|
HOUSE OF LORDS |
SESSION 2003-04 [2004] UKHL 8 |
OPINIONS
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
Burnett's Trustee (Respondent)
v.
Grainger and another (Appellants)
ON
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:
"My Lords, if this House were compelled to uphold the decision under appeal, I rather think I should be inclined to doubt whether the law of bankruptcy in Scotland was in a condition altogether satisfactory."
- 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:
"To clothe the feuar with a real right in the lands he required, and still requires, more than the charter; he requires delivery. By that is meant delivery, not of the charter (though that also is necessary), but of the lands. Such delivery is infeftment."
- 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:
"
he who first completes the real right, or, in other words, he who first divests the person last infeft, has the preferable right to the lands."
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:
"The proper object and effect of every valid seisin is to divest the granter of the heritable right, and to invest the grantee
It is of the very essence of a real right, not only to found a preference against a less perfect right, but to prevent any third party from acquiring a perfect right to the lands, which most certainly an unregistered seisin does not."
At p 938 he added this comment:
"In the same way, and on the same principle, the holder of a heritable bond, followed only by unregistered seisin, would fail in claiming a preference over personal creditors, because such creditors have the means of obtaining by adjudication a perfect right to the lands of the debtor."
- 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:
"Those rights, again, that spring from a connection which is formed with an individual have
a much more limited and uncertain operation. In these, as in all other instances of right, there is to be sure a corresponding obligation somewhere; but it lies in this case with that individual alone who has been applied to or bargained with as the means of getting at the thing. He, to be sure, in return for what he has received, or in fulfilment of the expectation he has raised, is bound to make good his word, and put me in possession of the thing in question. But with respect to all the rest of the world, who have had no sort of concern with this bargain of mine, and are probably ignorant even of any such having been made; I have no manner of claim nor bond upon them to repair my loss, or consider my disappointment."
- 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:
"any doubts which were entertained before the above decision are now held to be settled; and according to the doctrine in this case of Bell, the law is laid down by Erskine, that no conveyance of a personal right to lands can so divest the disponer as to prevent him from granting a posterior deed that may, by prior sasine, be made the preferable. Ersk ii, 7,26."
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:
"Subject to section 33 of this Act and section 91(3) of the Pensions Act 1995, the whole estate of the debtor shall vest as at the date of sequestration in the permanent trustee for the benefit of all the creditors; and -
(a) the estate shall so vest by virtue of the act and warrant issued on confirmation of the permanent trustee's appointment; and
(b) the act and warrant shall, in respect of the heritable estate in Scotland of the debtor, have the 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."
- 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:
"The only general doctrine which appears to be safe is, that in all competitions the right of the general body of creditors, or of an individual claiming a preference, is to be regulated strictly according to the criterion by which real right is contradistinguished from personal, unless it can be stated either,
1. That there is a radical defect in the title by which the bankrupt holds, and on which the right of the general creditors must rest; or,
2. That his right is radically qualified or conditional, not absolute; or
3. That the acquisition of the property on the part of the bankrupt was accomplished by fraud, of which creditors cannot, without participating, take advantage."
- 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:
"The question, however, must always return to this, What was truly the extent of real right in the debtor? And although he may be under a relative personal obligation, the real right legally constituted is that only which his sasine bears, and of which it gives assurance to the public; and accordingly, it has at last been held that such personal exceptions have no effect against creditors": Wylie v Duncan, 1803, M 10269.
- 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:
"I have already stated what I believe to have been the import of the judgment in Wylie v Duncan and similar cases, and I have only to remark further, that a personal obligation to convey heritable estate, undertaken by one who is the beneficial as well as the feudal owner, does not, according to the law of Scotland, denude him of his beneficial interest, or confer upon the person to whom it was contracted either the character or the rights of a trust beneficiary."
- 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:
"I know no safety to the feudal law, unless you prefer infeftments; for otherwise an imperfect right would be better than a complete one. There is great danger in departing from this feudal principle, but none in adhering to it. The disponee is safe, unless he is supinely negligent; for an adjudication cannot be taken on a sudden, and without the knowledge of many."
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.
LORD HOBHOUSE OF WOODBOROUGH
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:
"But there is no such thing as a real right which is imperfect or incomplete. Until the real right is transferred, the matter rests entirely upon personal obligation."
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.
LORD RODGER OF EARLSFERRY
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:
"The order of the court awarding sequestration shall as from the date of sequestration have the effect, in relation to diligence done (whether before or after the date of sequestration) in respect of any part of the debtor's estate, of -
(a) a decree of adjudication of the heritable estate of the debtor for payment of his debts which has been duly recorded in the register of inhibitions and adjudications on that date; and
(b) an arrestment in execution and decree of forthcoming, an arrestment in execution and warrant of sale, and a completed poinding,
in favour of the creditors according to their respective entitlements."
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:
"(1) Subject to section 33 of this Act and section 91 (3) of the Pensions Act 1995, the whole estate of the debtor shall vest as at the date of sequestration in the permanent trustee for the benefit of the creditors; and -
(a) the estate shall so vest by virtue of the act and warrant issued on confirmation of the permanent trustee's appointment; and
(b) the act and warrant shall, in respect of the heritable estate in Scotland of the debtor, have the 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.
(2) The exercise by the permanent trustee of any power conferred on him by this Act in respect of any heritable estate vested in him by virtue of the act and warrant shall not be challengeable on the ground of any prior inhibition (reserving any effect of such inhibition on ranking).
(3) Where the debtor has an uncompleted title to any heritable estate in Scotland, the permanent trustee may complete title thereto either in his own name or in the name of the debtor, but completion of title in the name of the debtor shall not validate by accretion any unperfected right in favour of any person other than the permanent trustee.
(4) Any moveable property, in respect of which but for this subsection -
(a) delivery or possession; or
(b) intimation of its assignation,
would be required in order to complete title to it, shall vest in the permanent trustee by virtue of the act and warrant as if at that date of sequestration the permanent trustee had taken delivery or possession of the property or had made intimation of its assignation to him as the case may be."
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:
"Any claim is either in rem or in personam, and there is an unbridgeable division between them. An action in rem asserts a relationship between a person and a thing, an action in personam a relationship between persons
. The Romans think in terms of actions not of rights, but in substance one action asserts a right over a thing, the other a right against a person, and hence comes the modern dichotomy between rights in rem and rights in personam. Obviously there cannot be a dispute between a person and a thing, and therefore even in an action in rem there must be a defendant, but he is there not because he is alleged to be under any duty to the plaintiff but because by some act he is denying the alleged right of the plaintiff. In a rei vindicatio he is denying the plaintiff's ownership by being in possession of the thing claimed."
As is apparent from the summary of counsel's submissions, this unbridgeable division between real and personal rights is central to the respondent's case. He claims that, since Mrs Burnett retained the real right of ownership in the flat, under section 31(1) of the 1985 Act her right was disponed to him as trustee, unqualified by any rights of the appellants against Mrs Burnett which were purely personal, existed solely between them and were of no concern to him. By recording the notice of title, the respondent says, he acquired the real right of property in the flat that the appellants are denying - originally, by possessing the flat. He therefore asks the court to pronounce a declarator of that right.
- 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
"make no faith in judgment by way of action or exception in prejudice of a third party who hath acquired a perfect and lawful right to the said lands and heritages; but prejudice always to them to use the said writs against the partie maker thereof, his heirs and successors."
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:
"That All Infeftments whether of property or annual-rent or other Reall Rights whereupon Sasines for hereafter shall be taken shall in all Competitions be preferable and preferred according to the date and priority of the Registrations of the Sasines without respect of the distinction of Base and publick Infeftments or of being clad with possession or not clad with possession in all time coming."
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:
"... I am very glad that the result is such as my noble friend proposes, and that now, on the authority of this House, it will be clearly taken as the law of Scotland, that unrecorded sasines are a nullity."
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:
"Thus the legal effect of such a disposition, even before it is followed by tradition of the subject disponed, is twofold.
In the first place, it operates as an actual alienation of the subject to the disponee; and it vests in him most of the essential attributes of ownership. In particular it vests in him not only a right to possess the subject and to reap its fruits but also a power to sell it; to dispone it for either onerous or gratuitous causes; and to settle the estate by mortis causa dispositions and deeds of entail. The right so created is transmissible from one person to another by voluntary disposition; and on the death of any person, in whom it is vested, it is transmissible to his heir by general service; and each person in whom it is vested successively has the powers and privileges of ownership above mentioned. This right is usually called a personal fee - a denomination importing not that the subject of it is moveable, for it is truly heritable, but that it is not feudal, and indicating at the same time that, even while not followed by solemn tradition or infeftment, the right is still sua natura a right of fee.
Secondly, such dispositive act, although it operates as a de praesenti alienation, and not merely as an obligation to alienate, does farther by implication impose upon the disponer an obligation of a different kind - viz a consequent obligation (as Lord Stair calls it) - as to delivery or tradition of the subject disponed."
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:
"Although the personal fee, thus vested in a disponee before he is infeft, confers upon him such powers and privileges of ownership, it is, while in that state, attended with some risks and disadvantages. One of them is, that the owner is not the entered vassal of the feudal superior. Another is, that as his right is not clothed with infeftment, and published in the Register of Sasines, it is 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. And still another disadvantage (which may often be of moment in cases relating to the titles of entailed estates) is, that when the disposition is granted under conditions intended to burden or restrict the disponee's right in favour of third parties, as creditors, or as heirs of entail, these conditions cannot be rendered real burdens upon the estate without being embodied in the infeftment of the disponee. But a personal fee, while in these and some other respects is not equivalent to a fully feudalised fee, still leaves the person to whom it belongs vested with the important powers and privileges of ownership formerly mentioned, and with a right, in addition, to call upon the disponer, or his heir, to grant a proper warrant for clothing the personal fee with feudal tradition."
- 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:
"It was itself a substantive and de praesenti disposition to a certain disponee, and to a certain series of heirs of entail, with all the restrictions prescribed by that statute. It was thus itself a habile entail. It is true that Major Skene's right under that entail was still only such a personal fee as has been described, and that in order to render its conditions and restrictions real burdens upon the estate, three proceedings were still requisite."
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:
"In virtue of that title she had all the powers and privileges of ownership arising from a personal fee as formerly mentioned, excepting in so far as these powers and privileges were restricted by the entail.... No doubt, while her right under the entail remained only personal, and the conditions in favour of the heirs of entail were not made real burdens upon the lands by her being infeft in them under these burdens, the rights of these subsequent heirs of entail were exposed to the risk of being defeated, in the manner already explained, - that is to say, by third parties obtaining themselves first infeft in the land, in virtue either of onerous and bona fide purchases from the heirs-at-law of the entailer, or of legal execution for payment of the onerous debts of such heirs, if these heirs should, in that character, have made up a feudal title to the lands. But, subject to that risk, the personal fee was vested in Elizabeth Skene by the deed of entail itself, and her general service as heir of entail; and a jus crediti was created in favour of the subsequent heirs of entail."
- 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 th
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