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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> MacAdam v. Grandison [2008] ScotCS CSOH_53 (27 March 2008)
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Cite as: [2008] CSOH 53, [2008] ScotCS CSOH_53

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OUTER HOUSE, COURT OF SESSION

 

[2008] CSOH 53

 

A820/06

 

 

 

 

 

 

 

 

 

 

 

REPORT

 

BY

 

THE HONOURABLE LORD HODGE

 

in the cause

 

DAVID BAIRD MACADAM

 

Pursuer;

 

against

 

MORNA GRANDISON

 

Defender:

 

 

ญญญญญญญญญญญญญญญญญ________________

 

 

 

Pursuer: Sir Crispin Agnew, Q.C., A Summers, Advocate; Campbell Smith, W.S.

Defender: D Johnston, Q.C.; Balfour + Manson, LLP

 

27 March 2008

 

[1] On 16 December 2003 in a petition by the Council of the Law Society of Scotland acting under section 41 of the Solicitors (Scotland) Act 1980 ("the 1980 Act") the court appointed the defender as interim judicial factor on the estates of the firm of Macadams SSC and of Mrs Macadam and her husband, the pursuer, who were the partners of the firm. On 13 January 2004 the court sequestrated their estates and appointed the defender as judicial factor on those estates. The court authorised her to make payments out of sums held in the name of the firm and the partners and, subject to section 42 of the 1980 Act, to divide the sum at credit of the client accounts among the firm's clients.

[2] The pursuer was admitted as a solicitor on 31 December 2002 and was assumed as a partner in the firm by his wife on 1 October 2003. In this action the pursuer seeks a declarator that he is not liable for any shortfall on the client account of the firm by reason of any fraudulent acts of Mrs Macadam or any liability arising out of those frauds, in so far as the shortfall or liability arose prior to his being assumed a partner on 1 October 2003. He also seeks count, reckoning and payment in respect of the defender's intromissions with his personal assets since 16 December 2003.

[3] The defender accepts that a significant proportion of the allegedly fraudulent acts and the misappropriation of funds occurred before the pursuer was assumed as a partner in Macadams SSC but submits that she is entitled to retain the pursuer's personal estate and use such part of it as is required to meet the shortfall on the firm's client account attributable to those acts (a) because the pursuer owns assets which have been paid for at least in part by client funds or has gratuitously derived benefit from those funds and (b) because the pursuer has dishonestly involved himself in the breaches of trust by Mrs Macadam which the misappropriation of client funds entailed. In relation to the misappropriations which occurred after the pursuer was assumed as a partner, the defender submits that the pursuer is liable qua partner and as a trustee who has acquiesced in the breach of trust by his co-trustee.

[4] An issue of competency has arisen which I consider appropriate to report to your Lordships. I discuss the issue in paragraphs 5 to 20 below. Thereafter I discuss the matters which were debated before me and express views on those matters in order to avoid duplication of effort and wasted expense should your Lordships either determine that I had jurisdiction in relation to the action or decide to remit the case to the Outer House.

 

The issue of competency which emerged during the debate

[5] The matter came before me on the Procedure Roll for a debate in relation to the parties' pleas to the relevancy. In the course of the debate an issue emerged as to the competency of the action in the Outer House during the currency of the administration of the factory estate by the defender on the authority of the interlocutor of the Inner House.

[6] Parties were agreed that the application to appoint the defender as judicial factor was correctly a petition to the Inner House in terms of Rule of Court 14(3)(b) as it was an application under an enactment relating to solicitors or notaries public. They also accepted that interested parties could raise issues relating to the administration of the factory estate in such cases by note in the Inner House process: see, for example, Pontifical Society v McGregor's Judicial Factor 1974 SC 106. Where the parties came to disagree was on whether it was competent for the pursuer, whose personal estates were subject to the defender's administration in accordance with the court's interlocutor of 13 January 2004, to pursue this action in an Outer House process during the administration of the estate.

[7] Mr Summers on behalf of the pursuer submitted that the action was competent. He referred to examples of actions being pursued against judicial factors in courts other than the court which appointed them both by creditors of the person whose estate was being administered and also by those entitled to a share in the estate. Thus in Ross v Gordon's Judicial Factor 1973 SLT (Notes) 91, in which a creditor of a solicitor raised an action against the judicial factor who had been appointed under the statutory predecessor to section 41 of the 1980 Act, Lord Avonside repelled the defender's plea to the competency of the action and stated:

"In all the authorities cited to me it is plain that a judicial factor is an officer of the court who acts under the superintendance of the accountant of court as a trustee, charged with the duty of safe-guarding and properly administering the estate given into his hands. But this in no way prevents creditors raising actions for payment against him in respect of debts due from that estate."

He referred to Irons, Judicial Factors, pp.47 and 53 (the latter may be a reference to para 53 on p.91 in which Irons suggests that ordinary actions against a judicial factor are competent in the sheriff court) and to Green's Encyclopaedia, Vol VIII, para 1099.

[8] Armstrong v G Dunlop & Son's Judicial Factor 2004 SLT 155 and 295 concerned a judicial factor appointed to the estate of a farming partnership. The judicial factor had obtained a decree for recovery of possession of a farmhouse in which the pursuer, who was a partner with her former husband in the farming partnership, resided. The pursuer sought declarator that she was entitled to ownership and occupation of the farmhouse free of any claims by the judicial factor, reduction of the sheriff court decree to recover possession and interim interdict against the judicial factor taking steps to evict or eject her. The Lord Ordinary granted interim suspension of the decree and interim interdict against the judicial factor. The Inner House upheld his interlocutor. No challenge was made to the competency of the action. But I observe that the issue of competency would not have arisen in that case because the Outer House had power to appoint a judicial factor on the estate of a farming partnership.

 

[9] Mr Summers, in accordance with his duty as counsel, also referred to Hallpenny v Howden (1894) 21 R 945, which he recognised might be contrary to his submission. In that case a domestic employee of a lady claimed, after the death of her employer, that her employer had given her some furniture. She and the judicial factor appointed on the deceased's estate referred the claim to arbitration. In the arbitration the employee produced a list of furniture in the deceased's handwriting in support of her claim. The arbiter decided the case against the employee. When the judicial factor refused to return the list to the employee, she raised an action in the sheriff court for delivery of the writing. The sheriff assoilzied the judicial factor and on appeal the Inner House affirmed his judgment. While two of the judges of the Second Division did not comment on the competency of the action, Lord Young opined that the action was incompetent. He stated:

"There is no doubt that a judicial factor may recover writings or property from others in such circumstances as to make it his duty to restore them to the persons from whom he got them when his purpose was served, but that would be a matter for him to determine in the first instance, and upon his own responsibility, and if there were grounds for saying that the circumstances under which he had acquired them did not warrant him in keeping them as judicial factor, that would be a question for our judgment, as he is an officer of our Court, and for the judgment of no other. We might have come to the conclusion that it was his duty as our officer not to retain them, but to hand them back to the person from whom he got them, or we might have arrived at a contrary result, but at any rate it would be for anyone desiring the return of such writings to appeal to us as his master and superior in the matter to give him instructions how to act. Therefore an action like this in the Sheriff Court against an officer of Court to compel him to give up documents which he thinks it according to his duty as judicial factor to retain, is, in my opinion, utterly incompetent".

[10] It is this dictum which gives rise to the report. Mr Summers stated, correctly, that this was an obiter dictum and that the other judges in the case had not addressed the issue. He pointed out that in Council of the Law Society v McKinnie (No 2) 1995 SC 94 (at p.115G) Lord President Hope had referred with approval to Ross v Gordon's Judicial Factor, but I observe that that reference and that of Lord Penrose (at p.109D-F) did not relate to Lord Avonside's statement about the rights of creditors to sue the judicial factor.

[11] Mr Johnston for the defender then sought to argue that the action was not merely premature and inexpedient but was incompetent. He submitted that the pursuer was not in the position of a third party creditor of the person, whose estate was being managed by the judicial factor, (whom he referred to as the ward) but was the ward. For simplicity I will use the expression "the ward" to describe the person whose personal estates are the subject of the factory. Mr Johnston submitted that while creditors of the ward could sue the judicial factor to recover debts due by the ward in courts other than the one which appointed the judicial factor, the circumstances were different when the ward sought to challenge the judicial factor's right to his estate. The pursuer was seeking to raise a fundamental question as to the extent of the estate which should be under the control of the judicial factor and the use to which the judicial factor was entitled to make of his personal estate. Such a challenge should be made by the pursuer as a note in the Inner House process or as a petition for directions by the defender to the Inner House. He submitted that the Accountant of Court played a central role in supervising judicial factors and would be circumvented if a ward raised such proceedings in the Outer House, because, unlike a note or petition for directions, the process might not be drawn to the attention of the Accountant of Court.

 

Discussion of the issue of competency

[12] I consider that the issue of the competency of the action in this case is one which I should report to your Lordships in the Inner House. In case it might assist a discussion of the issue before your Lordships, I set out my views below.

[13] There are actions which can properly be raised against a judicial factor in courts other than the one which appointed him. The judicial factor may enter into contracts or otherwise act in the course of his administration of the factory and disputes may arise with third parties as a result of such acts. Thus in Mack v Allan and Simpson (1832) 10 S 349 a judicial factor on a landed estate had granted a lease of grazings and the tenant of the grazings sued him in the sheriff court for damages for the death of a horse which had fallen into an unprotected ironstone pit.

[14] The factory estate may also in some circumstances be exposed to diligence by the ward's creditors. In the chapter on judicial factors in volume VIII of Green's Encyclopaedia, T Swinton Paterson stated (at para 1099) that the appointment of a judicial factor "interposes no barrier to the right of creditors to pursue any competent diligence, nor does it hinder an application for sequestration under the Bankruptcy Act". The authority on which he founded does not wholly vouch the first proposition. Where the title to assets remains in the name of the ward, those assets are exposed to diligence by creditors or possession by heritable creditors unless the purpose and terms of the appointment of the judicial factor are inconsistent with the diligence being done against, or a creditor taking possession of, the factory estate: see Ferguson v Murray (1853) 15 D 682. In that case the court envisaged that the appointment of a judicial factor to conserve an estate in the context of a dispute between heritable creditors would prevent such creditors from exercising their rights in security. Similarly, as a general rule a creditor of the ward can serve an arrestment to arrest in the hands of the judicial factor: Mitchell v Scott (1881) 8 R 875.

[15] The extent to which such actions are competent may depend on the specific tasks for which the court has appointed the judicial factor. The court appoints judicial factors to serve many purposes and not merely to conserve a person's estate: Walker, Judicial Factors, p.76 and Council of the Law Society v McKinnie (No 2) at pp.108F-G and 109C. There may be many cases where it is consistent with the task which the court has given a judicial factor, for example where the factor is conserving the estate on behalf of an absent person, that creditors of the ward are able to sue the judicial factor to recover debts due by the ward, as Lord Avonside suggested in Ross v Gordon's Judicial Factor. But it is not clear to me that creditors of a solicitor can recover debts due by him in his private capacity by suing the judicial factor appointed under section 41 of the 1980 Act. This is because the role of such a judicial factor is to settle the solicitor's liability to clients and others incurred in connection with his practice. While the judicial factor may make provision from the factory estate to allow the ward to meet his obligations in the interest of preserving that estate, it is not clear that creditors of the ward may sue the judicial factor in respect of the ward's obligations which have not arisen from his practice as a solicitor. They may sue the ward and, if their debts are not paid, seek sequestration of his estates under the Bankruptcy (Scotland) Act 1985.

[16] In Council of the Law Society v McKinnie (No 2) the court analysed the functions of judicial factors appointed under section 41 of the 1980 Act. So far as relevant that analysis may be summarised as follows. First, the appointment of a judicial factor on the estates of a solicitor under section 41 of the 1980 Act gives him control over two distinct estates, namely the client account which the solicitor holds in a fiduciary capacity and the solicitor's personal estate (pp.106H-107A). Secondly, the judicial factor can use the solicitor's personal estate to settle liabilities of the solicitor arising from his practice, including making up any deficit on the client account (pp.107C-E, 109G and 115F-I). Thirdly, the judicial factor does not have the powers and duties of a trustee in sequestration to receive and adjudicate upon creditors' claims (p.109D-F). Fourthly, the property of the solicitor which passes to the trustee on sequestration of the solicitor's estates under the Bankruptcy (Scotland) Act 1985 is his right to an accounting by the judicial factor of his intromissions with the property and the solicitor's reversionary right to any assets or balance of funds remaining (p.110G-111A). Fifthly, the clients' funds, being fiduciary funds, do not vest in the trustee in sequestration of the solicitor's estates - section 33(1)(b) of the Bankruptcy (Scotland) Act 1985 - but continue within the remit of the judicial factor (see also Council of the Law Society v McKinnie 1993 SLT 238) .

[17] The vesting of the ward's estate in the trustee in sequestration under section 31(1) of the Bankruptcy (Scotland) Act 1985 results in the termination of the judicial factor's administration of the estate which so vests. It leads to the recall of the appointment and the factory: Borthwick, Petitioner (1862) 1 M 104. Where the judicial factor appointed under section 41 of the 1980 Act held client funds, he would transfer the personal estate of the solicitor to the trustee, under deduction of or reserving his right to an appropriate proportion of his fees and outlays, and retain the administration of the client funds.

[18] It appears therefore that there are various court processes which can interfere with the administration by a judicial factor of the factory estate but which do not involve the court which appointed him. I have some doubt therefore whether Lord Young's approach was correct in relation to the matter in issue in Hallpenny v Howden. But where, as in this case, the substance of the challenge is to the entitlement of the judicial factor to administer and distribute a significant part of the ward's personal estate in accordance with the court's interlocutor and to abstract that part from the factory, I consider that Lord Young is correct in his view that it is for the appointing court to determine the challenge. It is the appointing court which has jurisdiction to recall an appointment - Borthwick, Petitioner - and it appears to me that it should be the appointing court which determines a challenge by the ward to a judicial factor's possession of a material part of the factory estate or an application that the judicial factor should give an accounting.

[19] Where, as in this case, there are issues of fact to be determined, it may be that the Inner House would consider it appropriate to remit the case to a Lord Ordinary to make findings of fact. Such a remit could also be made to determine particular legal issues which depended on disputed fact. But it appears to me that, if there is substance in Lord Young's approach, the challenge should be initiated in the Inner House.

[20] Absent binding authority on this matter and as it is a question of the jurisdiction of the Inner House, it appears to me appropriate to report this matter to your Lordships.

 

 

 

Other issues

[21] The other matters which parties debated are not matters on which I seek the opinions of your Lordships in this report as they do not raise matters of jurisdiction. I discuss them below because they were debated before the issue of competency arose and, should your Lordships consider that the action is competent in the Outer House or remit the matter to the Outer House, it is appropriate that I should record the submissions and my opinion on them.

[22] The pursuer in his note of argument initially offered a proof before answer but, in the event that the defender insisted on a debate, submitted that he was not liable as a matter of law for claims which arose before the date on which he became a partner of the firm. On the day of the debate, Sir Crispin Agnew on behalf of the pursuer lodged a supplementary note of argument in which he submitted (a) that there were no relevant and specific averments that the pursuer had ever agreed to be liable for the pre-existing deficit on the firm's client account when he joined the firm and (b) that there were no relevant and specific averments that the pursuer had personally misappropriated client funds from the firm's client account or that he was otherwise aware that the source of the funds with which he had been involved was tainted.

[23] Mr Johnston's initial position on behalf of the defender in his note of argument was that the action should be dismissed because the defender was an officer of the court under the supervision of the Accountant of Court and there was no basis on which the court in an action of declarator and for count, reckoning and payment should interfere with her administration of the factory estate before that administration had been completed and the defender had compiled her final accounts. The action was premature and should be dismissed. The defender had already prepared a scheme of division of the estate with a view to seeking her discharge. She had invited the pursuer to comment on the scheme of division but he had not done so. He referred to Council of the Law Society of Scotland v McKinnie (No 2) and Caledonian Railway Company v Glasgow Corporation (1905) 7 F 1020.

 

(i) Expediency and prematurity

[24] Mr Summers submitted that it was not appropriate that the pursuer, who disputed the right of the judicial factor to realise his personal estate and use it to fund the payment of the claims of the firm's clients, should not be able to challenge the judicial factor until she completed her administration when already more than four years had passed since the sequestration of his personal estates in the court's order of 13 January 2004. Sir Crispin Agnew also emphasised that the pursuer required access to the underlying books and accounts in order to ascertain both the extent of the shortfall on the client account and the extent of his personal liability therefor. The declarator sought to focus the issue of the pursuer's liability and the conclusion for interdict had been to protect the pursuer's assets but interim interdict had not been needed as the defender had undertaken not to realise his assets.

[25] Mr Johnston submitted that the action was inexpedient and premature. It sought to isolate one question, namely the shortfall on the client account, from other issues which would arise. In seeking count, reckoning and payment the pursuer had not carried out the correct procedure. The defender did not dispute her obligation to account. She had produced accounts of charge and discharge in relation to her intromissions and the pursuer had not sought to lodge notes of objection to them. The pursuer's position was that the accounts which were lodged did not allow the parties to focus on the areas of disagreement but the defender had prepared a draft scheme of division which was intended to achieve that purpose. The pursuer had been given the draft scheme but had not commented on it. The defender would produce a final account and a scheme of division before seeking her discharge but the claims of former clients of Macadams SSC had not yet been finalised. The defender had given an undertaking not to realise the pursuer's assets in the meantime and had made funds available to him to allow him to meet his liabilities. In the meantime the action was premature and should be dismissed.

[26] I am not persuaded that it is in all circumstances premature for a ward to raise before the appropriate court the question of a judicial factor's entitlement to intromit with and distribute his personal estate at any time before the judicial factor has produced final accounts. Some factories may take many years to administer and it may be contrary to justice to postpone a challenge until that administration is completed. Where the pursuer became a partner in the firm only shortly before the appointment of the judicial factor and the defender justifies her retention of the pursuer's estate principally on the basis of restitutionary claims on behalf of the clients of the firm I consider that the pursuer should not have to wait until the completion of the administration of the factory before challenging the basis of those claims. The expedient time for the court to consider the challenge may depend on the state of the judicial factor's investigation of (a) clients' and others' claims against the firm and (b) the pursuer's involvement in and notice of the alleged misappropriations. As the defender has been able to prepare (but has not yet lodged in process) a draft scheme of division which may go some way to address those issues I would not have been prepared to dismiss the action as premature.

 


(ii) The relevancy of the defender's case

[27] The defender's case is in summary that there is a shortfall on the client account of Macadams SSC as a result of the misappropriation of client funds which occurred both before and after the pursuer became a partner in that firm. The pursuer worked as a property manager in Macadams SSC in the 1990s. He also traded as a property factor initially through a limited company, Macfactor Homes Limited, until 1995, when he continued the business as a sole trader under the trading name of Macfactor Homes, working from the premises of Macadams SSC. The clients of Macfactor Homes were a limited number of private sector landlords of flats and houses in Edinburgh. The legitimate business of Macfactor Homes provided a regular stream of payments of rental income into its bank accounts. But that business did not explain the large sums which were transferred into Macfactor Homes' bank accounts from the client accounts of Macadams SSC. The pursuer had a detailed knowledge of financial affairs, their tax consequences and his own assets and liabilities. He and Mrs Macadam organised their financial affairs so that almost all of their assets were held in the pursuer's name.

[28] The defender avers that the pursuer and Mrs Macadam paid monies which should have been placed in Macadams SSC's client account into other accounts, including the client account of Macfactor Homes. The pursuer used misappropriated funds in connection with the business of Macfactor Homes and funds were transferred into the personal accounts of the pursuer and Mrs Macadam. The funds were used to repay loans over heritable properties, title to which was in the pursuer's name, and also when needed to fund Macadams SSC and its client account. The defender also avers that the pursuer used client funds from Macadams SSC to pay the deposit on a flat in Florida. There are specific averments of substantial sums of clients' money being paid into Macfactor accounts and used for the personal purposes of the pursuer or Mrs Macadam. The defender pleads examples of funds being misappropriated from specified executries and of one occasion when the pursuer misinformed charities as to the nature of the bequests in their favour. See paragraph 37 below.

[29] The defender also pleads that in May 2003 the pursuer and Mrs Macadam incorporated Macadams Limited and paid into the accounts of that company substantial amounts of loan funds advanced to clients of Macadams SSC. It is not clear from the averments whether and if so to what extent any of those funds were ultimately misappropriated from the clients for whom they had been obtained.

[30] In the written pleadings the defender advanced two cases to justify her retention of the pursuer's personal estate to satisfy the liabilities of Macadams SSC to their clients. The first case appeared to be an assertion that, contrary to the default rule in section 17 of the Partnership Act 1890, the pursuer had accepted liability for the deficiency on the firm's client account at the date of his assumption as a partner (Closed Record p.10A). Mr Johnston however explained that he did not insist upon that case which would therefore fall to be deleted from the pleadings.

[31] The second case, which Mr Johnston defended in the Procedure Roll debate, is that both before and after his assumption as a partner in Macadams SSC the pursuer had notice of the misappropriation of client funds held by the firm and that client funds were used to acquire assets, title to which was taken in the pursuer's name (Closed Record pp. 10A-B and 13D-E).

[32] Mr Summers on behalf of the pursuer criticised this case. He submitted (i) that the assertion that the pursuer had notice of the misappropriations was wholly imprecise, (ii) that there was a fundamental lack of specification in the averments that the pursuer and Mrs Macadam misappropriated client funds, and (iii) that the defender's failure to lodge the schedule which she had incorporated into her pleadings (Closed Record p.12D-E) and to produce the draft scheme of division deprived the pursuer of fair notice of the allegations made against him. In particular the pursuer needed to be informed of the extent of the shortfall and to whom among the clients the firm owed money as a result of the misappropriations. He referred to The Royal Bank of Scotland plc v Holmes 1999 SLT 563 and Drummond's Trustees v Melville (1861) 23 D 450 in support of the proposition that there required to be clear averments of specific facts from which fraud could properly be inferred. Such averments were also needed where criminal acts were alleged.

[33] Except for the need for the defender to produce the schedule which is incorporated into her pleadings, I am satisfied that there is no substance in the pursuer's challenge to the relevancy of defender's second and only remaining case. Both of the reported cases to which Mr Summers referred me were concerned with the pleading of an allegation of fraudulent misrepresentation. That is not the central issue in this case.

[34] The case which the defender pleads is a familiar one where a trustee seeks remedies for the misapplication of assets held on trust. It is not disputed that the client funds of Macadams SSC were funds which Mrs Macadam, and latterly she and the pursuer, held on trust for their clients. The defender asserts the right to retain the pursuer's personal estate and apply it towards the shortfall on the client account because of what she avers is the pursuer's liability to the trust in relation to the misappropriated funds. Such liability can take various forms.

[35] First, where a person has gratuitously received trust funds and mixed them with his own funds, the trustee, or in this case, the judicial factor, can trace the trust funds in his hands and recover them for the trust: Jopp v Johnston's Trustees (1904) 6 F 1028. Where trust funds have been inmixed with personal funds and the person then draws out part of the mixed fund, he will be held to have drawn out his own funds and not the trust funds: Jopp, Lord Justice Clerk MacDonald at pp.1034-1035, Lord Moncrieff at p.1036; In re Hallett's Estate [1879] 13 Ch D 696. Even where trust property is no longer traceable in his hands, a person who has been enriched by the consequence of another's fraud or breach of trust cannot retain the gratuitous benefit but is liable to reverse the unjustified enrichment: Style Financial Services Ltd v Bank of Scotland 1996 SLT 421, at p.426, Bank of Scotland v MacLeod Paxton Woolard & Co 1998 SLT 258, at p.274D-E, Clydesdale Bank v Paul (1877) 4 R 628. In the past, as in those cases, the obligation was categorised as an obligation to recompense but since the generalisation of the obligation to reverse unjustified enrichment in Shilliday v Smith 1998 SC 725 and Dollar Land (Cumbernauld) Ltd v CIN Properties 1998 SC (HL) 90 it is no longer appropriate to speak of recompense as a ground of action. Nor is it necessary, as in the past, to aver what were the five elements or prerequisites for recompense.

[36] Secondly, a person may be liable on the ground of unjustified enrichment to the trustee (or judicial factor) because he had knowledge that the funds which he received, and for which he has given value, were obtained through a breach of fiduciary duty by another: Thomson v Clydesdale Bank (1893) 20 R (HL) 59, Royal Brunei Airlines v Tan [1995] 2 AC 378, Style Financial Services Ltd v Bank of Scotland 1996 SLT 421 and Bank of Scotland v MacLeod Paxton Woolard & Co 1998 SLT 258. A person can incur such liability without his activity necessarily being criminal. It is sufficient to incur such liability that the person has dishonestly assisted in a breach of trust. In this context dishonesty is assessed objectively and can involve either conscious impropriety or reckless disregard to the rights or possible rights of others: Royal Brunei Airlines v Tan, at pp.389C-G, 390G-H, Bank of Scotland v MacLeod Paxton Woolard & Co, at p.276E-H.

[37] Thirdly, liability may arise on the basis of fraud. The defender pleads circumstances which may amount to either dishonest assistance in a breach of trust or fraud in relation to Helen Davidson's executry (Closed Record p.12B-C). She avers:

"During Helen Davidson's lifetime Mrs Macadam had operated a power of attorney on her behalf. In the course of an inspection carried out by the Law Society after the death of Helen Davidson it was discovered that two investments made by Mrs Macadam on her behalf before her death had not been ingathered as part of her executry estate. The relevant file could not be produced to inspectors and was said to have been misplaced. Following appointment of the defender as judicial factor, the file was discovered in a rubbish bin at the premises of Macadams SSC. It transpired that the pursuer was involved in the administration and winding up of the executry. The residual beneficiaries under the will were all charities. The pursuer wrote to them. He did not advise them that they were residual beneficiaries or of the amount of the residue. He informed them only that they had been left legacies and enclosed a cheque for the amount of the legacy".

This is, in my opinion, a relevantly pleaded case of fraud giving adequate specification of the circumstances from which fraud may be inferred. If the pursuer administered the executry as averred, he would have had access to Helen Davidson's testamentary disposition and would have known that the charities had not been given specific legacies but were residuary beneficiaries. The nature of the alleged misrepresentation is clear. His writing to the charities as averred would be prima facie evidence of dishonesty and if it were proved that he knew that the estate had not been wholly ingathered might be indicative of fraud.

[38] Fourthly, a trustee can incur personal liability when he acquiesces in a breach of trust or fraud on the part of a co-trustee. In this regard, Mr Johnston referred me to McLaren, Wills and Succession (3rd ed), p.1217, Wilson and Duncan, Trusts, Trustees and Executors (2nd ed), paras 28.36-28.37 and Wilkins v Hogg (1861) 31 LJ Ch 41, Lord Westbury at p.43 to vouch the proposition that a trustee can become liable for the acts of a co-trustee when he becomes aware of a misapplication of funds by his co-trustee and wilfully abstains from noticing it. Inactivity by the trustee is sufficient to amount to acquiescence in the breach of trust: Blain v Paterson (1836) 14 S 361. Mr Johnston submitted that the pursuer became a trustee of the client funds held by Macadams SSC on his assumption as a partner in November 2003 and acquiesced in his wife's continuing misappropriations, thereby incurring liability on this basis as well as on the bases described above.

[39] The defender's factual averments, which I have summarised or quoted in paragraphs 27, 28 and 37 above are sufficient for her to seek to make out a case based on each of the four grounds of liability to which I have referred.

 

Conclusion on the other issues

[40] If I have jurisdiction as an Outer House judge to hear the case, I would not sustain the pursuer's plea to the relevancy at this stage except to delete the averments to which I referred in paragraph 30 above, namely the sentence at p.10A of the Closed record beginning "In the circumstances". Otherwise, being satisfied that the action is not premature, I would allow parties a proof before answer of their averments.

 


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