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McInnes & Anor v. Thomson [2002] ScotHC 80 (25 June 2002)

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Coulsfield Lord Cameron of Lochbroom Lord Abernethy	P220/98 OPINION OF THE COURT delivered by LORD ABERNETHY in PETITION of MRS ELISABETH MABEL McINNES and ANOTHER First Petitioner; against BALFOUR THOMSON Second Petitioner: for Directions in connection with the Distribution of the Estate of the late Hugh Royden Neilson _______

 

 

Act: Connal, Solicitor Advocate, Q.C.; McGrigor Donald (Petitioners)

 

 

25 June 2002

1. The petitioners are the executors of the late Hugh Royden Neilson ("the deceased") who died on 17 September 1997. The deceased had been a Name at Lloyd's of London. He was an underwriting member of two syndicates. The syndicates operated on the basis of a separate account for each calendar year. Each of the years of which the deceased was a member of these syndicates have closed naturally with one exception. That is the year 1982 in respect of one of the syndicates. Consequently the deceased's estate has no actual or contingent liability except in relation to that syndicate for that year.
2. In the 1980's an increasing number of syndicates were unable to close as they would have done hitherto because of the uncertain level of liability for claims arising out of business in the US, in particular policies covering asbestosis and environmental pollution. Claims were frequently made well after the period to which the policy related with the result that the Names who were members of the syndicate remained liable to pay on claims on the syndicate for an indefinite period. This problem was exacerbated during the period 1988-92 when Lloyd's suffered very heavy but unquantifiable losses. As a result in 1996 Lloyd's produced what was known as a Reconstruction and Renewal plan. Under this plan a reinsurance company, known as Equitas, was formed and all liabilities of Lloyd's Names in respect of 1992 and prior years of account were reinsured into it.
3. The Equitas group includes two reinsurance companies authorised by the Department for Trade and Industry ("DTI"). One of these companies is Equitas Reinsurance Limited and it provides the bulk of the reinsurance under the Reconstruction and Renewal plan, including the reinsurance of the deceased's liabilities. The reserves of Equitas are such that the DTI, acting under Part I of the Insurance Companies Act 1982, has authorised the relevant companies in the group, including Equitas Reinsurance Limited, to carry on reinsurance business. However, although the liabilities of Names for 1992 and earlier years of account have been assumed by Equitas, the Names have not been released from those liabilities. With regard to those of the deceased they are therefore now with the petitioners as his executors.
4. According to the averments in the petition the petitioners have paid all of the debts of the deceased known to them save for the costs and expenses associated with the final administration of the estate. They have also paid all the legacies due in terms of the deceased's trust disposition and settlement and relative codicil and informal writing, all as varied by a deed of variation after his death. The petitioners are therefore now in a position to complete the administration of the deceased's estate and to distribute it to the residuary beneficiaries. They are anxious to do this as soon as possible. Given the possibility, however, of claims against the estate of unknown amounts and on unknown dates arising out of the deceased's underwriting activities as a Name at Lloyd's, the petitioners believe that they may be personally liable if any of the estate is distributed or if it is wholly distributed without retention. This is despite their belief that all such claims are secured by virtue of the fact that all Lloyd's syndicates of which the deceased was a member have either been closed or reinsured into the Equitas Group. They have accordingly raised this petition for directions seeking, first, the approval of the court of the distribution of the deceased's estate to date and the final distribution thereof without any retention or further provision being made for potential claims in respect of any contract of insurance or reinsurance underwritten by the deceased in the course of his business as an underwriting member of Lloyd's of London and, secondly, an order relieving them from personal liability for any such potential claims or for distributing the estate in accordance with the court's direction.
5. We were informed that the position that the petitioners find themselves in is the same as or similar to that of executors in a number of estates in Scotland. The present case is the first of its kind to be raised in Scotland. There have, however, been a number of cases in England where a similar situation has developed. The first case there was Re Yorke (decd) 1997 4 All E.R. 907 In that case the plaintiffs were the executors of Y, who had been a Name at Lloyd's of London from 1983 until his death in 1991. As stated above, as a result of the implementation of the Lloyd's Reconstruction and Renewal plan in August 1996, reinsurance of all Lloyd's 1992 and earlier non-life business was reinsured into Equitas. In that way, Y's estate had the benefit of reinsurance in respect of every possible Lloyd's risk to which it would or might otherwise be vulnerable. Having settled the debts and liabilities of Y's estate, other than the unascertained or contingent liabilities arising from his position as a Lloyd's Name, the plaintiffs wished to complete their administration by distributing the residue. However, they wished to be sure that distribution would not involve them in personal liability should creditors in respect of Y's position as a Name emerge. So the factual position of the executors there was the same as that of the petitioners here. The executors applied to the court for directions as to whether, given the protection of Equitas, they were under a duty to distribute to the remaining beneficiaries without any retention and free of all risk of personal liability; or whether they should retain something (and, if so, how much and for how long) against the emergence of one or more policyholders with a claim or claims against Y's estate. The case came before Lindsay J in the Chancery Division. He held that there was no duty on the executors to distribute the estate to the persons interested in it. He did, however, hold that there was good reason on the particular facts of the case before him to sanction a distribution of the estate to legatees without the executors requiring any retention out of the estate or any particular security beyond the personal security of the recipients in support of an indemnity from the beneficiaries to the executors should it transpire that the legatees had been overpaid by reason of there being emerging debts in respect of the deceased's open years as a Name which were unsatisfied by the Equitas arrangements.
6. In the present case the petitioners do not apply for directions that there is any duty on them to distribute the deceased's estate to the persons interested in it.
7. In Re Yorke (decd) Lindsay J examined in detail the Equitas arrangements. In doing so he had the benefit of evidence from Mr W.D. Robson, a Director and the Chairman of Anton Jardine Members' Agency Limited, a leading Lloyd's members' agent. He was Chairman of the Lloyd's Underwriting Agents' Association and had been involved in the Lloyd's market since 1963. Lindsay J also considered the financial strength of Equitas and in doing that he had the benefit of evidence from Mr Frank Attwood, a partner in Robson Rhodes who was, from 1980 to 1984, a member of the Auditing Practices Committee of the Consultative Committee of Accountancy Bodies and who, from 1984 to 1992, chaired the working party which produced that committee's audit brief on Lloyd's syndicates. He gave evidence in relation to the report by Coopers & Lybrand, the auditors of Equitas, for the period ended 4 September 1996. His conclusion was that the auditors did not consider that there was a significant level of concern about Equitas's ability in the foreseeable future to continue as a going concern.
8. In the present case the Court pronounced an interlocutor on 17 December 1998 in the following terms:

"The Lords, having heard the Solicitor Advocate for the Petitioners, appoint the Petitioners to lodge in process such supporting evidence as the Petitioners are able to provide by way of affidavits and productions as will inform the Court as to the position and relationship of a Name at Lloyd's such as the late Hugh Royden Neilson with Lloyd's and as to the operation of Equitas in respect of outstanding liabilities both in general and as regards those applying to the late Hugh Royden Neilson, remit to Mr James Drummond Young, Q.C. to consider that evidence and to discuss with the Petitioners any requirements for further evidence, and thereafter to report to the Court."

9. Further to that interlocutor affidavits and supporting productions from, among others, Mr W.D. Robson and Mr Frank Attwood were lodged. Mr Robson's affidavit was dated 13 March 2001 and Mr Attwood's 2 May 2001. In his report dated 3 July 2001 Mr Drummond Young, as he then was, considered that evidence in detail. It is not necessary to repeat the evidence here. It is sufficient to say that Mr Robson's evidence in relation to the background which led to the Reconstruction and Renewal plan, the formation of Equitas and the Equitas arrangements are as described above. Reporting on Mr Attwood's evidence in relation to the financial strength of Equitas Mr Drummond Young quoted Lindsay J's assessment in Re Yorke (decd) at page 923e-h:

"Equitas has been authorised by the Department of Trade and Industry to conduct its business and that authority has not been withdrawn. Its auditors, whilst qualifying their report upon its latest accounts, can be taken by inference not to have considered there to be a significant level of concern about its ability, at least in the then foreseeable future, to continue as a going concern. I cannot and do not pretend to be even as well informed about Equitas as, let alone to be better informed than, are the DTI or were Equitas's own auditors at the time of their report; I have no reason to doubt their assessments. It is, of course, possible to suppose the failure of almost any corporate reinsurer which, unlike a government, is unable to print its own money, but if, as I believe I may, I can properly approach the question of Equitas's adequacy, as a security given to the executors, in a practical and business-like way .., I have no doubt that it would be right to describe Equitas as a sufficient and proper provision".

Mr Drummond Young then went on to express the opinion that Lindsay J's view remains correct, and that reinsurance into Equitas provides a very substantial level of security. Indeed, Mr Attwood's evidence that Equitas's solvency margin and accumulated surplus had improved since then can be said to reinforce Lindsay J's conclusion. Mr Drummond Young was further of opinion, on the basis of the information contained in Mr Attwood's affidavits, that Equitas is likely to have sufficient assets to meet its liabilities into the foreseeable future. For our part we see no reason to disagree with this assessment.

10. Mr Drummond Young then examined the nature of the reinsurance into Equitas by reference to Mr Robson's affidavit. Mr Robson had compared reinsurance into Equitas with the system that previously enabled syndicates to close, the Reinsurance to Close contract ("RITC"). In neither case was there true or absolute finality but he concluded that in the final analysis there was no material distinction between them, except that the security behind the RITC is Lloyd's whereas the security behind Equitas is the UK authorised insurance company. Mr Drummond Young was of the opinion that that conclusion was correct.
11. Mr Drummond Young then considered the likelihood that policyholders will enforce claims against Names. For the reasons he gave in his report he concluded that it appears most unlikely that any claim will be made against the deceased's estate in respect of the liabilities reinsured into Equitas. He noted, however, that those liabilities nevertheless remain obligations of the deceased's estate.
12. In coming to his decision in Re Yorke (decd) that the order he made was permissible in English law Lindsay J of course proceeded upon English authorities. The principal issue before us was whether Scots Law would allow a similar order to be made in this case. The authorities to which we were referred all date from the nineteenth century. We were informed that there were no more recent cases in point.
13. In Lamond's Trustees v Croom 1871 9 M. 662 the question arose as to whether trustees and executors were liable to account personally to unpaid creditors if, as they had done in that case, they paid a portion of the estate, which was insolvent at the time, to beneficiaries. The Lord Ordinary was of the view that on the facts of the case the trustees had acted bona fide throughout and should therefore not be liable to account personally to the unpaid creditor. In the First Division, however, Lord President Inglis was of a different view. At page 668 he said this:

"The estate is insolvent; some of the creditors...are not paid; and yet the trustees have paid away a portion of the estate to beneficiaries. There can be no doubt that they are liable to replace what they have thus paid away, for no trustees are entitled to pay away one shilling of the estate to beneficiaries, until all the truster's debts are paid, and if they do so before ascertaining with certainty that the estate is solvent, they do so at their own risk."

The other judges of the First Division agreed.

14. In Heritable Securities Investment Association Limited v Miller's Trustees 1893 20 R. 675 a similar question arose. As in Lamond's Trustees, the Lord Ordinary was of the view that on the facts of the case the trustees had acted bona fide throughout and should therefore not be liable to account personally to the unpaid creditor. Again, however, the First Division took a different view. Lord President Robertson stated the law in uncompromising terms. At pages 694-5 he said this:

"It is said ... that the trustees are justified in dividing the estate among beneficiaries if they make reasonable provision for payment of creditors. From this doctrine, which underlies the Lord Ordinary's judgment, I entirely dissent. Extreme cases were put as supporting its fairness. Suppose an estate of £50,000 and a debt of £5,000 amply secured and not payable till ten years after the death, and of which the creditor cannot be forced to make payment till then, is the execution of the trust, it is asked, to be paralysed and nothing to be allowed to be given to beneficiaries until the creditor is satisfied? My answer is, that the rule is peremptory and applies to that case, and if the trustees choose to part with any portion of the estate, they do it at their peril. I see nothing startling in such a result. The good sense and self-interest of the persons concerned will generally provide a solution of any resulting inconvenience; but if a creditor declines to say yea or nay to any proposal which may be made for setting a part of the estate free from his claim, then I say his right must prevail, for the beneficiaries' right is entirely subordinate to his."

Lord Adam was of the same opinion. At page 697 he said this:

"I suppose there can be no question in law that the whole of the trust-estate, heritable and moveable, is liable for the truster's debts. I suppose it is equally clear in point of law that, if the trustees of a deceased truster are unable to pay his debts in full, they are liable to account to the creditors for the whole trust-estate which is or ought to be in their hands. I think there can be no doubt of these propositions. I think it equally clear that if trustees pay away the trust-estate improperly, they are bound personally to restore the amount so improperly paid away by them. I think it is also a clear proposition in point of law as your Lordship has said, that trustees are not entitled to pay any part of the estate to beneficiaries before the creditors are paid. Beneficiaries are of course in all cases postponed to creditors in such matters."

Lord McLaren strongly dissented, holding that in the circumstances of that case the trustees should not be personally liable to account to the creditor when they had paid out to the beneficiaries in the bona fide but ultimately mistaken belief that they had retained sufficient in the estate to meet his claim. Expressing the view that the rule laid down should be a convenient rule, consistent with practical trust administration and fair to all parties, he continued, at page 702:

"I may say with the greatest deference and respect, and I do think, that the rule which your Lordships are laying down is one that will operate with the most cruel hardships and injustice to families, because it means this, that wherever there are outstanding obligations - and nothing is more common in trust management, where the testator was a merchant or manufacturer, than outstanding obligations - the whole estate, heritable and moveable, is to be laid under an interdict, and not one penny can be paid to the family of the testator, because possibly at some future period investments which appeared ample may fail, and the creditors will hold the trustees responsible."

And at page 703 he said:

"It is really impossible to work out a trust upon the principle that the trustees must hold their hands for years until everything is paid off."

15. Despite these strongly worded opinions by the court in Lamond's Trustees and by the majority in Heritable Securities Investment Association Limited, it was recognised in those cases that there could be exceptions to the general rule. In the former case Lord Kinloch said, at page 671:

"Cases may undoubtedly occur in which the facts necessary to be known, in order to point out the true person entitled, may be beyond the knowledge, and fairly possible discovery of the trustees; and in such cases responsibility may be modified."

In the latter Lord President Robertson, although rejecting the trustees' plea that they had acted in good faith in that case, said, at page 695:

"The only case in which good faith has been laid down as excusing payments to beneficiaries to the prejudice of creditors is where the trustees were with good cause ignorant of the debt. In that case there is sound ground for refusing the claim of the creditor, for he is himself to blame, the duty of a creditor being to show himself and manifest his claim."

Lord Adam went a little further in that he was prepared at least to contemplate the possibility of a further ground on which bona fides might be a good defence for trustees in this position. At page 700 he said:

"It may be - I do not think it is necessary to decide that proposition in this case - that if trustees specially set aside a part of the estate, and invest it in securities which trustees may lawfully invest in, in order to meet a debt not presently payable, it may be that they may not be liable for any unforeseen loss or depreciation of these securities."

And in Stewart's Trustees v Evans 1871 9 M. 810 the defence of bona fides was successful. That case was decided by the Second Division only some three months after the decision in Lamond's Trustees. Reviewing the law in relation to this defence Lord Justice Clerk Moncreiff said, at page 813:

"The ordinary rule as to the defence of bona fide payment is stated by Lord Stair, iv. 40, 33:- 'The third common exception in personal actions is payment made bona fide to him who had not the true right, but where there was another preferable right which the defender neither did nor was obliged to know, and therefore the law secures the payer, without prejudice to the pursuer to insist against the obtainer of the payment.' He applies this doctrine to the case of executors - iii. 8, 70. It is true that he states the general duty of executors to be to withhold payment of legacies until decree be obtained against them; but modern practice has relaxed the rule as to the necessity of decree - see the case of Gardner, November 28, 1810 F.C. In the case of Harkness v Graham, 14 Shaw, 1015, Lord Corehouse sustained a payment made by curators to the family out of an estate which turned out to be insolvent, in a question with the creditors of the deceased, although there was no decree, in respect the estate was believed to be solvent, and no diligence had been done. He says that

'the children were creditors of their brother, the heir, for these provisions. There was no bankruptcy declared or known when these advances were made, and no creditor at that time had done diligence. In such circumstances it has been found that trustees and executors, being in bona fide, are entitled to pay primis intervenientibus, and the curators therefore were in safety to make moderate payments for the support of the family.'...

It is therefore not doubtful in point of law that if trustees and executors, after six months, pay away the funds, even to legatees, in the reasonable belief that all debts have been satisfied, they cannot be made personally responsible..."

Lord Cowan adopted these principles and agreed with the Lord President that the defence succeeded. Lord Neaves dissented but not on the matter of principle. On the contrary, he recognised the principle but was of the opinion that it was not applicable on the facts of that case.

16. The authorities thus recognise quite clear and simple rules in two situations. First, trustees and executors are bound to distribute to the correct persons, that is to the creditors before the beneficiaries and to the preferential creditors before the postponed creditors. So if they are aware, or should be aware, of the existence of a prior claim, they can only pay a postponed claim at their own risk. On the other hand, trustees and executors are not responsible to a creditor of whom they did not know and were not obliged to know. Concomitant with that is a duty on the creditor to make himself and his claim known to the trustees within a reasonably short time of the truster's death. See Heritable Securities Investment Association Limited, Lord President Robertson at page 691, and Stewart's Trustees, Lord Justice Clerk Moncreiff at page 813 and Lord Cowan at page 817. Each of the three cases mentioned above turned on whether the trustees knew or could be taken to know of the existence of the debt before they paid the beneficiaries.
17. The present case falls somewhere between these traditional rules, and is one which is not expressly considered in any of the authorities. Here there is no actual claim against the estate and an enforceable claim could only arise if two contingencies are satisfied, namely that a liability does emerge and the reinsurance with Equitas proves inadequate. Neither of these contingencies is likely and the combination of the two can fairly be described as so remote as to be practically out of the question. This, therefore, is not a case in which the possibility that a liability may emerge cannot be foreseen: it is, however, one in which the possibility which can be foreseen would be discounted by any reasonable person as so remote as to be merely speculative or hypothetical. In these circumstances, in so far as the petitioners have already paid away some of the estate to the beneficiaries we are prepared to approve what has been done. In addition, in our view, the petitioners should be held entitled to distribute the remaining estate free from personal liability to the hypothetical creditors. To hold otherwise would paralyse the administration of the estate for decades and, given the arrangements which have been put in place, that would in our view be wholly unreasonable.
18. The remaining question is whether this court should pronounce an order approving the distribution of the estate to date and the remaining estate and also an order relieving the petitioners from personal liability. There are references in the decisions already cited to the fact that trustees can seek the authority of the court if they are in difficulty, but the judges in those cases probably had in mind questions in regard to the interpretation of testamentary writings or the priority of different claims, rather than problems of the kind which have arisen in this case. See Lamond's Trustees, Lord Kinloch at p. 671; Stewart's Trustees, Lord Cowan at pages 817-8. Reference was made to what was done in Re Yorke (decd) but that case proceeded upon an extensive citation of English authority regarding the role of the court in relation to trusts, not all of which is necessarily applicable in Scotland. However, as Lord Cowan remarked in the passage cited above, there was a time when the practice was that executors would pay out only on a decree of the court: indeed one way of posing the question whether executors are bound to pay out is to ask whether they would have a defence to an action at the instance of a beneficiary. On the information before us, the position is, for the reasons discussed, that the petitioners would not have a defence to an action by the beneficiaries. The orders which the petitioners seek can therefore be regarded as a way of short-circuiting the procedure which might otherwise have to be followed and avoiding unnecessary expense.
19. For the foregoing reasons we shall make an order approving the distribution of the deceased's estate to date and the final distribution thereof without any retention or further provision being made for potential claims in respect of any contract of insurance or reinsurance underwritten by the deceased in the course of his business as an underwriting member of Lloyd's of London. We shall also make an order relieving the petitioners from personal liability for any such potential claims or for distributing the estate in accordance with the approval given.