right in the property. That rule applies to every transaction by which ownership in land is passed from one person to another. It is not confined to sale, although it is in contracts for the sale of the land that most transactions which lead to the transfer of ownership in land have their origin.

It can be seen that none of the changes effected by the conveyancing statutes have departed from the essential principle that up to the moment of the purchaser's infeftment the seller remained infeft with the superior and the holder of the real right in the property. The purchaser completed his title by recording the disposition in the General Register of Sasines: Craigie, Heritable Rights, 3rd edition (1899), p 396. This was the act of infeftment which divested the person who was last infeft of the real right. As Craigie, p 458, explains:

Up to that point the seller remained liable for payment of the feu-duties and the performance of the other obligations of the feu: Menzies, Lectures on Conveyancing (Sturrock's edition, 1900), pp 814-815. Prior to the recording of the disposition in the register the right of the purchaser was a personal right to the lands only. Until section 22 of the 1868 Act was repealed by section 48 of and Schedule 11, Part II to the Conveyancing (Scotland) Act 1970 the right, being personal, was transmissible by assignation: Craigie, pp 458-461. It carried with it all the rights of an uninfeft proprietor. But the right which the purchasers had was not a real right. So it was ineffective as against any third party who was able to obtain infeftment with the superior before he did.

In the opinion which he prepared on behalf of the majority of the judges of the whole Court which was reported to this House in Young v Leith (1847) 9 D 932, 937, Lord Fullerton said:

At p 938 he added this comment:

The effect of the provisions of the conveyancing statutes is that until the interest of the purchaser has been recorded or registered the seller remains vested in the real right. His relationship with the purchaser is, of course, controlled by the rights and obligations which were created by their contract. When the disposition is delivered the general rule is that it becomes the sole measure of the contracting parties' rights if there is a dispute about the subject to which right has been acquired by the purchaser: Orr v Mitchell (1893) 20 R (HL) 27, 29 per Lord Watson. The seller will usually have performed all the positive obligations arising from the contract of sale when the disposition is delivered to the purchaser on the date of settlement. But that is not an end of their contractual relationship. The seller remains bound not to derogate from his grant of the subjects as described in the dispositive clause. That is a matter of personal obligation, arising from the contract contained in the missives which he entered into with the purchaser.

Baron Hume explains the distinction between the personal right and the real right from the point of view of the purchaser in this way in his Lectures (1786-1822), vol II of the Stair Society edition, pp 2-3:

The rule that Scots law does not recognise a right which lies between a personal right on the one hand and a real right on the other applies to the relationship between the seller and the purchaser. But it also regulates the seller's relationship with third parties, and in particular his relationship with his creditors. It lies at the very centre of the law relating to rights in security, the law of diligence and the law of bankruptcy.

Protection of the rights of creditors: diligence

Rights in security provide means which creditors - "the rest of the world", in Hume's language - may have at their disposal for enforcing payment of their debts, in addition to their rights under the debtor's personal obligations: Gloag and Irvine, Law of Rights in Security (1897), p 3. They may take the form of a right of recourse against someone other than the debtor, as in the case of a cautionary obligation or guarantee. Or they may take the form of a real right in specific property belonging to the debtor, the effect of which is to put his property at the disposal of the creditor for the payment of the debt. No real right of security constituted by an act of the debtor over his heritable property is effectual until it has been completed by registration or recording in the appropriate register. The seller of heritable property is prevented by his contract with the purchaser from granting new security rights over his property which will defeat the rights of the purchaser. But a creditor who holds no right in security granted to him by the debtor voluntarily may subsequently acquire the means of enforcing payment of his debt which is in the nature of a right in security by the use of diligence.

The preferences in favour of a creditor which arise from securities constituted by voluntary grant or by legal diligence depend on the principle that the creditor holds a real right in the property over which his security extends: Bell, Commentaries on the Law of Scotland (McLaren's edition), i, 711. In contrast to the grant of a right of security, which is a voluntary act which the debtor performs in favour of the creditor, the use of diligence does not require the co-operation of the debtor. Diligence is the legal procedure by which a creditor attaches the property or person of his debtor, with the object of forcing him to appear in court to answer an action at the creditor's instance, or to find security for implement of the judgment which may be pronounced against him in such an action, or to implement a judgment which has already been pronounced: Graham Stewart, Law of Diligence, p 1.

Inhibition and arrestment respectively are prohibitory diligences against heritable and moveable property. Their effect is to make the debtor's property litigious, so as to prevent its voluntary alienation to the prejudice of the raiser of the action or the user of the diligence. The diligence of inhibition against heritable property renders the subject litigious as soon as notice of the diligence has appeared in the Register of Inhibitions and Adjudications kept under section 44 of the Conveyancing (Scotland) Act 1924, known as the Personal Register: Titles to Land Consolidation Act 1868, section 155. Litigiosity is defined by Bell, Commentaries, ii, 144, as "an implied prohibition of alienation to the disappointment of an action, or of diligence, the direct object of which is to attain the possession or acquire the property of a particular subject." The prohibition against voluntary alienations which arises from litigiosity is an incomplete diligence. To complete the diligence the creditor must acquire a title to the subjects affected by the prohibition. This is done by the judicial processes of adjudication, subject to the debtor's right of redemption within ten years, in the case of heritage and of furthcoming in the case of moveables. The adjudication becomes effectual, in the case of heritage, when the decree of adjudication is recorded in the register: section 62 of the 1868 Act, as substituted by section 62 of the Conveyancing (Scotland) Act 1874.

The process of adjudication against land for payment and in security of debt seems to have been part of the law of Scotland at least since the beginning of the thirteenth century: Bell, Commentaries, i, 740. A decree of adjudication is a compulsory process, but it has the same effect as a voluntary conveyance of the land by the debtor. The means by which the diligence is made effectual are the same as those which are needed where there is a contract for the sale of the land. Under the previous system of feudal tenure sasine was needed to obtain entry with the superior. Section 62 of the 1868 Act, as substituted by section 62 of the Conveyancing (Scotland) Act 1874, now provides that a decree of adjudication shall be held equivalent to a conveyance of the lands, and that the creditor may complete infeftment by using the decree as a conveyance of the lands or as an assignation of an unrecorded conveyance. It remains competent under the new system of ownership of land to specify a decree of adjudication as a midcouple or link of title for the purpose obtaining a real right to the land in terms of section 5 of the Conveyancing (Scotland) Act 1924, as amended by para 15 of Schedule 12 to Abolition of Feudal Tenure etc (Scotland) Act 2000.

Competition between several adjudging creditors is regulated by a rule which was first introduced by the Act of 1661, c 62. This is that every creditor who obtains a decree of adjudication within a year and a day from the date when the first adjudication is entitled to share equally with the first adjudger: Graham Stewart, p 638. Until a process of general sequestration or attachment was introduced by the Sequestration Act 1772, there was no equivalent rule for determining priority between creditors who obtained a diligence against moveables: Bell, Commentaries, ii, 73-74. The rule which was introduced by that Act was that no individual arrestment or poinding against moveables thirty days before sequestration was to have any preference. Provision was made for the conveyance of the bankrupt estate to a factor for its management and recovery on behalf of the whole body of creditors and for its equal and rateable distribution among them. The 1772 Act was limited in its duration, as were a number of later statutes which retained the sequestration system on a temporary basis: Goudy, p 4. It was not until the Bankruptcy (Scotland) Act 1839 was enacted that the system which is to be found in its current form in the Bankruptcy (Scotland) Act 1985 was made permanent.

It is against this background that those who seek to purchase heritable property in Scotland must conduct themselves. Parties contract with each other on the basis of what is published to all the world in the register. In practice a good marketable title with clear searches in both the Property Register and the Personal Register is demanded of the seller by the purchaser. In this way the purchaser obtains protection against all transactions which may have affected the property up to the date of settlement. There is, inevitably, a gap in time between the date of presentation of a deed for recording the Personal and Property Registers and the date when it is recorded or registered. A search which produces an adverse entry ex facie of the record, even if it relates to an inhibition which was laid on after the missives were entered into, is not a clear search: Dryburgh v Gordon (1896) 24 R 1. So it is the practice for a letter of obligation to be granted by the agent for the seller to the agent for the purchaser by which the granter of the letter makes himself personally liable to produce a clear search within a specified period after the date of settlement, usually one year, so long as the disposition is presented for recording or registration within a relatively short period. The period specified in the letter of obligation referred to by the appellants in Answer 3 of the Closed Record was twenty-eight days.

In practice the letter of obligation provides sufficient protection for the purchaser who presents his disposition for recording or registration with this period. Its purpose is to cover the risk that, during the period between the interim report at the date of settlement and the recording of the disposition, a deed which adversely affects the purchaser's interests may be recorded in the Register of Sasines or a diligence may be registered in the Personal Register. An inhibition laid on after missives have been concluded cannot prevent the due implement of the contract of sale, as an inhibition strikes only at the personal and voluntary acts of the seller. But an inhibition which is laid on after the missives have been concluded but before the date of the disposition, apparently striking at the sale, may cause difficulty in a question with a subsequent purchaser: Henderson v Dawson (1895) 22 R 895, 902, per Lord McLaren.

The protection which the letter of obligation provides flies off after the expiry of the period for the recording of the disposition which it specifies. From then on a disponee who delays or omits to record the disposition does so at his own risk. As Bell, Commentaries, vol i, 21, note 1,explains, with reference to the case of Bell of Blackwoodhouse v Gartshore, 1737 M 2848:

A bona fide purchaser is protected by the principle of good faith against any subsequent purchaser of the land who, in the knowledge of the prior sale, wins the race to the register: Rodger (Builders) Ltd v Fawdry, 1950 SC 483. On the same principle, he is protected against an attempt by the seller to grant a subsequent standard security over the lands which he has purchased to a creditor who accepts the security in bad faith. But the general rule is that third parties are entitled to deal with a person who holds himself out as the owner of lands on the faith of the register. This rule applies not only to those who may wish to enter into voluntary transactions with the seller, but also - and here is the greater risk - to his creditors. The only way in which the disponee can be sure of preventing a third party, such as an adjudging creditor, from acquiring a real right to the lands which will prevail against his right is by registration: Young v Leith (1847) 9 D 932, 937.

Bankruptcy

The ultimate remedy for the creditors, if their debts are not paid, is to petition for the debtor's estate to be sequestrated. Section 31(1) of the 1985 Act provides:

What does section 31(1) of the 1985 Act mean when it says that the act and warrant shall have same effect as if a decree of adjudication in implement of sale, as well as a decree of adjudication for payment and in security of debt, subject to no legal reversion, had been pronounced in favour of the permanent trustee? Adjudication is the ordinary form of diligence for attaching heritable property: Goudie, p 531. It may be either for debt or in implement of an obligation. The purpose of the adjudication is to transfer a right of property in the subject adjudged to the creditor. The act and warrant is a statutory adjudication. It is equivalent to a conveyance of the lands to the trustee, to which he may complete title by registration of the act and warrant as if it were a conveyance or by using it as an assignation of an unrecorded conveyance if the debtor's title was uncompleted: section 31(3).

A decree of adjudication for payment and in security of debt is the penultimate step in the execution of diligence against heritable property. The final step is the presentation of the decree for recording or registration in the appropriate register. The rule is that the creditor attaches the estate of the debtor by an adjudication tantum et tale as it stands vested in him, and subject to all the conditions and qualities legally attaching to it: Graham Stewart, pp 128 (arrestment) and 606 (adjudication). But this does not mean that the creditor is liable for any personal obligations of the debtor relating to the property which has been attached. What it means is that he takes the heritable estate in which the debtor was infeft, subject to no limitation or burden which does not appear on the face of the records, and his moveable estate under such conditions only as qualify his real right, but free from all his personal liabilities: Mansfield v Walker's Trustees (1833) 11 S 813, 822-823 in the opinion prepared for the majority by Lord Corehouse.

Bell, Commentaries, i, 299, describes the rule more fully in this way:

real

personal

As Bell, Commentaries, i 301, explains, the public registers have the effect of protecting both creditors and purchasers against such burdens and qualifications of the real right of a proprietor infeft as are not of the nature of a radical defect in the title. Personal qualifications which do not appear in the record are unavailing as real burdens on the property and are of no effect against third parties:

Wylie v Duncan,

Accordingly, it is no answer to a claim by a creditor who adjudges heritable property from his debtor that the debtor is subject to a personal obligation under an agreement entered into by him to convey that property to a third party acting in good faith and for full value. So long as the real right remains with the debtor, it is at risk of adjudication for payment and in security of debt at the instance of his creditors. Nor is the adjudging creditor bound by the debtor's personal obligation not to derogate from his grant. Erskine, II, i, 1 defines the real right as "the right of using and disposing of a subject as our own, except in so far as we are restrained by law or paction." At III, i, 2 he says that a real right "entitles the person vested in it to possess the subject as his own; or, if it be possessed by another, to demand it from the possessor, in consequence of the right he hath in the subject itself." The restraints that are binding on the debtor by paction, which prevent him from demanding the subjects back from the purchaser, are of no effect in a question with the debtor's creditors. If, after the disposition has been delivered but before it is registered, the estate of the seller is sequestrated and the trustee gets to the register first, the subjects will vest in the trustee as part of the seller's estate for the purposes of his bankruptcy: Burns, English and Scottish Bankruptcies (1913) 96 LQR 460, 463.

The tantum et tale rule

In Heritable Reversionary Company Ltd v Millar (1892) 18 R 1166, a decision of the Court of Session which was later to be reversed by this House, Lord McLaren delivered a powerful dissenting opinion. He said at p 1173 that, in the case of a bankrupt trustee whose estate was to be divided among his creditors, the property available for distribution would be the property which he held in his own right and that on proof that any property vested in him was trust estate it ought to be struck out of the sequestration. This, he explained, was the rule expressed in the maxim that creditors and adjudgers take the debtor's estate tantum et tale as it stands in his person. He distinguished the case of Wylie v Duncan 1803 M 10,269, where the bankrupt was under an obligation to reconvey the property to the seller on demand, on the ground that that was not a case of a trust qualifying the title of the trustee but was a case where the bankrupt had purchased the estate "out-and-out" and that the obligation to reconvey was purely personal.

When the case reached the House of Lords, Lord Watson observed that the doctrine of tantum et tale was of very secondary importance in a case where the question was whether the subjects in question were the property of the bankrupt at all within the meaning of section 102 of the Bankruptcy (Scotland) Act 1856: (1893) 19 R (HL) 43, 49. The appellants had not recorded the back-bond or declaration of trust which they had received in respect of their loan of part of the purchase price, and the disposition which they had granted to the bankrupt was absolute and unqualified. So the trust was latent, as it did not appear on the register. Nevertheless Lord Watson said that there was no doubt that the holder of the legal title was in reality a bare trustee, and that the person whom the whole beneficial interest belonged was the true owner: pp 46-47. The effect of the trust was that the apparent title did not, in the ordinary or any true legal sense, make the land the property of the person who held the title: p 49.

But Lord Watson's observation at p 48 that the doctrine of tantum et tale had no application to cases where the competition related, not to estate held by the bankrupt under a bare trust, but to estate of which he was the beneficial proprietor has to be read has to be read in its context. He was careful on the same page to distinguish the cases of Mitchells v Fergusson, 1781 M 10,296, Wylie v Duncan, 1803 M 10, 269 and Mansfield v Walker's Trustees (1833) 11 S 813, on the ground that they were cases where the creditors who had completed a feudal title by adjudication to lands of which their debtor was the beneficial owner and were in competition with others who had prior but merely personal rights to demand a conveyance from him. At p 51 he said:

Wylie v Duncan

In Wylie v Duncan, 1803 M 10, 269 the claim against the trustee was based on a missive letter by which the bankrupt had bound himself to reconvey the subjects to Wylie. The personal obligation to which Lord McLaren in the Inner House (1892) 18 R 1166, 1173 and Lord Watson in the House of Lords (1893) 19 R (HL) 43, 48 referred was the obligation to reconvey. In Mansfield v Walker's Trustees (1833) 11 S 813 the bankrupt had undertaken to grant a bond in security of a loan over lands of which he was the proprietor. The description of the lands in the bond was of a part of the lands only, with the result that the security was inadequate. The question was whether the trustee was bound by the unfulfilled, and latent, obligation to grant a bond over the remainder. Here too the obligation was an obligation to convey.

In Mitchells v Fergusson, 1781 M 10,296, on the other hand, the argument proceeded on the assumption that this obligation had been performed as the disposition had been delivered to Fergusson: see the report of the case in Ross's Leading Cases, vol 3, 120, 122, where the argument for the Mitchells (the adjudger) was that the nature of feudal rights was such that they could not be affected, qualified or burdened by any personal deed and that a conveyance, so long as it continued personal, did not divest the disponee. The judges accepted this argument. Lord Braxfield in particular is reported at p 125 as saying that the reason why dispositions were not ordered to be recorded by the Act of 1661 was that they were "mere personal deeds". In the report of the case in Hailes' Decisions p 879, 880 the words attributed to him in this passage of his opinion are "Dispositions are not mentioned in the statute, for they do not affect the feudal right."

According to the same report at p 880 Lord Gardenston said:

In other words, if I may paraphrase these observations, safety lies in infeftment. It is up to the disponee, if he seeks safety, to present the deed for recording or registration in the appropriate register as soon as possible. It does not require more than ordinary diligence on his part for this to be achieved. Your Lordships were not referred to any case since that opinion was delivered which shows that Lord Gardenston's assessment of the position was inaccurate. In any event, as Bell, Commentaries, vol ii, 308 observes, any doubts that were cast on the soundness of that decision in Smith v Taylor, 18 December 1795, were removed by the opinions delivered in Buchan v Farqhuarson, 1797, M 2905, in which Smith was disapproved. It is a striking feature of the present case that there was a delay of some fourteen months before this step was taken on the appellants' behalf by their solicitors. Their counsel, Mr Gale QC, accepted that the delay in this case was exceptional.

As I read Lord Watson's speech in Heritable Reversionary Company Ltd v Millar (1893) 19 R(HL) 43, he was seeking to maintain the general rule laid down in Young v Leith that an obligation which is merely personal to the debtor and would not bind his creditors is not binding on the permanent trustee. He referred to the obligation to convey. But it is the character of the obligation, not its content, that determines whether it binds the creditors. The common thread that runs through all the authorities is that the right of the disponee remains a personal right until his title enters the register. Certainty is preferred to uncertainty. The statutes, including the Bankruptcy Acts, have all been framed on the assumption that this is how the law of Scotland seeks to achieve a fair balance between the various competing interests that may arise where transactions are entered into relating to heritable property.

In Forbes's Trustees v Macleod (1898) 25 R 1012 the second party was the trustee in the sequestration of a Mr Carrick, to whom a bond and disposition in security granted by a third party had been assigned in security of an advance which he had made to the trustees. Mr Carrick's title to the subjects appeared from the record to be unqualified, as the assignation to him was ex facie absolute. But he acknowledged in a back letter that the assignation had been made to him in security of the advance, and he undertook to reconvey the bond when the debt had been repaid. The rule that the creditors of the ex facie absolute proprietor could take no higher right than he himself possessed was applied. As soon as the debt was paid, Mr Carrick ceased to have any pecuniary interest in the subjects. So there was nothing left for his creditors to attach. His title was, as Lord McLaren put it at p 1015, merely nominal.

In Colquhouns' Trustee v Campbell's Trustees (1902) 4 F 739 a firm of law agents had failed to record two bonds and dispositions granted by the owner of a property in Glasgow in security of loans which their clients had made to him. They then obtained and recorded an ex facie absolute disposition of the same subjects in their own name as security for debts owed by the owner to the firm. This was a fraudulent breach of trust. Lord Kinnear said at p 744 that the decision in Heritable Reversionary Company v Millar (1893) 19 R (HL) 43 showed that the estate must honestly belong to the bankrupt, and that the creditors cannot enlarge the estate for distribution by adopting a fraud on the part of the bankrupt or doing something which would have been a fraud if it had been done by him when he was solvent.

These two cases, together with the Heritable Reversionary case, demonstrate how liberally, as Lord McLaren put it in Forbes's Trustees v Macleod at p 1015, the principle that creditors take the estate tantum et tale is applied in favour of the true owner against the creditors of a trustee or other person having a qualified title. But the situations with which they were dealing do not apply here, and Mr Gale did not seek to rely on them.

Was the property nevertheless held on trust?

There is no doubt that Mrs Burnett was the beneficial owner of the property when she contracted to sell to the appellants. Mr Gale accepted that the act of delivering the disposition to the appellants in exchange for the purchase price did not have the effect in Scots law of creating a trust over Mrs Burnett's title to the property in favour of the appellants as trust beneficiaries. I think that he was right to concede this point. In Gibson v Hunter Home Designs Limited, 1976 SC 23, the disposition had been executed but not delivered. It was held that entry to the subjects and payment of the price, referable to the terms of the missives, did not instruct the existence of a trust pending delivery of the disposition to the purchaser. Lord President Emslie said at p 28 that there was no evidence whatsoever in that case of the constitution of a trust and that it was impossible to entertain the suggestion that as a result of the purchaser's entry to the subjects and payment of the price a trust in his favour had come into existence. I also think that Mr Gale was right not to attempt to draw any analogies from English law. In Allan's Trustees v Lord Advocate, 1971 SC (HL) 45, 53-54, Lord Reid explained that it is not possible to seek enlightenment on this matter from England, as the origin of trusts in Scotland is very different. He said that it is possible to accept the position that a person can make himself a trustee of his own property provided he does something equivalent to delivery or transfer of the trust fund. But for the reasons that I have already given there is an unbroken tract of authority to the effect that the mere act of delivering the disposition, which is a personal deed, does not affect the title to the property.

Had it not been for the views which my noble and learned friend Lord Hobhouse has expressed on this point I would not have wished to say anything more about it, as no arguments were addressed to this matter on either side. But I do need to say something in reply to the concern which he has, quite understandably, expressed that there was here a fully arguable route to a solution in the appellants' favour which was not and should have been taken.

The first and most important point that has to be made is that according to the law of Scotland a trust, in the present context, has to be created expressly. Scots law does not accept that a constructive or remedial trust can arise from a contract of sale, nor does it recognise the concept of equitable ownership: see the discussion in Sharp v Thomson, 1995 SC 455, 479-481. So a person has to do two things if he wishes to establish a trust of his own property in favour of a third party, such as a purchaser. He must first make a declaration that the property is to be held in trust for the third party. He must then effect delivery of the trust property to a trustee or, if he himself is to be the sole trustee, he must do something which is the equivalent of delivery. As Lord Cameron pointed out in Gibson v Hunter Home Designs Limited, 1976 SC 23, 31, it is no longer open to doubt since Allan's Trustees v Lord Advocate, 1971 SC (HL) 45, that a truster can put his own funds into a trust of which he may himself be the sole trustee. But there must, as he went on to say, be some identifiable declaration of trust and there must then be intimation of the fact of the trust and its tenor or delivery of the trust deed. A mere declaration of intent is not sufficient, as there must be a clear and identifiable declaration of trust - an express declaration, as Lord Kinnear said in Bank of Scotland v Hutchison Main (in liquidation) 1914 SC (HL) 1, 8.

The key to a proper understanding of the decision on this point in Gibson lies in the fact that there was no language in either the missives or the disposition which could be construed as having this effect. In Allan's Trustees, on the other hand, it was clear that the words which Miss Allan used in her letter to the insurance company were sufficient to create a trust. They contained an express declaration that the policy was from the moment of its commencement to be held in trust for named beneficiaries. The problem which Lord Reid was considering in that case was the problem of delivery.

In the present case there is no problem of delivery, as the disposition was delivered to the purchasers. The problem is that the disposition lacked any words which could be said to amount to an express declaration that until it was recorded the property was being held in trust for the purchasers. This problem could have been cured by inserting words into the disposition which had this effect, as my noble and learned friend Lord Hoffmann is right to point out. An express declaration of trust in a separate deed would have been just as good, provided it was sufficiently clear to enable the trust property, the beneficiaries and the purpose of the trust to be identified and provided too that deed was delivered or at least intimated to the purchasers. There was, to adopt Lord Hobhouse's words, a communicated intimation. But the document which was intimated - the disposition - did not contain any provision which could be construed as setting up a trust. In the absence of any such provision there could be no trust, however strong the evidence was about delivery.

The second point that needs to be made is simply by way of clarification, lest there be any doubt as to the position which I was adopting on this matter in the Inner House in Sharp v Thomson, 1995 SC 455. It should be understood that the argument that was presented that a trust had been created in Gibson v Hunter Home Designs Limited, 1976 SC 23 was, as Lord President Emslie noted at p 27, an alternative argument to the first argument. The first argument was that the property in the subjects had passed by virtue of the missives, payment of the price and actual entry to the subjects by the purchaser. This had nothing to do with the argument about the creation of a trust. The reservations which I expressed in Sharp at p 469 about the Lord President's analysis of the three stages of the transfer of land to the purchaser were confined to that part of his opinion only. Nothing I said in Sharp was intended to cast any doubt on the soundness of his opinion on the trust argument, with which Lord Cameron too was in full agreement. As I said in Sharp at p 479, no one in that case suggested that the decision that no trust was created in Gibson was unsound in any respect. It was in this context that Lord President Emslie referred to Lord Herschell's speech in Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43, 44. There is nothing in that passage, or in the Lord President's treatment of it, with which I disagree.

Conclusion

Mr Gale did not seek to argue that some kind of intermediate right of property in the subjects, the effect of which was to diminish the extent of Mrs Burnett's real right in them, was transferred to the appellants when the disposition was delivered to them in settlement of the transaction which they had entered into. His case was that the subjects nevertheless did not form part of her "whole estate" as at the date of her sequestration within the meaning of section 31(1) of the 1985 Act.

In my opinion the context in which the words "the whole estate of the debtor" appear in the statute shows that they must be given a meaning which gives effect to the rights which creditors are able to exercise against the debtor's property to secure payment of their debts. The permanent trustee in his turn is obliged by the statute to exercise on behalf of the general body of creditors all the rights which the creditors would each have been able to exercise against the bankrupt's estate had they been acting as individuals. The real right in the property of which Mrs Burnett was the beneficial owner remained vested in her at the date when the permanent trustee's notice of title was recorded in the Sasine Register. The only qualifications on that right were of a personal character. They bound Mrs Burnett. But they were of no effect in a question with her creditors or with the permanent trustee.

My Lords,

I agree that this appeal should be dismissed. I also agree that this should be for substantially the reasons given by my noble and learned friend Lord Hope of Craighead, both in this House and in his earlier judgments delivered in the Court of Session (eg, the first part of his judgment delivered in the First Division in Sharp v Thomson 1995 SC 455), and by my noble and learned friend Lord Rodger of Earlsferry. I pay tribute to the depth and intimacy of their knowledge of the Scots system of conveyancing, its history, law and practice, and its application in relation to the Scots insolvency statutes.

I have however, like my noble and learned friend Lord Hoffmann, certain reservations which I will explain. But I should say at once that I am not shocked as a commercial lawyer by the scheme and consequences of a sequestration under s. 31 of the Bankruptcy (Scotland) Act 1985. The law of England has very similar consequences which from time to time give rise to complaints by merchants that they have been harshly treated. But the English law is and has been for several centuries that merchants must always be on guard against dealing with persons whose solvency is not assured and structure their transactions accordingly, particularly in international trade. The trustee in bankruptcy has powers beyond those possessed by the bankrupt. There is a fundamental distinction between property rights or secured rights, on the one hand, which must be respected by the trustee and, on the other, contractual rights which can only give rise to a claim provable in the liquidation and the payment of a pro rata dividend (if any). But what does surprise me is that Scotland, now a highly developed economy, should have a land law which is still based on the judicial development, albeit sophisticated, of the laws of Rome and the mediaeval Feudal system. I recognise that by the Infeftment Act 1845 (and following statutes) the formalities involved in acquiring the legal and feudal title have been replaced by a requirement for the registration of the new transaction in the General Register of Sasines (seisin), a deeds register, or in the Land Register, a titles register, and that following Scottish Law Commission Reports, Nos. 68, 183 and 114, and some academic criticism, more radical reforms sweeping away the feudal system are now being introduced under the Abolition of Feudal Tenure (Scotland) Act 2000: see paragraphs 13 and 14 of Lord Hope's Opinion.

My reservations have the following structure:

(a) The 1985 Act expressly provides in s. 31(1) it is subject to s.33 and s. 33(1) expressly provides that: "The following property of the debtor shall not vest in the permanent trustee - ... (b) property held on trust by the debtor for any other person." This provision was new and was included in the 1985 Act on the express recommendation of the Law Commission.

(b) It is at least arguable that in the present case the debtor (vendor), at the date of the sequestration, held the part of her heritable estate now in dispute on trust for another person.

(c) It follows that, by reason of this express statutory provision, the permanent trustee was not empowered to sequestrate it.

It was a feature of the present case that leading counsel for the appellants, although he was relying upon such cases as Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43, expressly declined to rely in any way upon s. 33(1) and did not argue the point; consequently leading counsel was able to say that the point was not relied upon against him and therefore he would not address any argument about it. The appeal proceeded solely upon the basis of the appellants' argument that, as a matter of the true construction of s. 31(1), the words "the whole estate of the of the debtor" did not cover the property in dispute, an argument which was, in my opinion, bound to fail. I find this all the more surprising since s. 33(1) was the subject of submissions both before Sheriff Principal D J Risk QC and before the Extra Division. But it is clear that your Lordships' House cannot go behind the express concessions of the appellants' counsel and that what I am about to say will be obiter and without the benefit of having heard argument.

Section 33(1):

There is no dispute that s. 33(1) was a deliberate statutory addition to the statutory scheme. There is also no dispute that the relevant time to test the question 'does the debtor hold the property on trust?' is at the time of the making of the sequestration order under s.6. It makes no difference whether the trust did or did not predate the transaction between the vendor and the purchaser, provided that it existed by the time of the sequestration order. It is also clear that the trust has to be what in England would be called an 'express' trust. Scots law does not recognise constructive or remedial trusts or equities such as the equitable ownership arising from a contract enforceable by an order of specific performance. It is also now clear that the "tantum et tale" argument is discredited but it is not the same as, or provide the answer to, the question requiring to be answered in the present case: did the debtor, at the material time, hold the property on trust? The submissions made in the courts below however did include whether a restricted interpretation should be given to the words "held on trust" so as to deprive the introduction of s. 33(1) of any effect. This surprising submission apparently met with a mixed response in the courts below; it does not seem to have carried any weight in this House with Lord Hope and Lord Rodger.

Was there here a trust?

This is the nub of the point and requires to be developed. But first I should refer to paragraphs 44 and 51 of the Opinion of Lord Hope that "there is an unbroken tract of authority to the effect that the mere act of delivering the disposition, which is a personal deed, does not affect the title to the property". To similar effect is what he said in Sharp v Thomson 1995 SC 455, 468H:

With great respect this misses the present point. The present point arises upon the basis that the purchaser never acquired the legal (or feudal) title: see Lord Hamilton at 2002 SLT 699, 709I. He never acquired the "real right". If he had, the present point would not have arisen. S. 33(1) proceeds on the basis that the vendor has the legal title and the real right but nevertheless holds it (them) on trust for another. The relevant question is not, as in previous cases, "what if anything has the purchaser acquired?" but "what is the status of the vendor at the material time?" The unbroken tract of authority focuses upon and answers the first question: no one disputes that. But what now needs to be focussed on and answered is the second question which concerns the vendor not the purchaser. The former mind-set must be put to one side. (I will refer later to what was said by Lord President Emslie in Gibson v Hunter Home Designs 1976 SC 23 and by Lord Clyde in Sharp v Thomson 1997 SC (HL) 66 at pp.70-1.)

Turning now to the facts of this case, the transaction started with the usual missives which included the clause that the contract would cease to be enforceable in so far as fully implemented by [the delivery of the disposition]". The disposition signed by the vendor, dated and delivered 8th November 1990 did fully implement the missives. It acknowledged the payment of the full purchase price. It disponed "heritably and irredeemably" to the purchasers "all and whole" the property sold "with entry and vacant possession as at 9th November 1990". The purchasers did enter into the vacant possession of the property the following day as stated. The earlier contract was therefore fully performed and ceased to have any further force or effect. The warrandice (that is to say the warranty of title) was expressly (re-) granted. This last is, of course, solely a contractual warranty, liable if broken (which there is no suggestion it has ever been) to give rise to a contractual (ie personal) liability of the vendor in the future; it in no way qualifies the completeness of the performance by the vendor of his obligations, indeed its (re-)grant in the disposition confirms that completeness. The vendor had done everything required of her. The only thing left to be done was a unilateral act to be done by the purchaser alone - registering the disposition.

Do these facts have any capacity to give rise to a trust? So far as formalities are concerned, Scots law does not require any formality or documentary evidence of the making of a trust save in one situation where the trustee unilaterally declares that he holds the property on trust where some document signed by the trustee is required as evidence. The signed disposition delivered in the present case is capable of providing such written evidence. It is only consistent with the debtor holding the property as a bare trustee and so declaring.

But Lord Hope (paragraph 44) would still say that there is no capacity, citing Lord Reid's speech in Allan's Trustees v Lord Advocate 1971 SC (HL) 45 at pp 53-54. Lord Reid warned that the Scots law of trusts was not of the same origin as in the law of England. He emphasised that "some sort of delivery" was required to complete the trust. He obviously was using these looser words to distinguish what was required from the acts of 'delivery' required to complete a transfer of the legal or feudal title; he was postulating that the legal title remained with the trustee. He said that something "equivalent to delivery" of the property - "equivalent to delivery … of the trust fund" -

was required to bring the trust into operation. Contractual words alone are not enough though a communicated "intimation" to the beneficiary might be equivalent to delivery of the property. In the present case there was both a communicated intimation and a delivery of the property to the purchaser. In the present case the purchaser as previously demonstrated does not have to invoke any words of contract. So the language of Lord Reid does not provide the permanent trustee with an answer to the relevant question.

The key inquiry is: what does the evidence support as amounting to a trust? What status of the vendor does it show existed at the material time? The authorities provide the answer: it was the status of a bare trustee. The seminal authority is the dicta in the Heritable Reversionary case. The modern authority is the speeches of Lord Keith, Lord Jauncey and Lord Clyde in Sharp. There is also a useful discussion by Lord President Emslie in Gibson. I accept that both Heritable Reversionary and Sharp are distinguishable and were decided on the construction of the particular security documents (and applicable statutes) in those cases. Lord Hope and Lord Rodger would follow neither. I will be as sparing as possible in my quotations.

In Heritable Reversionary, Lord Herschell said that confusion must be avoided between the position where "the owner appearing on the register is a bare trustee" and that where the owner has simply "come under some contractual obligation". (p.44) Lord Watson said at p.46: "As between [the debtor and the other person] there can, in my opinion, be no doubt that according to the law of Scotland the one, though possessed of the legal title, and being the apparent owner, is in reality a bare trustee". Per Lord Field at p.54: "if the two interests, the legal on the one hand, and the whole beneficial interest on the other, are vested in different persons, the apparent owner who has the legal title is, as between him and the beneficial owner, the bare trustee": see also at p.55. This House upheld the dissenting judgment of Lord M'Laren in the First Division.

In Gibson, Lord Emslie rejected the argument that the missives were capable of giving a proprietary right. He affirmed that a contract gives no more than a jus crediti. "Putting the matter in another way the seller of subjects under missives is not, in a question with the purchaser, divested of any part of his right of property in the subjects of sale until, in implement of his contractual obligation to do so, he delivers to the purchaser the appropriate disposition." (p.27) He referred to Heritable Reversionary citing Lord Herschell at p.44. He expressly pointed out that an undelivered disposition, the payment of the price or mere entry on the subjects (referable to the terms of the missives) provide "no evidence whatsoever of the constitution of a trust" "pending delivery of the disposition". (p.28) Lord Emslie's dicta were followed and applied in later cases, but not by Lord Hope who expressly disapproved them. (For those interested, English law applies similar criteria, distinguishing between contracts not yet fully performed and those which have been fully performed: see Jenkins J in Re Rose [1949] Ch 78, 89 and Snell's Equity: Chapter 7.6.)

Sharp concerned a floating charge over the property of a company which had developed flats on a plot of ground. The company sold one of the flats to the Thomsons and delivered the disposition. Receivers were then appointed and the floating charge crystallised. The Thomsons then recorded the disposition. Lord Keith (as did Lords Browne-Wilkinson and Steyn) expressly agreed with the speeches of Lord Jauncey and Lord Clyde. Lord Jauncey held that after delivery of the disposition the vendor was a bare trustee. (pp.71 and 72); "as between disponer and disponee the transfer of all the former's interest is at once complete upon the delivery of the disposition". (p.73) Lord Clyde affirmed the distinction between a jus in re, a jus ad rem and a jus crediti. (p.84 and p.80) Turning to the case before him, he analysed the position of the debtor company and, treating it for this purpose as if it was a disponer, said that, where a disposition had been delivered, the disponer "had a bare title to the flat, a real right, but a right which was open to defeat as soon as the disponees recorded their disposition". (p.84) Thus, the legal and feudal title remained with the disponer as a bare title but nothing more. He approved Heritable Reversionary on the basis that the bankrupt was a "bare trustee". (p.80)

I consider that applying s33(1) and the existing judicial authorities, the facts of this case do make out a fully arguable prima facie case that the debtor did at the material time hold the subjects on trust for the disponee as a bare trustee. For those who wish to see a more just result in disposition cases, I suggest that s. 33(1) and the existing authorities provide a fully arguable route to obtaining that goal should the situation arise again (which it possibly never will) and it is unfortunate that it was lost sight of in the present case.

My Lords,

A, the owner, sells her flat to B and C. B and C pay the price to A and, in return, she delivers the relevant disposition to them. B and C take possession of the flat, but do not record the disposition in the Register of Sasines ("the register"). A is sequestrated and, on the basis that the flat remains part of her estate at the date of sequestration, the trustee in sequestration, who knows of the disposition to B and C, records a notice of title to the flat in the register. B and C then record their disposition. An Extra Division of the Court of Session hold that the trustee's title is to be preferred and that he can evict B and C from the flat without repaying the price. Reduced to algebraic terms, that is the issue that confronts the House in this appeal.

The decision of the Extra Division is correct. But it shocks. It is important not to play down that sense of shock since admitting that the decision shocks, and identifying why, are the keys to explaining why it is also correct. It shocks because it seems inequitable when judged by the criteria applied in other cases. Suppose that D, a purchaser from A, who was aware that she had previously sold and disponed the flat to B and C, deliberately tried to cut them out by recording his disposition before them. He would be regarded as not being in good faith and would therefore not obtain a valid title. In the case of a purchaser like D, as Lord Justice Clerk Thomson famously remarked in Rodger (Builders) Ltd v Fawdry 1950 SC 483, 501, "offside goals are disallowed". They are disallowed because they are judged to be unfair. By contrast, the trustee in A's sequestration who proceeds to record a notice of title ahead of B and C, despite being well aware of A's previous sale and disposition to B and C and with the intention of cutting them out, is not regarded as being in bad faith and obtains a valid title. The offside rule does not apply and the trustee's goal is allowed - even though, by the standards that apply to a purchaser, it would be judged to be unfair and would not be allowed. In order to maximise the assets available to the creditors, the trustee can deliberately set out to destroy B and C's right to complete their title. The difference in this respect between a purchaser and a trustee in sequestration lies at the heart of this case.

The Facts

The actual circumstances can be summarised quite shortly. In October 1990 the appellants, Mr and Mrs Grainger, entered into a contract with Mrs Carlene Burnett to buy her flat at 94 Malcolm Road, Peterculter, Aberdeen for £45,000. On 8 November 1990 Mrs Burnett executed a disposition of the property. On the same day her agents delivered the disposition to the Graingers' agents in exchange for the price. The following day the Graingers took possession of the flat. At that stage their agents did not follow the usual course of recording the disposition in the register - apparently because of a possible exchange of garden ground that was in contemplation. At some point Mrs Burnett executed a trust deed in favour of her creditors, the trustee being an accountant, Mr Michael Reid. On 29 May 1991, on a petition at his instance, Mrs Burnett's estate was sequestrated and Mr Reid was appointed interim trustee in the sequestration. On 23 July 1991 the sheriff declared Mr Reid to be the permanent trustee ("the respondent") and, by virtue of the act and warrant of that date, the whole of Mrs Burnett's estate as at 29 May 1991 vested in the respondent as trustee for the benefit of her creditors. Although no proof has been held, it is clear from the respondent's pleadings that, by 25 November 1991 at the latest, he was aware that the appellants still intended to record their title to the flat. On 10 December 1991 the respondent recorded a notice of title in the register giving notice that, as trustee, he had right to the flat. On 27 January 1992 the Graingers' agents recorded the disposition from Mrs Burnett.

In these proceedings the respondent craves a declarator that the appellants are not entitled to occupy the flat and a further declarator that the property in the flat is meantime, and has been since the date of sequestration, vested in him as the permanent trustee. In addition he craves warrant for the summary ejection of the appellants, their dependants and tenants from the flat. The sheriff granted decree in terms of these three craves. On appeal the sheriff principal allowed the appeal and dismissed the action. An Extra Division (Lord Coulsfield, Lord Maclean and Lord Hamilton) allowed the respondent's appeal and restored the sheriff's order. In this appeal your Lordships are asked to restore the decree of the sheriff principal and to dismiss the action. Counsel informed the House that since the Court of Session hearing the appellants had moved out of the flat and that, by agreement between the parties, steps were being taken to sell it. In these circumstances only the second crave now raises a live issue.

The scheme of the Bankruptcy (Scotland) Act 1985

Ultimately, the decision in the case turns on the interpretation and effect of section 31(1) of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act").

Section 5(1) provides that the estate of a debtor may be sequestrated in accordance with the provisions of the Act. A petition is presented to the court and, in a case like the present, the court grants warrant to cite the debtor to appear before it. The date of the grant of the warrant becomes the date of sequestration: section 12(1), (2) and (4)(b). Under section 13(1) the court appoints an interim trustee and the clerk of court must forthwith send a certified copy of the relevant court order to the keeper of the register of inhibitions and adjudications for recording in that register: section 14(1).

Recording the certificate has the effect, as from the date of sequestration, of an inhibition and of a citation in an adjudication of the debtor's heritable estate at the instance of the creditors who subsequently have claims accepted in the sequestration: section 14(2). By virtue of the inhibition the debtor is prevented from disposing voluntarily of any heritable property. Moreover, under section 37(1) the court order has certain effects in relation to other diligences:

In the present case it is the effects on heritable property that are of more significance. Under the Diligence Act 1661 and the Adjudication Act 1672 all adjudications for personal debts before, or within a year and a day after, the first effectual adjudication, come in together, as if one adjudication had been obtained for all the sums in question. Since the court order has the effect of a decree of adjudication for payment, the result is that, where the sequestration begins within a year and a day of the first effectual adjudication, the general body of creditors immediately rank pari passu on the proceeds of that first effectual adjudication. In other words any security which the first creditor obtained by adjudging the debtor's heritable property becomes, in effect, a security in favour of the general body of creditors. In addition section 31(8) makes it incompetent on or after the date of sequestration for any creditor to raise or insist in an adjudication against the estate of the debtor.

In terms of section 21(1) the interim trustee must call a meeting of creditors to be held within 28 days of the date of sequestration, or such longer period as the sheriff may allow on cause shown. At that meeting, if possible, the creditors proceed to elect a permanent trustee: section 24(1). The interim trustee reports this election to the sheriff who, failing any timeous objection, declares the elected person to be the permanent trustee. The sheriff confirms his election and the sheriff clerk issues to him an act and warrant: section 25(1)(a) and (2). This procedure was followed in the present case.

When the permanent trustee is appointed, the estate of the bankrupt vests in him for the benefit of the creditors. This happens by virtue of section 31 which provides inter alia:

I shall have to examine subsection (1) in more detail later. At present it should be noted that the "whole estate of the debtor" which vests in the trustee under subsection (1) is "his whole estate at the date of sequestration, wherever situated": section 31(8). It does not, however, include property that the bankrupt held on trust for anyone else: section 33(1). Similarly, when the estate vests in the permanent trustee, this is without prejudice to the right of any secured creditor that is preferable to the trustee's rights: section 33(3). On the other hand, subject to certain exceptions which are not relevant for present purposes, any dealing of, or with, the debtor relating to the estate vested in the permanent trustee is of no effect in a question with the trustee: section 32(8).

The permanent trustee must recover, manage and realise the debtor's estate and distribute it among the debtor's creditors, according to their respective entitlements: section 3(1)(a). Under section 39 he is given extensive powers for achieving this and, under section 64(1), the debtor must take any practicable step, including executing any document, which may be necessary to enable the permanent trustee to perform this function. The provisions for calculating the creditors' entitlement are somewhat complex, but the basic rule is that a creditor is entitled to claim the accumulated sum of principal and interest which is due on the debt as at the date of sequestration: sections 22(9) and 48(7) and paragraph 1(1) of schedule 1.

The parties' submissions

The rival submissions for the parties were, basically, simple and related to the interpretation of the phrase "the whole estate of the debtor" in section 31(1) of the 1985 Act.

For the appellants Mr Gale QC submitted that these words were not apt to include Mrs Burnett's title to the flat which, before her sequestration, she had sold to the appellants and in respect of which she had granted them a disposition. Having taken these steps, Mrs Burnett could not have sold the flat to anyone else without committing a criminal offence - fraud of some kind. She therefore had no substantial interest in the flat and merely held a bare title to it. Following the general approach adopted by this House in Heritable Reversionary Company Ltd v Millar (1892) 19 R (HL) 43 and Sharp v Thomson 1997 SC (HL) 66, your Lordships should hold that Parliament did not intend that property held by the debtor under this bare title should form part of her "estate" which vested in the respondent as permanent trustee. Rather, on her sequestration the bare title to the flat had remained in Mrs Burnett: the respondent had therefore had no power to deal with it. His purported registration of the notice of title to the flat in the register was void. By registering the disposition in their favour the appellants had accordingly divested Mrs Burnett of the real right to the flat and had vested it in themselves. The appeal should be allowed and the action dismissed.

For the respondent Mr Hodge QC submitted that the words "the whole estate of the debtor" meant what they said. By his act and warrant the entire estate of the debtor vested in the permanent trustee, except in so far as the 1985 Act provided otherwise. While property held on trust for any other person was excluded by section 33(1), there was no similar exclusion of property in respect of which the debtor had granted a disposition but to which the disponee had not completed title. It followed that the debtor's right in the flat had vested in the permanent trustee. Although Mrs Burnett could not have sold the flat to anyone else without committing a crime, this was due to her obligations to the appellants under the disposition. The real right remained vested in her. If she had in fact (wrongfully) sold and conveyed the flat to a second purchaser, he would have been entitled to rely on the entry in the register showing her as the owner. He would not have been affected by any dealings between Mrs Burnett and the appellants unless he knew of them. On registering his disposition and becoming infeft before the appellants recorded their disposition, the second purchaser would accordingly have obtained a valid title to the flat from Mrs Burnett and could have ejected the appellants. This showed that the obligations under the disposition which affected Mrs Burnett were purely personal and did not qualify her right of property. It was her right of property that had vested in the respondent and he was not affected by any of her personal obligations. He could therefore record a title to the flat and sell it, so that the proceeds would be available for distribution to Mrs Burnett's creditors. This approach to the interpretation of the 1985 Act was consistent with the way that the equivalent provisions in earlier bankruptcy statutes had been applied as part of the scheme of creditors' remedies in Scots law. The decisions in Heritable Reversionary Company Ltd v Millar and Sharp v Thomson were distinguishable. If the latter were not distinguishable, the House should not follow it. The present case was exceptional because of the extreme delay in recording the disposition. In practice no problem would arise provided that dispositions were registered promptly, in accordance with good conveyancing practice. A client who suffered prejudice as a result of the solicitor taking too long to register could recover appropriate damages for professional negligence. If, contrary to counsel's submission, the present case were thought to highlight a genuine weakness in the Scots law of bankruptcy, the legislature was the appropriate body to deal with it.

The significance of the register in this case

In the course of his submissions Mr Hodge repeatedly emphasised the central rôle of the register and the consequent need to maintain the rule that a prospective purchaser or heritable creditor is entitled to rely on the title as revealed in the deeds on the register. Hence he is not to be affected by personal rights that are not recorded there. As my noble and learned friend, Lord Hoffmann, observed during the hearing, however, it was not always clear exactly how these somewhat general submissions applied to the circumstances of this case.

There is nothing in the pleadings to suggest that Mrs Burnett's personal creditors ever had regard to her title to the flat when initially deciding to contract with her. Of course, at the time of Mrs Burnett's sequestration the register would have shown her as being infeft as owner of the flat but would not have revealed that she had sold it to the Graingers. But, when he recorded the notice of title, the respondent was not relying on the register for his information: from other sources he already knew that she had sold the flat and delivered the disposition to the Graingers. In this respect his situation was by no means unique: from time to time purchasers will be aware of such a previous transaction and disposition by the seller. If so, they are not entitled to ignore that information on the ground that the disposition is not recorded in the register. If, knowing of the previous transaction and disposition, they record their disposition, they are not in good faith and will not obtain a valid title - the offside goals rule applies. Here, by contrast, the respondent says that, being aware of the Graingers' rights under their disposition, he could legitimately ignore them and obtain the real right to the flat as an asset for Mrs Burnett's creditors.

It follows that, in a case like the present, the fact that the disposition is not recorded in the register had no bearing on the creditors' initial decision to contract with Mrs Burnett. Nor did it mislead the trustee. For him the critical question is simply whether, by granting the disposition, Mrs Burnett has prevented him from ultimately acquiring the real right to the flat. For, if granting the disposition were to have that effect, then any notice of title recorded by the trustee would mislead purchasers from the trustee into believing that they could acquire a valid title from him when in fact they could not. The reliability of the register would thus be compromised. It was, partly at least, in order to preserve the integrity of the register from that kind of threat that, in the great case of Bell v Gartshore (1737) M 2848; 2 Ross's LC 410, the Court of Session adopted the principle that unrecorded personal deeds, such as a disposition, could not affect feudal rights. In two further important cases, Douglas v Adjudging Creditors of Kelhead (1765) 3 Ross's LC 169; sub nom Douglas v Stewarts M 15616 and Mitchells v Ferguson (1781) M 10296; Hailes 879; 3 Ross's LC 120 the court went on to hold that this principle applied even in cases, like the present, where the creditors had not relied on the register when contracting with the debtor. I examine these cases in detail below. Though important, the principle is not, of course, sacrosanct. Deriving, as it does from legislation rather than from the common law, it is subject to any qualifications in the relevant legislation, such as the provision on trusts in section 33(1) of the 1985 Act and the provisions on floating charges in the Companies Act 1985.

Sharp v Thomson

The disputed interpretation of section 31(1) of the 1985 Act therefore brings up certain more fundamental issues of Scottish property and bankruptcy law. Like his predecessor in Sharp v Thomson, however, counsel for the appellants was at pains to stress that he did not question these more basic aspects of the law: they stood inviolate, but were of no relevance if, on the proper interpretation of section 31(1), the flat was not part of Mrs Burnett's estate and so did not vest in the respondent.

Sharp v Thomson concerned a floating charge which a company had granted over the whole of its property which might from time to time be "comprised in our property and undertaking". The terms of the charge echoed the terms of section 462(1) of the Companies Act 1985 which allows a company to create a charge "over all or any part of the property … which may from time to time be comprised in its property and undertaking." The company had sold a flat, which was part of its property, and had delivered the relevant disposition to the purchaser. Before the purchaser's agents recorded the disposition, however, the floating charge crystallised. The question was whether, at the time of crystallisation, the company's rights to the flat still formed part of "our property and undertaking" in terms of the charge and, by implication, in terms of section 462(1). The Court of Session held that the rights were caught by the floating charge, but your Lordships' House allowed the purchasers' appeal on the basis that the term "property" in section 462(1) was not being used in any technical sense and was not intended to include the company's bare title to the flat which the purchasers could have defeated at any moment by recording their disposition. Lord Jauncey and Lord Clyde gave the only two full speeches, with which the other members of the House agreed. It is possible to detect differences between the two speeches, as Lord Hamilton demonstrated in his careful analysis in this case in the court below: 2002 SLT 699, 708K - 709E, para 8. As he also pointed out, however, at p 708J, for the House the essential question in Sharp v Thomson concerned the construction of the words "property and undertaking" in the instrument of charge and, by implication, in section 462(1). See, for instance, Lord Clyde's identification of the issue, 1997 SC (HL) 66, 79H, and his emphasis, at p 82A - D, on the need to construe the term "property" as part of the phrase "property and undertaking".

In these circumstances I respectfully agree with the Extra Division that Sharp v Thomson is distinguishable from the present case. In itself that does not mean, of course, that the approach to interpretation which was identified in that case should not be applied here. Admittedly, the two expressions in question are rather different: "property and undertaking" in Sharp, "the whole estate" in the present case. But, again, that difference would not of itself be enough to show that the approach adopted in Sharp should not be applied, with suitable modifications, in this case. Indeed Lord Jauncey appears to have assumed that a permanent trustee in bankruptcy could not obtain a real right by recording a notice of title before the uninfeft proprietors recorded their disposition: 1997 SC (HL) 66, 77F - G. The cases differ fundamentally, however, in another respect. The words which the House had to interpret in Sharp were relatively new, having first entered Scots law in the Floating Charges and Receivers (Scotland) Act 1961. Since there was little prior authority to indicate how they should be interpreted in the circumstances of that case, the House was relatively free to adopt its own interpretation. Here, by contrast, the provision that the House has to interpret is only the latest embodiment of a measure with a history stretching back for 200 years or more. Moreover, the very wording of section 31(1), which speaks of adjudication in implement of sale and adjudication for payment and in security of debt, imports by reference a body of law regulating these matters. In this case it is therefore simply not possible to interpret and apply the relevant words without regard to a considerable body of authority which underlies and surrounds the bankruptcy legislation.

Mrs Burnett not a trustee for the appellants

As Lord Clyde noted in Sharp v Thomson 1997 SC (HL) 66, 83E - F, the focus is not so much on the position of the purchasers as on the position of the debtor who has granted the disposition and, hence, of the permanent trustee in whom her estate has vested. It is worth emphasising, therefore, that Mr Gale did not submit that prior to her sequestration Mrs Burnett had held the title to the flat in trust for the appellants. It respectfully appears to me, despite the observations of my noble and learned friend, Lord Hobhouse of Woodborough, that he was right to do so, for the reasons explained by my noble and learned friend, Lord Hope of Craighead. Modern Scots law does indeed recognise that a person can make himself a trustee of his own property for trust purposes. But, as Lord Reid held in Allan's Trs v Lord Advocate 1971 SC (HL) 45, 54, the truster must have an intention to make himself trustee of his own property and must also do something equivalent to delivery or transfer of the trust fund. In the present case there is no declaration of trust or anything else to suggest that Mrs Burnett ever intended to make herself trustee of her property in the flat for the benefit of the appellants. So no question of trust arises. This case is accordingly distinguishable from Heritable Reversionary Company Ltd v Millar (1892) 19 R (HL) 43. There the House held that, where the bankrupt had been the trustee of property, the bare legal title to that property did not form part of "the whole property of the debtor" and so did not vest in the permanent trustee in bankruptcy under section 102 of the Bankruptcy (Scotland) Act 1856. Here, by contrast, the appellants' case is not that Mrs Burnett was actually a trustee and had the bare title of a trustee but that, having delivered the disposition, she had only a bare title which no more formed part of her "estate" for the purposes of section 31(1) of the 1985 Act than the bankrupt trustee's bare title in the Heritable Reversionary Company case formed part of his "property" for the purposes of section 102 of the 1856 Act.

The tenure of moveable property in Scotland is, and always has been, allodial. Craig, Jus Feudale 1.9.25, says that all moveables are allodial and we have full ownership in them and can use or abuse them as we wish: mobilia autem omnia allodialia sunt, in quibus dominium plenum habemus, ut iis uti, vel abuti, pro arbitrio nostro possimus. By contrast, with certain exceptions, the tenure of land in Scotland is feudal. This remains the position until 28 November 2004 when the feudal system is due to be abolished by section 1 of the Abolition of Feudal Tenure etc (Scotland) Act 2000. While the rights of the feudal superior are still important in controlling certain uses that the vassal can make of his property, in other respects they have for the most part dwindled in significance. Moreover, the radical reforms that were progressively introduced between 1845 and 1874 swept away most of the technicalities of feudal conveyancing. To lawyers of today a discussion of those technicalities may seem even more sensational than a chapter on the fall of the rupee in a political economy textbook. Since, however, the law of bankruptcy in Scotland developed at a time when they still had to be observed, the underlying principles must be recovered by penetrating the technicalities that encrust them.

Real, personal and feudal rights

Drawing on Roman law, Scots law distinguishes between real rights, rights in rem, and personal rights, rights in personam. In Sharp v Thomson 1995 SC 455, 461G - 475E Lord President Hope went into the Scottish authorities in detail. Since his analysis has not been challenged, I can deal quite briefly with the point. The distinction between the two kinds of rights has never been explained more clearly or concisely than in B Nicholas, An Introduction to Roman Law (1962), p 100:

in rem

in personam

in rem

in personam

in rem

in personam

in rem

rei vindicatio

The point is often made that in Scots law the real right of ownership in things is transferred by giving possession and not by mere agreement: traditionibus non nudis pactis rerum dominia transferuntur. While that rule does not apply to the economically most significant transactions in moveable property, sales under the Sale of Goods Act 1979, it does apply to the passing of title in corporeal moveables in other circumstances. In the case of land, however, the position is more complicated. If I grant you a disposition of a piece of land that I own, or you acquire the land under a court order having the effect of a disposition, and then you enter into possession, you do not acquire a real right of ownership in the land. This is because the feudal estate in the land is not transferred merely by giving you possession. The feudal estate is transferred only by the disponee becoming invested or infeft in it. At common law this required the purchaser to be given sasine, viz feudal possession, in a special symbolic ceremony performed on the land on behalf either of the feudal superior or of the disponer - depending on whether the chosen method was resignation in favorem and regrant or base infeftment followed by a charter of confirmation. Hence the brocard quoted by Stair, Institutions of the Law of Scotland 2.4.18: nulla sasina, nulla terra, no sasine, no land. In the case of land the rule is: the real right of ownership in lands is transferred by the giving of sasine not by mere agreement. That remains the theoretical position. Nowadays it would, however, be more realistic to say that ownership in lands is transferred by recording the disposition, not by mere agreement.

Registration

Provided that there was a disposition of the lands from the true infeft proprietor and sasine was given and duly witnessed, at common law nothing more was required for the disponee to acquire a real right in the lands. This created opportunities for fraud since the owner might sell the lands and grant sasine to more than one person, there being no effective way for the victims to discover the existence of any other grant. After a number of unsuccessful attempts, the Registration Act 1617 ("the 1617 Act") laid the foundations of the system of registration of deeds which has existed ever since and which has proved largely effective in preventing such frauds. It provided that all instruments of sasine should be registered within sixty days of their date, failing which, they should

The effect of this Act and of the later Act 1696 c 18 was to make it compulsory for disponees to register the relevant instrument of sasine within 60 days. In other words, even though all the necessary elaborate requirements of the common law had been completed, the disponee would not be able to rely on his instrument of sasine against a third party "who hath acquired a perfect and lawful right" to the land unless he had registered the instrument of sasine.

Once the requirement for registration had been introduced, various problems emerged. One was how to determine the priority of infeftments on which sasines were taken and duly registered. The Real Rights Act 1693 gave the answer:

This statute remains in force today and is central to the case for the respondent. He says that, by recording his notice of title in the register, he took sasine on his infeftment of the property in the flat and this infeftment is to be preferred to the infeftment of the appellants who did not record their disposition in the register until some weeks later.

The obligation to record the instrument of sasine in the register within sixty days remained in force until section 3 of the Infeftment Act 1845 provided that the instrument could be competently recorded at any time during the lifetime of the party in whose favour it had been expede. One might have thought that, with the removal of the time-limit, the incentive to register the instrument of sasine would have vanished and the problems which had prompted the 1617 Act would have re-emerged. This did not happen, however, because the removal of the time-limit was only part of a much larger package of reforms that did away with the need actually to go to the lands and perform the sasine ceremony. It was enough to record an instrument of sasine, saying that sasine had been given in the lands. Not surprisingly, this new method of taking sasine proved popular because it saved a lot of time and trouble. But it worked only if the instrument of sasine was actually recorded. So convenience became the compulsitor for registration. Some years later, under sections 1 and 2 of the Titles to Land Act (Scotland) 1858, now sections 15 and 16 of the Titles to Land Consolidation (Scotland) Act 1868, the same effect could be achieved by recording the disposition or a notarial instrument, without any need to expede and record an instrument of sasine. So in most cases recording the conveyance became the equivalent of taking infeftment by receiving sasine. Finally, under section 4(2) of the Conveyancing (Scotland) Act 1874, infeftment by registration came to imply entry with the nearest feudal superior.

Since 1874, therefore, registration has been the means by which the disponee has become infeft and has been entered with the feudal superior. In other words, it is the means by which the disponee obtains a real right or feudal right in the subjects - and he does so without the need for any further involvement on the part of the disponer. Under the modern system, once the disponer has delivered the disposition, his work is done: he need do no more than refrain from interfering.

Feudal investiture is necessary not only for the creation of a real right of ownership in land, but also for the creation of certain lesser real rights. In particular, subject to an exception that is no longer relevant, if a creditor adjudges land in security of his debt, then, to complete a real right that will be effective against other adjudgers or voluntary disponees, such as purchasers, he must become infeft - formerly by going through much the same procedures as were used for transferring ownership and recording the instrument of sasine in the register, nowadays by recording the decree of adjudication: section 62 of the Titles to Land (Consolidation)(Scotland) Act 1868, as substituted by section 62 of the Conveyancing (Scotland) Act 1874. Recording is what makes an adjudication "effectual" for the purposes of the Diligence Act 1661 and the Adjudication Act 1672. Moreover, under the Real Rights Act 1693 in any competition the date of registration of the decree determines priority.

Failure to register

Since registration is now the means of taking sasine, it follows that any disponee who fails to record the disposition has not taken sasine and is not infeft. His position is therefore distinguishable from that of a purchaser before 1845 who had taken sasine, but who had failed to record the instrument of sasine within the sixty days prescribed by the 1617 Act. The relevant wording of the Act was extremely obscure and so, for more than two hundred years, the effect of a failure to register the instrument of sasine remained doubtful. In Young v Leith (1844) 6 D 370; (1847) 9 D 932; (1848) 2 Ross's LC 81, however, it was finally settled that unrecorded instruments of sasine were nullities, but the granter of the sasine was not entitled to plead the nullity. Lord Campbell concluded his speech in your Lordships' House with this flourish, 2 Ross's LC 81, 108:

Mr Hodge placed considerable emphasis on Lord Campbell's words as demonstrating the central rôle which recording deeds in the register plays in Scots law. In my respectful opinion, however, this statement is of no conceivable relevance in the law of today and reference to it can only serve to introduce confusion. Under the modern law there are, for all practical purposes, no separate grants of sasine and so the problem of the status of an unrecorded sasine, which Lord Campbell was so happy to see resolved, no longer exists. Today infeftment is taken - and is only taken - by the very act of recording the disposition or notice of title, which is regarded as the equivalent of taking sasine. The appellants' problem is simply that they did not record the disposition, and so are not to be regarded as having taken sasine, until after the respondent had recorded his notice of title. The true issue today is what effect, if any, is to be given to rights, such as those of uninfeft proprietors, which do not appear on the register.

The position of the uninfeft proprietor

At the time when Mrs Burnett was sequestrated, the appellants were disponees to whom the disponer had delivered the disposition but who had not yet recorded it in the register and were accordingly not yet infeft. Even if only for a short period, this is a stage through which all purchasers of land must pass and so the nature of their rights is of some importance. Sometimes, as in section 31(3) of the 1985 Act, such a person is simply said to hold an "uncompleted title" to the land; or, more fully, he may be described as a person having an interest in land "but whose title thereto has not been completed by recording": section 12(1) of the Conveyancing and Feudal Reform Act 1970. Writers may try to capture the nature of his position by saying that he holds a "personal title" (eg Craigie, Scottish Law of Conveyancing: Heritable Rights (3rd edition, 1899), p 434), while it has long been common practice to describe him as "proprietor", as opposed to "heritable proprietor", of the lands: eg Erskine, Institute of the Law of Scotland 2.6.51; Craigie, Heritable Rights, p 436, dealing with the drafting of deeds. In M'Adam v M'Adam (1879) 6 R 1256, 1258 Lord President Inglis referred to "the owner of a personal right to land". The fluctuations in terminology are suggestive of a certain instability in the thinking about the uninfeft proprietor's position. In recent years the question has prompted both academic and judicial analysis. The opinions of the judges of the First Division in Sharp v Thomson 1995 SC 455 discuss the matter.

Rather than go over the same ground, I draw particular attention to certain observations of the Whole Court in Earl of Fife v Duff (1862) 24 D 936 on the "personal fee", as they call it, of the uninfeft proprietor. Although in Sharp v Thomson 1997 SC (HL) 66, 70, 84, both Lord Jauncey and Lord Clyde alluded to these observations in passing, for some reason they have tended to be given less prominence than might have been expected in discussions of the topic.

The Earl of Fife and his trustees sought a declarator that they had power to sell certain lands and to receive the price and use it at their pleasure. The defenders included the heirs called to the succession by various deeds. Some of the heirs contended that the lands in question were subject to an entail and so could not be sold. The First Division rejected the contentions for the Earl and his trustees and assoilzied the defenders: Earl of Fife v Duff (1861) 23 D 657. The pursuers appealed to this House which instructed that the case should be argued before the whole judges and that their opinions should be reported to the House. This was done and a single opinion was returned by the Whole Court with the exception of Lord Mackenzie, who was absent due to illness: Earl of Fife v Duff (1862) 24 D 936.

The opinion of the Whole Court began by setting out the well-established rules relating to the transmission of the ownership of feudal subjects. They explained that voluntary transmission of such subjects was effected by a dispositive act followed by tradition of the subject to the transferee. To explain the nature of the dispositive act, they cited Stair, Institutions of the Law of Scotland 3.2.3, including his comment - apparently directed at the natural law position - that the words of conveyance "express something presently done, and not engaged to be done; and so can be nothing else but the alienation or transmission of the right itself." Their Lordships observed, at p 941:

de praesenti

Having described in some detail the two modes of feudal "tradition" by which the disponer could perform his obligation as to the delivery or tradition of the land, the court continued, at p 942:

This analysis by the Whole Court of the nature of the personal fee was critical to their decision. Discussing the nature of the deed granted by Major George Skene in 1721, they held, at pp 943-944:

de praesenti

Similarly, describing the situation of Elizabeth Skene, who by her general service had taken the personal fee out of Major Skene's haereditas jacens, the court said, at p 947:

jus crediti

When after four days of argument your Lordships' House affirmed the decision of the Court of Session, (1863) 4 Macq 469, it was on the basis of that analysis. For instance, Lord Westbury LC said, at p 487, that Major Skene's settlement remained effectual "as a disposition of the personal fee, although the parties entitled under it would be obliged to resort to some other mode of obtaining a feudal tradition of the subject." He went on to say, at p 488, that, despite subsequent actings by Major Skene, the settlement "remained what it originally was, an actual immediate conveyance, giving right to, and capable of receiving, feudal investment, and consequently possessing the elements of a habile entail."

As the law stands today, the uninfeft proprietor is in much the same position as at the time of the decision of the Whole Court and of this House. He has the right to possess the subjects and to reap the fruits, including taking the rents; he has the power to sell the subjects and, by deducing title, to dispone them for either onerous or gratuitous causes. When he dies, his right to the subjects forms part of his heritable, as opposed to his moveable, estate for purposes of legal rights: Stair, Institutions of the Law of Scotland 3.5.6; Succession (Scotland) Act 1964, section 10(2); cf Gloag and Henderson, The Law of Scotland (11th edition, 2001), para 36.07. Subject to that Act, the uninfeft proprietor can bequeath the subjects in his will. In addition under section 12 of the Conveyancing and Feudal Reform (Scotland) Act 1970 he can grant a standard security over the subjects. In one very real sense, however, the position of the uninfeft proprietor has actually moved on since 1862 - and even more so since the eighteenth century when the deeds under consideration in the Earl of Fife's case were executed. Even in 1862 an uninfeft proprietor required the active involvement of the feudal superior if his infeftment was to become public, but since the Conveyancing (Scotland) Act 1874, once infeft, a disponee has been deemed to be entered automatically with his superior. So an uninfeft proprietor has it in his own power to do everything necessary to become infeft and so to vest the real or feudal right in himself, simply by recording the disposition in the register. If anything, therefore, the position of an uninfeft proprietor vis à vis the granter of the disposition has been strengthened.

The decision of the Whole Court, as affirmed by this House, in the Earl of Fife's case therefore constitutes the most authoritative possible licence for describing the holder of the personal fee, personal title or uncompleted title as an "owner" and his rights as "powers and privileges of ownership": the execution and delivery of the disposition can be said to vest in him "most of the essential attributes of ownership". The Whole Court and your Lordships' House would therefore have found little to quarrel in the well-known passage in Lord President Emslie's opinion in Gibson v Hunter Home Designs Ltd (in liquidation) 1976 SC 23, 27:

In the distinguished company of Lord President M'Neill, Lord Justice Clerk Inglis and the other judges of the Court of Session - not to mention your Lordships' House - Lord President Emslie can scarcely be accused of unorthodoxy, far less of heresy. Moreover, whatever criticisms might now be made of the language or reasoning in Earl of Fife v Duff would be pointless quibbles when the passage has stood for more than 150 years. For present purposes, the case is useful as marking the high point in the authorities characterising uninfeft proprietors, like the appellants, as having the powers and privileges of owners. Indeed, although Mr Hodge frequently referred to uninfeft proprietors, such as the appellants, as the "creditors" of the granter of the disposition, in reality there is nothing by way of positive action that they can or need demand of the granter. All that they want, and can or need demand, is that the granter leave them alone and do nothing to prevent them completing their title. Seen from the other side, in practice the only obligation of the granter is to leave them alone and do nothing to prevent them completing their title.

But it is important to notice that, however far the judges went in describing the uninfeft proprietor as an owner in Earl of Fife v Duff, what he had was a "personal fee", with the corresponding obligations on the disponer being personal obligations. The personal fee had indeed the characteristics of a personal right.

For one thing, the right was transferred by assignation - in due course under section 22 of the Titles to Land Consolidation (Scotland) Act 1868. Even after section 3 of the Conveyancing (Scotland) Act 1924 made it possible for an uninfeft disponer to deduce title from the person last infeft, such assignations remained competent. In practice, however, the convenience of the new system meant that they fell into desuetude after 1924. They were eventually abolished by section 48 of the Conveyancing and Feudal Reform (Scotland) Act 1970.

More importantly, perhaps, the judges of the Whole Court in the Earl of Fife's case quite specifically pointed out, 24 D 936, 942, that the uninfeft proprietor's personal fee was of no effect against third parties who might attach the estate by legal execution for the debts of the disponer, or who might in bona fide purchase it from him, and be first infeft. For present purposes this means that the personal fee was held to be of no effect against adjudgers and bona fide purchasers who were first infeft. That remains the position today.

With this introduction, I can now turn to see how the law that applies to the present case has developed.

Section 31(1) of the 1985 Act

In critical respects the language of section 31(1) of the 1985 Act repeats the language of earlier bankruptcy statutes. Parliament first says that by virtue of the act and warrant the whole estate of the debtor vests in the permanent trustee. The relevant picture is therefore not of the permanent trustee stepping into the shoes of the debtor, but of the debtor's estate being taken from her and placed in the hands of a completely different individual, the trustee for the debtor's creditors. This suggests that, in so far as the debtor herself may be subject to personal obligations, those obligations do not affect this new person, the permanent trustee. That is, of course, consistent with the general rule in sequestrations that the permanent trustee is not bound by contracts entered into by the debtor unless he expressly or impliedly adopts them.

Section 31(1)(b) then explains precisely what is meant by the heritable estate vesting in this way. The particular form of vesting was originally chosen to allay any alarm that applying sequestration to heritable estate would subvert the feudal principles of transmission, upon which the whole system of heritable conveyances was built: Bell, Commentaries on the Laws of Scotland (5th edition, 1826), Vol 1, p 400. The wording of the present provision is rather obscure but its interpretation is perhaps helped by noticing that it derives from the rather clearer words of section 23 of the Act of 1793 (33 Geo III, c 74):

The model for vesting is based on adjudication which "is a judicial disposition to the subject": Bankton, Institute of the Laws of Scotland 3.2.49.

First, the act and warrant from the sheriff has the same effect as if a decree of adjudication in implement of sale had been pronounced in favour of the permanent trustee. Since an adjudication in implement is a way of obtaining specific implement of a seller's obligation to convey property, armed with his decree or judicial disposition, the trustee can proceed to infeft himself as owner - nowadays by recording a notice of title on the register, as the respondent did in this case.

Section 31(1)(b) then says that the act and warrant has the same effect as if a decree of adjudication for payment and in security of debt, subject to no legal reversion, had been pronounced in favour of the permanent trustee. Normally, an adjudger initially acquires only a right to the subjects which is redeemable within ten years on payment of the debt, but the effect of this part of section 31(1) is to confer "a right of absolute property in the trustee, for the benefit of the creditors, according to their rights and interests at the time": Mansfield v Walker's Trs (1833) 11 S 813, 829 - 830 per Lord Craigie. Again, the trustee's right under the judicial disposition will be converted into a real or feudal right only if he records a notice of title in the register, as the respondent did.

At first sight it looks as if the legislature has piled Pelion upon Ossa, since both the adjudication in implement and the adjudication for payment and in security result in the trustee having an absolute right of property on infeftment. But, in actual fact, giving the act and warrant the effect of an adjudication for payment and in security is significant because it is one of the ways in which the law of sequestration builds upon the pre-existing law of adjudication for debt. In particular, the trustee in sequestration is to be treated as an adjudger for payment with a decree in his favour for the benefit of the creditors. And it is because he is treated as an adjudging creditor, and not merely as a purchaser, of the debtor's heritable estate that the trustee can set out to destroy the rights of uninfeft purchasers of that estate by infefting himself before they do. A purchaser could not do this: Rodger (Builders) v Fawdry 1950 SC 583.

Adjudgers and prior personal rights

The eighteenth and nineteenth century case law which I must now examine bears witness to a prolonged struggle to define the position of creditors who obtain a decree of adjudication against their debtor's estate. At an early stage it was accepted that bona fide purchasers were not affected by personal rights of the seller which were not recorded in the register. After all, such purchasers could be taken to have consulted the register and to have proceeded on the information about the seller's title to be found there. The same could be said of creditors who insisted on the debtor providing them with a heritable security. Both groups transacted on the faith of the register. But, it was argued, creditors who used adjudication to obtain a security over their debtor's property were different. They had originally chosen to lend money or to transact with the debtor either without taking any security at all or else on the basis of a personal security, such as caution from a third party. At all events, these creditors had not relied on the debtor's land for security and had not therefore relied on his title to the land as set out in the register. So, if it turned out that the debtor had entered into personal obligations relating to the land, such creditors could not claim to have been misled by the unqualified nature of his title in the deeds recorded in the register. If they proceeded to adjudge their debtor's property, there was therefore no reason why they should be in any better position than the debtor himself on whom they had chosen to rely: they should take his property tantum et tale, subject to any personal obligations, including obligations to uninfeft purchasers, that affected his right to the property. So ran the argument that was eventually to fail - but only after a valiant fight by its proponents.

A trio of cases

For present purposes the story begins with the seminal case, Bell v Gartshore (1737) M 2848; 5 Br Suppl 198; 2 Ross's LC 410; Arniston Collection of Session Papers Vol 7 (1720 - 1737) No 51 (Advocates Library). Alexander Oliphant bought a tenement in Kelso which was being sold by the adjudging creditors of William Chatto. Without becoming infeft, in 1730 Oliphant disponed the decree of sale to Chatto's son, who also was not infeft. Two years later Chatto junior granted a heritable bond to Bell of Blackethouse who had paid two bills of exchange for him and was entitled to relief. Bell entered into possession but was not infeft. In 1734 John Gartshore, another creditor of Chatto junior, adjudged the decree of sale of the tenement from him and obtained a charter of resignation from the superior, the Duke of Roxburgh, on which he was infeft. A question arose as to the respective entitlements of Chatto junior's two creditors, Bell and Gartshore. The critical issue was whether, by granting the heritable bond, Chatto junior had denuded himself of his entire personal right to the tenement, with the result that, when Gartshore purported to adjudge it from him, there was nothing left to be carried by the adjudication. Apparently at the insistence of Lord Kilkerran, the Court of Session reconsidered their original decision in favour of Bell. Departing from certain earlier cases, the court, presided over by the newly installed Lord President Forbes of Culloden, eventually held, by a majority, that the granting of the heritable bond did not denude Chatto junior of his personal right to the tenement. It followed that the adjudication operated so as to vest that personal right in Gartshore. Since Gartshore was infeft and Bell was not, Gartshore's right was to be preferred.

Counsel for Bell - Andrew M'Douall, the future Lord Bankton and institutional writer - sought to argue that the case was concerned with nothing more than the effect of a personal conveyance by an uninfeft proprietor. The importance of the case for present purposes lies in the successful contrary submission for Gartshore, apparently written by Robert Dundas of Arniston - who had, however, been appointed to the bench as Lord Arniston a few days before the crucial penultimate hearing. The argument was to this effect. The heritable bond granted by Chatto junior to Bell was, indeed, merely a personal conveyance. There was no provision for recording such a personal conveyance in the register. It followed that, if the effect of such a personal conveyance were that it denuded the granter of all his rights in the subjects, then anyone purchasing from him would in fact acquire nothing - even though the purchaser would have no way of knowing this. If the purchaser then went on to become infeft and to record the instrument of sasine, anyone consulting the register would be misled into thinking that the purchaser had a valid title, when in fact he had no title at all. It was no answer to say that any subsequent purchaser would be secure because he had purchased on the faith of the record, since there was no law that protected a purchaser against latent claims that did not appear on the face of the records. Therefore, for the system of registration to work, the underlying assumption must be that unfeudalised personal conveyances did not denude the granter, whether he was infeft or uninfeft. Counsel summarised his argument in this way, at p 2852:

Lord Kilkerran observed, 5 Br Suppl, 198, 199:

1mo

Lord Kilkerran's third point, at p 199, was:

3tio

concessis

a non habente

In his Institute of the Law of Scotland 2.7.26, written between 1765 and 1768, Erskine stated the law in the light of this case as follows:

jus obligationis

Bell

Although Bell v Gartshore was specifically concerned with the position of an adjudger, within a few years, for the kinds of reason that I have outlined in paragraph 112, the court came to draw a distinction between adjudgers and bona fide purchasers from an infeft proprietor. Such an argument certainly found favour in Ireland v Neilson (1755) 5 Br Supp 828 where the debtor had acquired the land by fraud: it was held that the adjudgers were affected by the debtor's fraud, even if a purchaser would not have been. See also Gibb v Livingston (1763) 4 Br Supp 897.

But any possible trend against adjudgers received a check in Douglas v Adjudging Creditors of Kelhead (1765) 3 Ross's LC 169; sub nom Douglas v Stewarts M 15616; Campbell Collection of Session Papers Vol 64 (1792) No 43 (Advocates Library). Counsel for the adjudgers was Robert MacQueen, the future Lord Braxfield and a noted authority on feudal law. In 1705 Sir William Douglas had bound himself in his marriage contract to provide the estate of Kelhead in favour of himself and the heirs-male of his body. He failed to carry out that obligation. Instead, in 1724 he executed a strict entail of the lands, which was recorded in the register of tailzies, but no infeftment followed upon it. He died in 1733 and, eventually, in 1751 his son, Sir John Douglas, succeeded in having the entail reduced on the ground that Sir William had had no power to entail the estate of Kelhead since it had been provided to the heirs of the marriage. Sir John was then infeft in fee simple in the estate and proceeded to borrow large sums. In due course, during Sir John's lifetime, a process of ranking and sale of the estate was brought at the instance of his creditors, some being heritable creditors infeft and others being personal creditors who had adjudged and one of whom was infeft. Sir John's eldest son, Captain Douglas, objected to the sale on the ground that, by serving heir to Sir William, his father had barred himself from reducing the entail. The creditors argued that, even supposing that the reduction of the entail could be taken out of the way, this could not affect their debts since the feudal right of the estate was vested in Sir John as a fee-simple without any fetters or limitations whatever and so it was liable for the payment of all his personal debts. In other words the entail would never be more than a personal right which would not affect the creditors, since it had not been feudalised by infeftment and recording in the register of sasines. The Court of Session upheld this argument, in respect of both the heritable creditors and the adjudging personal creditors. Captain Douglas reclaimed against the interlocutor in respect of the adjudging personal creditors. The court adhered to its decision.

The argument of James Burnett, the future Lord Monboddo, for Captain Douglas was that there was a great distinction between the heritable creditors, who had contracted on the faith of the records in the register, and the adjudging creditors who had lent their money on personal bonds and who could not therefore be said to have contracted upon the faith of the records. (The general creditors in the present case are in a broadly similar position.) Mr Burnett argued that such a personal creditor could not be in a better condition than his debtor. When he lent money to the debtor, he got no more than the debtor's promise to repay it and, when he subsequently adjudged the debtor's property, this was simply a method of operating payment. Mr MacQueen's argument for the adjudgers was to the effect that in law all of Sir John's creditors, irrespective of whether they were infeft on a heritable security or they adjudged in security of their debts, trusted their money on the faith of his infeftment in the estate, as appearing from the records. The argument continued, 3 Ross's LC 169, 172:

Since the creditors had carried the estate by adjudication and infeftment, the personal deed of entail could not compete.

The adjudging creditors won. Although the opinions of the judges are not reported, Lord Monboddo recorded, at pp 173 - 174, that the court took the case upon the general point that "no entail can be effectual against a purchaser, creditor by heritable bond, or adjudger, unless completed by infeftment…." In Black and Grant v Gordon (1794) 3 Pat 317 Lord Justice Clerk Braxfield followed this decision in another case where an entail had been recorded in the register of tailzies but infeftment had not followed. Dismissing an appeal from that decision, your Lordships' House rejected the appellants' argument that the adjudging creditors could not claim to have relied on the title as it stood in the register of sasines.

The dispute about the position of adjudgers came to a head in Mitchells v Ferguson (1781) M 10296; Hailes 879; 3 Ross's LC 120; Faculty Collection Session Papers, December 1780 - February 1781, No 35 (Advocates Library). The facts are complex and the pleadings somewhat tortuous. A simplified version suffices for present purposes. In 1768 William Donald sold his house to Agnes Carson but, pending payment, the disposition was held by Donald's man of business. As found by the Lord Ordinary (Monboddo), the price was paid by a certain William Ferguson, on the basis that Carson would grant him a heritable bond or a disposition in security. When she failed to do so, Ferguson raised proceedings for implement of this obligation and obtained a decree in absence on 4 July 1777. The following month, on 9 August 1777, the Mitchells, as creditors of Donald, obtained a decree of adjudication of the house against him and were infeft. Carson, however, raised a multiplepoinding and suspension of the decree in absence. The question was whether, by reason of the adjudication, the Mitchells took the title to the house subject to the obligations of Donald under the sale to Carson. The Lord Ordinary, relying on Ireland v Neilson and Gibb v Livingston, held that Donald's creditors could not carry off the house by adjudication except under the burden of the previous sale. The Mitchells reclaimed and a hearing in presence was ordered. The reclaiming motion was allowed. Lord Monboddo dissenting, the court held, M 10296, 10299, that "the adjudication and infeftment following upon it are preferable to the personal disposition founded on by Ferguson."

In Sharp v Thomson 1997 SC (HL) 66, 74G - H Lord Jauncey distinguished Mitchells v Ferguson on the ground that the disposition had been delivered to Donald's man of business and not to Carson. But, although it does indeed appear from the pleadings that the disposition was delivered to Donald's man of business pending payment of the price and was never physically delivered to Carson, there is nothing to suggest that this was regarded as important once the price had actually been paid. Lord Jauncey suggested that, to judge from his language, in Heritable Reversionary Company v Millar (1892) 19 R (HL) 43, 48 Lord Watson must have understood Mitchells v Ferguson as a case where the seller had not delivered the disposition. But the report of the argument in the Appeal Cases, [1892] AC 578, 601, 603, suggests that counsel for both parties proceeded - rightly - on the basis that in Mitchells the disposition was to be treated as having been delivered. Moreover, as will appear below, Lord Watson did not question the line of cases founded on Mitchells.

At a general level, in Mitchells v Ferguson the court rejected the submission that the distinction between the position of a purchaser and the position of an adjudger had been overlooked in Bell v Gartshore. Lord Braxfield said, 3 Ross's LC 120, 125, that "there never was a cause judged with more solemnity, nor by abler judges and lawyers, than the cause of Bell of Blackethouse"; if the distinction between a purchaser and adjudger was not "stirred" there, this was not because it was not thought of, but because counsel must have been of the opinion that it was not tenable. The Lord President, the second Lord President Dundas of Arniston, listed, at p 126, a number of distinguished judges, including his father, who had all regarded Bell v Gartshore as fixed law.

The first argument for Ferguson has a bearing on one of the arguments for the appellants in this case. Mr Gale submitted that, since Mrs Burnett could not have sold and disponed the flat without being guilty of fraud, the bare title should not be regarded as vesting in the trustee in her sequestration. In Mitchells v Ferguson counsel for Ferguson argued that, since a person who grants a second disposition in fraudem of the first is guilty of a crime, the law will not compel any man to do this. It would be equally repugnant to common sense and to law for the court, in an action of adjudication, to put itself in the position of the debtor and in effect to grant the adjudger the title that it would not have forced the debtor to grant. In other words, if it would have been fraud on the part of Donald to dispone the house to the Mitchells, the court should not grant decree of adjudication of the house from him to the Mitchells. In rejecting this argument Lord Braxfield observed, at p 125, that a bankrupt cannot grant a disposition to any particular creditor, but "will it thence follow that his creditors cannot adjudge because it would have been fraudulent in his debtor to give him a voluntary right?" Similarly, in the present case, the mere fact that Mrs Burnett could not have disponed the house to a third party without committing a crime is no reason to hold that an individual creditor cannot adjudge or that under section 31(1) of the 1985 Act the act and warrant does not have the effect of an adjudication of her right in the flat to the trustee in her sequestration.

The second argument for Ferguson - which is also of importance for the present case - was that a bona fide second purchaser, who obtained information about the subjects from the register, would be deceived if he were cut out from his purchase by a personal and latent deed of the seller. An adjudging creditor, however, who did not contract in reliance on the register but trusted solely to the personal security, could no more exclude an anterior disponee without infeftment than he could exclude an anterior disponee whose infeftment appeared in the register. The adjudger had no bona fides to plead in relation either to his debtor or to the law. An adjudger must be content to take that which he had adjudged, tantum et tale, as it stood in the person of his debtor. Counsel for the Mitchells argued that the principle to be applied had been established in Bell v Gartshore: personal deeds cannot affect feudal rights. And it was this principle, and not any application of bona fides, that explained why a second disponee once infeft excludes a prior disponee remaining uninfeft.

In the later case of Russell v Ross's Creditors 31 January 1792 FC; M 10300; sub nom Pierse v Ross 3 Ross's LC 177, 180 Lord Braxfield was to declare that not one portion in his memorial in Douglas v Adjudging Creditors of Kelhead "but in my opinion is founded on the feudal law of Scotland." It is clear that in Mitchells v Ferguson he applied that approach - while, in much the same way, Lord Monboddo dissented on the basis of his argument as opposing counsel in that case. In Lord Monboddo's view, 3 Ross's LC 120, 126, the result reached by the majority was unjust:

In Lord Braxfield's view, on the other hand, all creditors, irrespective of whether or not they had relied on the register when transacting with the debtor, were to be regarded as having available for payment of their debts the debtor's heritable estate unqualified by any unrecorded personal rights. Lord Braxfield considered that Ferguson's argument to the contrary was potentially dangerous because it would lead to fraud. For instance, a debtor might grant a heritable bond to a creditor with a warrant to infeft and the creditor might not take an infeftment. Other creditors, seeing the debtor in right of the estate and with no burden on the records, might lend large sums of money. The heritable creditor would only have to turn up, produce his heritable right and tell the creditors that there was nothing for them since they could only take the estate with the burdens that were competent against the debtor. The same would apply to marriage contract trustees who chose to leave the husband in possession and not to take an infeftment. Lord Braxfield added, at p 125:

As the report of counsel's argument, at p 123, shows, in this passage "1661" is a misprint for "1617". Lord Hailes reports the beginning of the passage in this form, Hailes 879, 880:

tantum et tale

bona fides

mala fides

bona fides

The decision therefore seems to have proceeded on the basis of the fundamental point underlying the decision in Bell v Gartshore, that feudal rights were not affected by personal rights. And personal creditors who had not actually consulted the register when initially deciding to contract with the debtor were entitled to found on this principle, just as surely as purchasers or heritable creditors who had. The personal creditors could therefore adjudge the debtor's heritable estate free of any personal obligations.

The rule in favour of adjudgers eventually prevails

Despite the solemn and, apparently, clear decision of the court about the position of adjudgers, in subsequent cases counsel continued to advance the argument that they should be treated differently from purchasers and heritable creditors. For instance, the point was touched on in Thomson v Douglas, Heron & Co 15 November 1786 FC; M 10229. Thomson had disponed land to a man of business to sell and apply the proceeds for the behoof of Thomson. The disponee omitted to insert this qualification in the procuratory of sasine and it did not appear on the register. He then proceeded to borrow money and granted a heritable security in favour of Douglas, Heron & Co. Other creditors adjudged the property. The court held that the allegations of fraud on the part of the disponee were irrelevant against the defenders' heritable securities but that they were relevant as to the creditors who had adjudged the property. According to the Faculty Collection report, the court held, at p 454, that it had been found in decisions, which for the stability of the law ought not to be departed from, that adjudgers must take the right of their debtor tantum et tale as it was in his person. But the Folio Dictionary report records, M 10299, that the point "was little discussed … and the court did not mean to lay down the rule in general, that adjudgers must take tantum et tale."

However that may be, the decision raised sufficient doubts for Lord President Ilay Campbell to order a hearing in presence in Russell v Ross's Creditors 31 January 1792 FC; M 10300; sub nom Pierse v Ross 3 Ross's LC 177; Campbell Collection of Session Papers Vol 64 (1792) No 40 (Advocates Library). The argument proceeded on the basis of the memorials written by Lord Braxfield and Lord Monboddo as counsel in Douglas v Adjudging Creditors of Kelhead: (1792) 3 Ross's LC 177, 180 and 185. In the light of the hearing the court declared that the opinion in Thomson v Douglas Heron & Co to the effect that adjudgers, unlike purchasers, must take the right of their debtor tantum et tale, had been erroneous. The Lord President held, 3 Ross's LC 177, 182, that the issue of principle as to the position of adjudging creditors had already been settled in Mitchells v Ferguson. See in addition his manuscript comments, obviously written at a later date, 3 Ross's Leading Cases 177, 184 - 185 and also Baron Hume's Lectures Vol 4, p 474.

The argument continued to cause trouble, however, as is clear from Smith v Taylor 18 December 1795, Bell, Treatise on the Law of Bankruptcy Vol 1 (1800), p 52 note; Commentaries on the Law of Scotland (7th edition (1870) by J M'Laren) Vol 1, p 308 note 3. A debtor, who was not infeft, borrowed money on a heritable bond. The creditor immediately took infeftment but this could not give him a real right since the debtor himself had not been infeft. The debtor was sequestrated and the trustee was careful to make up his title without infefting the debtor, by dropping him out of the feudal progress. The trustee thus had a real right, while the heritable creditor's right remained personal. The heritable creditor argued, however, that the trustee, as representing the general creditors, could not take any better right than stood in their debtor. The Lord Ordinary rejected this argument but the heritable creditor reclaimed and his argument was upheld. Again, steps were taken to correct the position - this time, in Buchan v Farquharson 24 May 1797 FC; M 2905; 3 Ross's LC 137. On 28 June 1788 Robert Gordon assigned a personal bond for 3000 merks to the Reverend Robert Farquharson. Gordon was sequestrated on 19 July and the assignation was intimated on 4 August, but Gordon's estate did not vest in the trustee in bankruptcy until after that. The trustee brought an action against Farquharson to reduce the assignation, inter alia because it had not been intimated until after the sequestration. The court assoilzied Farquharson on the ground that the assignation had been completed by intimation before Gordon's estate had vested in the trustee. A sequestration did not prevent a creditor from completing his right by any act independent of the consent of the debtor, such as intimating a previous assignation. But the court also observed, FC at p 67:

Bell records, Treatise on the Law of Bankruptcy Vol 1, pp 52 - 53 note; Commentaries on the Law of Scotland (7th edition) Vol 1, p 308 note 3, at pp 308 - 309:

In Wylie v Duncan (1803) M 10269; 3 Ross's LC 134 Wylie sold certain tenements to Archibald who took infeftment on the disposition. On the same day as he received the disposition Archibald granted a letter to Wylie binding himself to resell the tenements to Wylie on six months' notice. The following year Archibald was sequestrated and the trustee, who was infeft, sold the tenements. Wylie then produced the letter and insisted that the original transaction had been intended as a security for a loan. He therefore claimed to be entitled to redeem the tenements on payment of the sum borrowed. He brought proceedings against the trustee before the Glasgow magistrates who assoilzied the trustee. Archibald appealed to the Court of Session, arguing that the trustee must take the debtor's property tantum et tale, subject to the right of redemption. The Lord Ordinary found in favour of Archibald but the court allowed the trustee's reclaiming motion. Lord President Campbell observed inter alia, 3 Ross's LC 134, 136 - 137:

Tantum et tale

gremio

if there is

tantum et tale

Precisely for the kinds of reasons that Lord Hoffmann has highlighted, the status of trusts which did not appear on the register continued to be debated. That question was not settled until the decision of the House in Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43, 48. For the rest, however, the tract of decisions just discussed appears to have gone a long way to settling that adjudgers and, hence, trustees in bankruptcy - just like bona fide purchasers - took the subjects free of any personal obligation on the part of the debtor. Certainly, even by 1800, in his Treatise on Bankruptcy Vol 1, p 52 Bell felt able to state what he regarded as the settled doctrine in this way:

The passage appears in very much the same form in Bell's Commentaries on the Law of Scotland (7th edition) Vol 1, p 308. In a later passage of the Treatise, at p 82, Bell repeats the point:

The decisions in Buchan v Farquharson and Wylie v Duncan, in particular, and these observations by Bell show that, for the last 200 years, in terms of the bankruptcy legislation, heritable property which the debtor has sold and disponed but on which the purchaser is not infeft has been regarded as forming part of the debtor's estate that vests in the trustee in sequestration by adjudication or, originally, by voluntary conveyance from the debtor. Indeed, so far from there ever being any doubt about the bankruptcy statutes applying so as to vest such rights in the trustee, the actual live issue in the early days was whether the deliverance on the sequestration constituted a mid-impediment preventing a purchaser or a creditor under a heritable bond from taking sasine after the date of sequestration. The point was settled in favour of the creditor and purchaser in Cormack v Anderson (1829) 7 S 868. This meant that purchasers and heritable creditors could acquire a preference over the trustee by taking sasine and duly recording the instrument of sasine before the trustee completed his feudal title. They were therefore to be regarded as rivals and opponents of the trustee and of the general creditors for whom he acted. The trustee's right and the right of the purchaser, heritable creditor or assignee were "simply two independent rights running a race against each other": Tod's Trs v Wilson (1869 ) 7 M 1100, 1103 per Lord Kinloch.

Indeed, once this general point had been established, competitions between uninfeft heritable creditors and purchasers and uninfeft trustees in sequestration were inevitable. A rather special competition of this kind occurred in Inglis v Mansfield (1835) 1 S & Macl 203 (HL); sub nom Mansfield v Walker's Trs (1833) 11 S 813 (Court of Session). In 1823 Josiah Walker, the admirer of Robert Burns and dilettante professor of Humanity at Glasgow University, agreed to lend £6,000 to James Stuart of Dunearn WS. Stuart gave Walker a heritable bond which both parties apparently believed covered 95 acres of valuable land. Walker took infeftment and the instrument of sasine was recorded in 1824. In 1828 Stuart suddenly went abroad in bankrupt circumstances. He was sequestrated on 1 September of that year and on 6 October Mansfield was confirmed as trustee in the sequestration. In accordance with the procedure at the time, a decree of adjudication was pronounced in favour of the trustee. It was recorded on 18 October. On looking at the titles the trustee discovered that the security granted by Stuart in 1823 covered only five acres and he therefore proposed to claim the remainder of the land for the benefit of the general creditors. At the request of agents for Walker and other parties to whom bonds had been granted, however, on 29 May 1829, from the safety of New York, Stuart granted what was described as "a bond of corroboration", in effect extending the security to cover the whole of the 95 acres, which were fully described. Stuart also granted a precept on which sasine was taken on behalf of Walker and recorded on 13 July 1829. Meanwhile, on 19 June, as required under the bankruptcy legislation at the time, Stuart had executed a special disposition in favour of the trustee so as to allow him to complete title to the heritable estate. The trustee was infeft on 12 August 1829.

The trustee then raised proceedings to reduce the bond of corroboration. One ground, which is of no importance for present purposes, related to the Bankruptcy Act 1696. The other ground was that the bond of corroboration and precept of sasine, which was the only possible basis for Walker being infeft in the 95 acres, had been granted subsequent to the period when Stuart's estates were specially adjudged and declared to belong to the trustee, "whereby the said James Stuart was divested thereof, and, consequently, the said disposition and infeftment thereon are null, as being granted a non habente potestatem." Walker's defence was that the bond of corroboration had been executed in implement of an agreement that did not fall under the 1696 Act, "nor did the decreet of adjudication prevent Mr Stuart from granting such a deed, nor Mr Walker from taking infeftment in the lands, seeing that at the time when he did so the trustee had not obtained infeftment." Walker died in 1831 and the defence of the action was taken over by his trustees, headed up by the Reverend Dr John Inglis, father of the future Lord President. The Lord Ordinary reported the question to the Inner House and the Second Division consulted the other judges. There was a division of opinion among the judges of the Court of Session, with both the Lord President and the Lord Justice Clerk favouring Walker's trustees. But, in accordance with the views of the majority, decree of reduction of the bond of corroboration was pronounced. Walker's trustees appealed to your Lordships' House, but the House dismissed the appeal.

It is important to notice that it was Walker who was first infeft on the additional lands in July 1829, by virtue of the bond of corroboration - the trustee in sequestration being infeft in the estate only in August. Walker's trustees therefore argued that, at the time when Stuart granted the bond of corroboration, the real right in the lands remained vested in him - and so, when the real right subsequently vested in the trustee, it was subject to the security made real by Walker's infeftment on the bond. The argument for the trustee was, in effect, that, irrespective of the strict feudal position, the deed impetrated from Stuart during the bankruptcy proceedings was void.

The argument for Walker's trustees clearly caused Lord Brougham some anxiety when giving his initial views at the end of the hearing on 8 April 1835. He indicated, 1 S & Macl 203, 324, that his opinion was that section 29 of the bankruptcy statute "divests the bankrupt, although it does not invest the trustee until his feudal title shall be made up." So neither the bankrupt nor the trustee could deal with the property - the bankrupt because the estate was vested in the trustee and the trustee because he could not give a feudal title until his investiture was completed. Lord Brougham considered that nothing could be "more consistent with the principles of statute law, or less consistent with the principles of the common law, than that any fee should remain in pendente, or, as it is sometimes phrased, in nubibus." When he came to give his considered reasons, four days later, Lord Brougham did not advert to the arguments on this point in detail, but simply affirmed, at pp 336 - 337, that, by reason of section 29 and other provisions of the bankruptcy statute, the adjudication in favour of the trustee "divests the bankrupt: although, until the trustee makes up his title, he cannot convey by sale or encumbrance upon plain feudal principles, still it is enough to take the property out of the bankrupt…." On this basis Lord Brougham held that Stuart had had no power to grant the bond of corroboration once the decree of adjudication in favour of the trustee had been pronounced.

The principal argument for Walker's trustees on this aspect of the case was, however, to the effect that, when Stuart's heritable estate was adjudged to the trustee for the general creditors under the bankruptcy statute, he took the estate tantum et tale as it stood in Stuart. Either fraudulently or by culpa lata, Stuart had failed to dispone the 95 acres. Had he done so, the lands would have been subject to a heritable security. Therefore the trustee could not reduce the bond of corroboration which was simply designed to do what Stuart should have done in 1823. This argument traversed many familiar features of the landscape, Mitchells v Ferguson, Smith v Taylor, Buchan v Farquharson, Russell v Ross's Creditors and Wylie v Duncan: 1 S & M'L 203, 316. In particular, the appellants reverted to the theme that adjudgers were people who had relied on the personal credit of the debtor rather than on the state of his heritable title in the register. So there was no reason why they should be entitled to ignore personal obligations of the debtor simply because they had not entered the register: 1 S & M'L 203, 297 - 300, 314 - 316. The respondent argued that the tantum et tale doctrine went no further than to affect creditors and adjudgers where the debtor had originally acquired the property in question by fraud. It did not apply where, as in that case, the debtor had acquired an unqualified title but, in the enjoyment of that unqualified right, he had come under an obligation, express or implied, to convey the right to another: 1 S & M'L 203, 313 - 316, referring to the same tract of authority.

In his initial decision, at pp 326 - 327, Lord Brougham acquitted Stuart of any blame, far less of any fraud or culpa lata, in the original transaction in 1823 - thereby cutting away the basis of the appellants' argument. Accordingly, in his final decision Lord Brougham did not deal with it in any detail. He simply distinguished the English law relating to equitable interests and said, at pp 338 - 339:

tantum et tale

In other words Lord Brougham held that, since the debtor and the trustee in sequestration are different persons, the trustee is not affected by any personal obligations that may have affected the debtor. On the other hand the trustee does take the heritable estate subject to the obligations that affected the estate in the debtor's hands. But, since purely personal obligations do not affect the heritable estate as such, the real right that the trustee takes is not subject to any burden. It followed that when Stuart's estate had vested in the hands of the trustee it had been unaffected by any possible obligation of Stuart to Walker to grant a heritable security over the remainder of the 95 acres. Impliedly, at least, Lord Brougham rejected the more detailed argument for the appellants.

In Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43, 48 Lord Watson was careful to distinguish and not to cast doubt on the decision in Walker's Trs v Stuart's Tr or in any of the earlier cases. Indeed he expressly said, at p 48, that he had no doubt that the doctrine of tantum et tale had no application in the circumstances of Russell v Ross's Creditors. He then went on to point out that in that case and in Mitchells v Ferguson, Wylie v Duncan and Mansfield v Walker's Trs the application of the tantum et tale doctrine had been rejected where the creditor was in competition "with others who had prior but merely personal rights to demand a conveyance from him [sc the debtor]." There is therefore nothing in Lord Watson's reasoning that affects the clear line of authority which governs this case. Similarly, in Coloquhouns' Tr v Campbell's Trs (1902) 4 F 739, 743 - 744 Lord Kinnear regarded Mansfield v Walker as a correct statement of the law.

The race to the register

In his Commentaries on the recent statutes relative to... sequestration in mercantile bankruptcy (1840), p 168, in Observation 2 on section 25 of the Bankruptcy (Scotland) Act 1839, Bell said that its effect with regard to such heritable property as requires sasine:

Bell's view is particularly authoritative since he had been the principal architect of the 1839 Act. In his Digest of the Bankruptcy (Scotland) Act 1856 (1856), p 151 note at p 153 Alexander records that this view "does not appear to have been ever challenged."

In Lord Melville v Paterson (1842) 4 D 1311 a question arose about the application of the vesting provisions of the 1839 Act in a case where the debtor had died. Citing Bell in support, the Lord Ordinary (Ivory), whose decision was affirmed by the Second Division, referred to the position in the sequestration of a living debtor in this way, at p 1315:

personal right

first completed

The same idea of a race for the first registration between the uninfeft purchaser from the debtor and the uninfeft trustee in his sequestration is found, for example, in J Burns, "English and Scottish Bankruptcies" (1913) 29 LQR 460, 463. Contrary to what Lord Maclean supposed, 2002 SLT 699, 707C, in the present case the parties were taking part in just such a race.

For modern readers at least, the image of a race tends to conjure up a sporting contest played according to rules - in which, to use Lord Justice Clerk Thomson's slightly mixed metaphor, offside goals are not allowed. Nothing could be more misleading. In Scots law the competition between the trustee and the uninfeft purchaser or creditor with an unrecorded heritable security is a struggle in deadly earnest with the aim of destroying the other competitor's chance to obtain the real right by recording the relevant deed and infefting himself first. Those taking part in this race are no Corinthians and swear no Olympic oath of sportsmanship. If your opponent is slow off the mark, mistakes the way or stumbles, you do not chivalrously wait for him to catch up: you take full advantage of his mistakes. Nice guys finish last and don't get the real right.

A purchaser cannot knowingly enter such a race with an earlier purchaser. Rather, if a purchaser becomes aware "that there may be a prior purchaser in the same queue for Register House he must ask the latter if he be such a purchaser and in the event of a positive, correct answer yield place to him": Alex Brewster v Caughey 2002 GWD 15-506, at para 73 per Lord Eassie. But Stair, Institutions of the Law of Scotland 1.14.5 draws the critical distinction between purchasers and those, such as adjudging creditors, exercising legal diligence, who are aware that someone has bought the property but is not yet infeft:

malam fidem

ex capite fraudis,

Any right that the purchaser acquires when he knows of the previous sale is reducible on the ground that he is participating in the seller's fraud. But knowledge of a previous sale does not prevent a creditor from completing his diligence and acquiring a real right: he is entitled to proceed on the basis of the feudal right of the debtor to heritable subjects as recorded in the register and to disregard any personal right relating to those subjects. That principle underlies the decisions in Douglas v Adjudging Creditors of Kelhead (1765) 3 Ross's LC 169 and Mitchells v Ferguson (1781) M 10296; Hailes 879; 3 Ross's LC 120. Moreover, as the pleadings show, in Mitchells counsel for the adjudgers argued successfully that, if Ferguson had not himself chosen

Vigilantibus jura subveniunt

In Russell v Ross's Creditors, sub nom Pierse v Ross (1792) 3 Ross's LC 177, 181 Lord Justice Clerk Braxfield made very clear the wholly different standards that the law applies to purchasers as opposed to creditors who are trying to secure their right:

mala fide

bona fide

Referring to this case, in his observations on Calder v Stewart (1806) Hume 440, 443, Baron Hume speaks of the creditor affecting his debtor's lands with diligence "in contempt of the tailzie" for payment of his debts.

In Mansfield v Walker's Trs (1833) 11 S 813, 828, under reference to Duke of Norfolk v Annuitants of the York Buildings Co (1752) M 7062, Lord Craigie observed:

Having mentioned more recent cases where there had been an attempt to question the position in the case of adjudications of lands, Lord Craigie referred to earlier cases and continued, at p 829:

Lord Balgray, at p 831, referred to the mistake made by Stuart in conveying only five instead of 95 acres of land and said that this no doubt created an obligation on him to apply the proper correction

Similarly, in Earl of Fife v Duff (1862) 24 D 936, 942 the Whole Court were careful to say that the personal fee was of no effect "against third parties who may attach the estate by legal execution for the debts of the disponer, or who may in bona fide purchase it from him, and be first infeft." The requirement of good faith applies only to purchasers.

The winner of the race

My Lords, in the present case the respondent has done nothing more than take advantage of the mistake or error of his rivals, the appellants, in failing to get off their mark and record the disposition from Mrs Burnett promptly. Even once their agents had become aware that her estate had been sequestrated and that the respondent had been appointed as permanent trustee, for whatever reason, they failed to act. In retrospect at least, that was a mistake, since it allowed the respondent to record his notice of title before the appellants. As the authorities show, even although the respondent was well aware that the appellants held a disposition from Mrs Burnett, he was fully entitled to take advantage of their mistake by recording the notice of title and so completing the diligence by acquiring the real right in the subjects for the creditors. At times during his submissions Mr Hodge appeared somewhat apologetic about what the respondent had done: conspicuously, he was unable to say whether the respondent had recorded the notice of title with the deliberate purpose of defeating the appellants' rights. I have little doubt, however, that this is exactly what he did, since there appears to be no other good reason for taking the step. After all, he did not need to do so in order to grant a disposition to a purchaser since he could have deduced title from Mrs Burnett. Moreover, in his pleadings the respondent avers that he sought the advice of his law agents on or about 25 November - not long before he recorded the notice of title. In reality, when he recorded his notice of title at the expense of the appellants, the respondent acted in the spirit of the established law by exploiting their failure to record the disposition in their favour. He did nothing more than his duty on behalf of the creditors. To have done less for them would have been questionable, to say the least. Therefore, in this case the law of bankruptcy worked as it has been intended to work for at least 200 years. Whether that law is - in the words of Lord Macnaghten in Heritable Reversionary Company Ltd v Millar (1892) 19 R (HL) 43, 52 - "in a condition altogether satisfactory" obviously involves fundamental issues of legal policy. But they are of a kind that must be left to the legislature. Your Lordships have to apply the existing law.

In the result, Mrs Burnett's right to the flat vested in the respondent as part of her "whole estate" under section 31(1) of the 1985 Act. Since the respondent then recorded his notice of title and became infeft in October 1991, by reason of the Real Rights Act 1693 his infeftment is to be preferred to the infeftment of the appellants who recorded their disposition in January 1992. The respondent is therefore entitled to declarator in terms of the second crave in the initial writ.

Finally, I should wish to reserve my opinion on a point that was not fully explored at the hearing of the appeal: whether, when the uninfeft proprietor's rights are destroyed by the trustee recording a notice of title, the uninfeft proprietor can rank as an unsecured creditor in the sequestration. Mr Hodge asserted that he could, and there is support for that view in a comment of Bell, Treatise on the Law of Bankruptcy Vol 1, p 82. I remain unclear, however, as to the exact basis of such a claim - which arises only after the date of sequestration - in warrandice or otherwise. It follows that I would also reserve my opinion on the, not unrelated, point about unjust enrichment which Lord Hoffmann has mentioned but which was not argued in the appeal.

For these reasons, in view of the change of circumstances since the interlocutor of the Extra Division, I would recall their interlocutor and the order of the sheriff insofar as he granted decree in terms of the first and third craves of the initial writ, but I would affirm his order granting decree of declarator in terms of the second crave.

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	United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Burnett's Trustee v Grainger & Anor [2004] UKHL 8 (4 March 2004) URL: http://www.bailii.org/uk/cases/UKHL/2004/8.html Cite as: [2004] UKHL 8, 2004 SCLR 433, 2004 GWD 9-211, 2004 SC (HL) 19, 2004 SLT 513, [2004] 11 EG 139, [2004] 11 EGCS 139