Scottish Court of Session Decisions

John Warrack, shipowner, 43 Constitution Street, Leith, and others, the trustees acting under the trust-disposition and settlement of the late John Warrack, shipowner, Leith, who died on 3rd July 1907, parties of the first part; Charles Cumming Warrack and others, the surviving liferent beneficiaries under the said trust-disposition and settlement, parties of the second part; and the said John Warrack and others, the fiars or contingent fiars of a share or shares of the residue of the testator's estate, parties of the third part, brought a Special Case to determine in what way were to be treated, so far as regarded the liferent of the second parties and the fee of the third parties, certain sums received in respect of shipping shares forming part of the trust estate.

The trust-disposition conveyed to the first parties the testator's whole estate, and, inter alia, provided—“… I empower my trustees in their discretion to allocate and hold (with power to vary) for any beneficiary or prospective beneficiary (whether liferenter or fiar) the whole or any part of any investments for the time being held by them, and I declare that in paying out any residuary beneficiary in whole or in part my trustees shall have the sole right to decide whether such payment out shall be made in cash or by transfer of investments or other unrealised assets, and if wholly or partly by the transfer of investments or other unrealised assets, the values to be put on such investments or other unrealised assets for transfer shall be fixed by my said trustees, and their decision shall be final: Declaring further that the amount of capital to be retained from the income of which to pay any annuity or other payment out of income under these presents shall be a matter solely in the discretion of my trustees: I empower my trustees to delay the realisation of the whole or any part of my estate for such time as they in their discretion (and as to which they shall be the sole judges) shall think fit, and in particular I specially authorise my trustees to hold for the benefit and at the risk of my estate the whole or any part of my shares in steamships or steamship companies so long as the steamships, the share in which are so held, remain under the management of the firm of John Warrack & Company, shipowners and merchants, Leith, and either the said John Warrack junior or the said James Howard Warrack remains a member of that firm. … In the event of any part of my said estate being at the date of my decease invested or being thereafter invested by my trustees in wasting securities, the proportion of the return from such wasting investments which shall be treated as income, or whether the whole or any part of such return shall be treated as income for the purposes of these presents, shall be matters entirely in the discretion of my trustees and as to which they shall be the sole judges. …

The Case stated—“3. The testator, who had for many years carried on the business of shipowner at Leith, was at the date of his death largely interested as a shareholder in the various steamers managed by his

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firm. … At the date of the testator's death he owned twelve 64th shares in the s.s. ‘Macduff,’ seventeen 64th shares in the s.s. ‘Braemar,’ fourteen 64th shares in the s.s. ‘Lennox,’ fourteen 64th shares in the s.s. ‘Atholl,’ ten 64th shares in the s.s. Lothian,’ six 64th shares in the s.s. ‘Montrose,’ and six 64th shares in the s.s. ‘Erroll.’ The total value of the said ship shares as entered in the inventory of the testator's estate was at the date of his death £31,756, 5s. 4. … The first parties having in view the progressive physical deterioration of the steamers, and the discretion conferred on them by the testator in regard to wasting securities, considered from time to time the apportionment of the dividends received between capital and revenue. By minute of the first parties dated 6th April 1908 it was resolved that ‘4 1 2 per cent. on those values would in present circumstances be a suitable return to the liferenters out of the dividends received on the holding of ship shares, and that the balance of the dividends beyond that rate received to 31st March 1908 should be carried to capital.’ By minute of 12th May 1909 the first parties resolved that ‘from the dividends received from the ship shares in cumulo in each year for each beneficiary, interest at 4 1 2 per cent. on the total value of the ship shares set aside in the scheme of division for such beneficiary should be credited to revenue, and the balance, if any, treated as returned capital.’ The first parties also resolved to pay out of capital the call made on the shares of the s.s. ‘Macduff.’ The matter was next dealt with by the first parties at a meeting held on 15th January 1913, when it was minuted that ‘the trustees carefully considered the question of the apportionment of the returns from the ship shares between capital and revenue, and after fully discussing the matter and the principle which had been followed in previous years, they were of opinion that at the present time the liferenters were entitled to a higher return than they were receiving. At the same time, they considered that the return should now be based on actual present valuations, and no longer on the valuation made for division at 31st March 1908. They accordingly resolved that the liferenters should be credited for the current year out of the gross returns with 6 per cent. free of income tax on the cumulo value of the ship shares as valued at 31st March 1912. They were further of opinion that the liferenters should in future be credited in each year with a rate of interest based on the actual values given by Messrs John Warrack & Company as at the previous 31st March.’ In accordance with this resolution, 6 per cent. on the value of the ship shares was paid to each liferent beneficiary in 1913 on the valuation at 31st March 1912 and in subsequent years. In addition, special payments were made out of the extra profits on 2nd August 1916 and 5th February 1917 of 25 per cent. of the value of said shares. The total payments of income made by the first parties to the second parties in respect of the earnings of the four after-mentioned steamers after 31st March 1908 equal 3·718 per cent. per annum on the initial value of the shares of the s.s. ‘Macduff; 5·45 per cent. per annum on the initial value of the shares of the s.s. ‘Lothian’; 5·7 per cent. per annum on the initial value of the shares of the s.s. ‘Braemar’; and 8·624 per cent. per annum on the initial value of the shares of the s.s. ‘Lennox.’ … 5. The s.s. ‘Macduff’ was sold on 26th June 1911 at a slight loss. The s.s. ‘Braemar’ was sold on 18th June 1913 at a profit. The s.s. ‘Lothian’ was seized in Hamburg by the German Government at the outbreak of the war, and the owners' claim was settled by the underwriters on the basis of a total loss. The s.s. ‘Lennox’ stranded on the southeast coast of Ireland in December 1916, and became a total loss. The s.s. ‘Atholl,’ the s.s. ‘Montrose,’ and the s.s. ‘Erroll’ are still trading, and no question arises in regard to them in this case. The earnings of the said steamers ‘Macduff,’ ‘Braemar,’ ‘Lothian,’ and ‘Lennox’ varied considerably during the period between 31st March 1908 and the date of the close of their respective accounts, but in the case of the ‘Lennox,’ which was trading for two years and a-half subsequent to the outbreak of war, her earnings were high. Further, owing to the great rise in the value of shipping subsequent to the outbreak of the war, the insurances on the ‘Lennox’ were increased in proportion to the rise in her market value, and in consequence of this the first parties received in respect of her policies of insurance a sum greatly in excess of the value of her shares as at March 31, 1908. The net result on the accounts of the four steamers in question was, treating the shares as a single investment, that the sums received on the sale of the ‘Braemar,’ and recovered on the loss of the ‘Lothian’ and ‘Lennox,’ and after allowing for a slight loss on the ‘Macduff,’ largely exceeded the initial value of the shares of those steamers as at 31st March 1908; also that the surplus dividends during the period ( i.e., the proportion of dividends credited to capital) were not wholly required for the purpose for which they were originally credited to the capital account, because the depreciation on the shares of the four steamers, which represented the progressive physical deterioration suffered by the steamers themselves at the date of sale or loss, even if paid out of the surplus dividends rather than out of the surplus capital ( i.e., the capital received by the first parties on account of the sale or loss of the steamers in excess of the initial value of the shares) would leave a large sum at the credit of capital which was derived entirely from revenue, and represented accumulations of income derived from the earnings of the steamers. Questions of difficulty have arisen as to the principles on which the accounting between capital and revenue should be conducted, and as to whether the second parties are entitled to have withdrawn from capital and paid over to them as income the surplus dividends which were credited to capital by the first parties to meet the depreciation of the shares due to the progressive physical deterioration of the steamers and other

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contingencies. There is also the further question whether, if the second parties are entitled to receive payment of the surplus dividends as income, such payment should be under deduction of the total depreciation of the shares of the four steamers. The second parties claim return from capital of the whole surplus dividends as earnings of the ship, which they maintain formed income to which they were entitled under the testator's trust-disposition and settlement, and also that those surplus dividends should now be paid to them without deduction of the sums written off for depreciation. The third parties appear on behalf of themselves, and they also represent the interest of persons who may ultimately be found to have a right of fee in the liferented shares of capital. The third parties, in respect of their vested or contingent right under the holograph will of Mrs Mary Warrack or Cooper or Milne to the residue of her share of the testator's estate burdened by the liferent to her husband Dr Thomas Milne, who is one of the second parties, claim that the surplus dividends in question form capital which the first parties are bound to hold for the third parties and others who are, or may ultimately be, entitled to same in fee, and do not form income which under the said trust-disposition and settlement is payable to the second parties 7. The main question in the present case relates to the surplus dividends which were credited to capital by the first parties to meet the said depreciation and other contingencies. The amount of those dividends as above stated is £14,513, 16s. 8d. If depreciation falls to be deducted from this sum it is reduced to £12,007, 11s. 8d., which is subject to a further deduction of £145, 2s. 9d. for administrative expenses, leaving the net sum of £11,862, 8s. lid. as the amount by which the capital account has been increased out of the earnings of the four steamers. If it should be held that the reduction in value in respect of depreciation of the shares of the four ships for the period from 31st March 1908 to the date of sale or loss of the steamers, namely, the above-mentioned sum of £2506, 5s., ought not to be deducted from the surplus dividends in view of the fact that the sums received by the first parties upon the sale or loss of the steamers very largely exceeded the initial value of the shares as at 31st March 1908, the above sum—viz., £11,862, 8s. 11d.—will fall to be increased by the said £2506, 5s., and in that case the depreciation would correspondingly reduce the capital account in respect of the shares of those steamers, though still leaving it considerably greater than at the date of the scheme of division. 8. The first parties maintain that the shares of the steamers were wasting securities within the meaning of the said trust-disposition and settlement; that the powers and discretion conferred on the first parties as trustees by the testator with respect to wasting securities were not exhausted when they credited to capital account the surplus dividends of each year; that those surplus dividends were credited to capital account not for the purpose of being vested in the first parties for behoof of the third parties or the other ultimate fiars, but to meet depreciation of the shares consequent on the progressive physical deterioration of the steamers and other contingencies, and the first parties are entitled at the close of each ship's account to withdraw from capital account the amount which proved not to have been necessary to meet the total depreciation upon the shares of that ship and pay it over to the second parties as income. The sums paid to the second parties as income out of the dividends of the steamers were reasonable in amount so long as each ship's account remained open, and gave to the man adequate proportion of the earnings of each steamer during the whole period, and the sums credited to capital account were not more than were reasonably sufficient to meet the depreciation on the shares which would progressively increase with the age and deterioration of the steamers. Other contingencies also had to be provided for, such as liability for calls for loss in trading, or for overhaul or repair of the steamers. In making the various apportionments prior to the outbreak of the war the first parties apportioned the dividends with a strict regard to the earning power of the steamers at the time and in view of the contingencies that might at any time arise. After the outbreak of the war the only one of the four steamers referred to which was still trading was the s.s. ‘Lennox,’ and the effect of the war on the value of that old steamer and on her earning capacity could not be anticipated. As matters eventually turned out on the loss of the ‘Lennox,’ the earnings of that steamer permitted the payment to the second parties of a bonus of 25 per cent. on two occasions in addition to the usual 6 per cent. on the value of the share The first parties, if legally entitled to do so, are willing to re-state their accounts so as to give the second parties a larger proportion of the total earnings of the steamers, or such sum as the Court may determine that the second parties are entitled to receive. With regard to the question whether the total depreciation of the shares should, in the circumstances that have arisen, be charged to the surplus dividends which have been credited to capital or should be charged to the surplus capital represented by the sums received by the first parties in excess of the initial value of the shares, the first parties adopt the contention of the third parties. 9. The second parties maintain that they are entitled to payment of ( a) the full amount of the surplus dividends less administration expenses amounting to £14,368, 13s. 11d., or otherwise ( b) the full amount of the surplus dividends less depreciation and administration expenses amounting to £11,862, 8s. lid., or otherwise ( c) such proportion of the surplus dividends as the first parties on a re-statement of their accounts may apportion to income. With regard to the annual apportionments made by the first parties, the second parties submit that these were not final, and had not the effect of appropriating to the fiars of the shares as capital the surplus earnings of the ships which were not in each year paid as income.

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But if and in so far as the said apportionments may be construed as having that effect, the second parties maintain that it was beyond the power and discretion of the trustees so to do. Shipping shares are not wasting investments, and the power and discretion conferred upon the trustees by the testator with regard to wasting securities did not apply to the shipping shares now in question. In any case such power and discretion was limited to the object of making provision for replacing the loss or deterioration in a wasting security or investment. It might be, and the second parties do not question that it was, a proper precaution for the trustees to set aside a reasonable amount to provide for the various contingencies to which shipping shares are subject, but it was beyond their power to appropriate to capital anything in view of the wastage which had actually occurred. It cannot be reasonably contended that the actual wastage exceeded the sum of £2506, 5s., which is stated by the first parties to be the total depreciation on the shares. The second parties accordingly maintain that the surplus dividends formed income belonging to the second parties which the first parties held for them in trust subject only to payment therefrom of any sum that might be required to meet depreciation of the shares of the four steamers and other contingencies. In point of fact the surplus dividends were not required to meet the depreciation of the shares, and no other contingencies in fact arose. The said surplus dividends were held by the first parties in trust for the second parties, and were not affected in their legal character by being credited to the capital account, or even by being invested as capital and allocated to the shares of capital held by the first parties for the second parties in trust for their liferent interest. It is immaterial, in the view which the second parties present, whether at the date of the sale or loss of the steamers the difference between the reduced value and the initial value of the shares was paid out of the surplus dividends or by a payment out of the surplus capital. The result in either case would be to set free from capital a sum equal to the accumulated surplus dividends as income, the amount thereof payable to the second parties depending on whether the total depreciation was properly payable out of the said surplus capital or out of the surplus dividends which were credited to capital, and was a proper charge against the surplus dividends themselves. On this point the second parties maintain that in fact there was no depreciation of the shares of the ‘Braemar,’ the ‘Lothian,’ and the ‘Lennox,’ as the progressive physical deterioration of those steamers was, as the final accounts show, more than compensated by the enhanced value of the steamers at the date of sale or loss. The second parties further submit that no further apportionment by the trustees is necessary to determine the rights of parties. 10. The third parties maintain that the shares of the said steamers were wasting securities within the meaning of the said trust-disposition and settlement, and that the first parties, as the testator's trustees, having once exercised the discretion conferred on them by the trust-disposition and settlement in the matter of apportionment of steamer dividends, their discretion and their powers in that regard were exhausted. They refer to the testator's trust-disposition and settlement and the provisions therein contained, and also to the minutes of the trustees of 6th April 1908, 12th May 1909, 8th June 1910, 15th January 1913, 26th March 1914, 16th March 1915, 27th July 1916, and 31st January 1917, which clearly set forth the resolutions of the trustees with regard to the apportionment of the steamer dividends. They therefore maintain that the proportion of total dividends payable in respect of the steamer shares during each year when credited to capital became capital which fell thereafter to be held by the first parties in trust for the second parties in liferent and for the third parties and other ultimate fiars in fee. Its legal character was thus irrevocably fixed. In point of fact the surplus dividends on the shares of the four steamers, which amounted at 31st March 1914 before the war to £11,167, 19s. 11d., and surplus dividends from that date to 31st March 1917 amounting to £3345, 16s. 9d., became immixed with the capital of the trust estate and were invested by the first parties as capital without reference to their source of origin. The investments so made were from time to time allocated by the first parties to the second parties in liferent in proportion to the cash balances available for investment at the respective dates, and thereafter the income from said allocated investments was ingathered by the first parties and credited to the revenue account and was ultimately paid to the second parties. The first parties were under no legal obligation to apportion the dividends in any particular way. They might have, if they had thought fit, credited to capital account only the amount of the depreciation of each of the steamer's shares, and might have paid the whole balance of the dividends from time to time to the second parties; but instead of doing so they credited the surplus dividends to capital, invested them as capital, and allocated them as capital, and thereby excluded all right or claim at the instance of the second parties thereafter to have them treated as income. The third parties further maintain that the fact that the sums received by the first parties on the sale of the ‘Braemar’ and on the loss of the ‘Lothian’ and ‘Lennox’ in respect of the shares they held in those steamers for the second parties in liferent and the third parties in fee exceeded the initial value of those shares is not relevant to the legal question submitted to the Court. At the date when the several apportionments of dividends were made it was not possible for the trustees to forecast the contingencies which actually arose, and they made their various apportionments with reference to the position of matters which were within their cognisance at the time. The shares of capital held by the first parties in fee for the third parties and the other ultimate fiars in so far as these consist of

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a return of capital in excess of the initial value of the shares of the ‘Braemar,’ the ‘Lennox,’ and the ‘Lothian,’ cannot legally be diminished by charging against such excess the said sum of £2506, 5s. written off for depreciation of the steamer shares. The s.s. ‘Braemar’ when sold was eighteen years old, the ‘Lothian’ when lost was twelve years old, and the ‘Lennox’ when lost was twenty-one years old, and the initial value of these steamers was subject to the deduction of depreciation calculated on the ordinary principles affecting steamers of their class and tonnage for the period to the date of sale or loss, and what was sold or lost was a steamer which had undergone a certain actual amount of physical deterioration, and the first parties recovered on the sale of the ‘Braemar’ and under their policies on the ‘Lothian’ and the ‘Lennox’ proportionately less for each steamer than they would have recovered for similar new ships, the difference being the equivalent of the physical deterioration.”

The questions for the judgment of the Court were—“1. Did the annual apportionments made by the first parties of the dividends accruing on the shares of the four steamers in question constitute final appropriations to capital of the said dividends in so far as they were not paid to the second parties? 2. If so, were the said appropriations within the powers of the first parties ( a) Generally, and ( b) With regard to the amount allowed in the accounts for depreciation? 3. If either the first or second question is'answered in the negative (1) Do the surplus dividends on the said shares form revenue of the trust, to payment of which the second parties are entitled under the testator's settlement; or (2) Are they capital which the first parties are bound to hold for the second parties in liferent, and the third parties and others contingently in fee; or (3) Are they subject to a fresh apportionment by the first parties? 4. If the first alternative of the immediately preceding question is answered in the affirmative (1) Are the second parties entitled to payment of the whole surplus dividends; or (2) Are the first parties entitled to deduct therefrom and to retain as capital the amount allowed in these accounts for depreciation?”

Argued for the first parties—The steamship shares constituted wasting securities in the sense of the trust deed. Power was thereby given to the trustees, in regard to such wasting capital, to apportion sums derived from such shares as between capital and income. So far as the actual apportionment was concerned, if the trustees had in their absolute discretion acted in bona fide their actings could not be called in question. The trustees were willing to submit themselves to the views of the Court.

Argued for the second parties—A steamship was not a wasting substance in the sense of the trust deed. It was often more permanent in its nature than many subjects which were certainly not looked on as wasting ones, e.g., houses. A distinction could be drawn between investments which wasted by the use of them and securities the substance of which was consumed by their use. In common phraseology a wasting security was confined to the second class. The trustees were not entitled to set large sums aside indefinitely in order to meet contingencies which might never arise, although they could set aside something to provide for possible repairs and cover deterioration. They could not in their discretion appropriate sums received to capital; it was ultra vires of them to do so when the risk which they apprehended might never have materialised. As this was now the case, the surviving liferent beneficiaries had a right to claim the money which had been so set apart. The testator did not intend the shipping shares which formed part of his estate to be included in the term “wasting investments,” otherwise he would have expressly said so. The appropriation of sums by the trustees from year to year was not final, and they were not barred from reconsidering the matter. The following authorities were cited— Leightonv. Leighton, 1867, 5 Macph. 561, 3 S.L.R. 291; Adam and Forsyth v. Forsyth's Trustees, 1867, 6 M. 31, 5 S.L.R. 26; M'Farlane's Trustees v. M'Farlane, 1903, 6 F. 201, per Lord Kyllachy at p. 205, 41 S.L.R. 164; M'Leod's Trustees v. M'Leod, 1916 S.C. 604, 53 S.L.R. 422; Mills v. Northern Railway of Buenos Ayres Company, (1870) L.R., 5 Ch. App. 621; Bishop v. Smyrna and Cassaba Railway Company, [1895] 2 Ch 596; Wentworth v. Wentworth, [1900] AC 163.

Argued for the third parties—Steamships were wasting subjects. The Inland Revenue authorities looked upon them as being so in fixing the period of twenty-two years as their life, and in permitting deduction to be made by way of allowance for wear and tear. All that the trustees' discretion amounted to was to consider what proportion of the income was to be apportioned to the liferent beneficiaries and what proportion was to be set aside as capital to cover wastage of the subject. Unless a certain amount of a ship's earnings was annually appropriated to capital there would after about twenty-two years be no more ships, and therefore nothing for either liferenters or fiars. The testator had conferred on the trustees great discretionary powers. The liferenters were not to get the whole liferent, but only what the trustees thought right after the appropriation of a certain portion of the income to capital in order thereby to provide against depreciation. The whole matter rested on the trustees' discretion, but once they had acted they had to abide by what they had done; their discretion was not sufficiently wide to allow them to revoke their actings. Counsel referred to the following cases— The Leith, Hull, and Hamburg Steam Packet Company v. Inland Revenue, 1899, 1 F. 1117, per Lord Trayner, at p. 1125, 36 S.L.R. 745; Brown v. Gellatly, (1867) 2 Ch. App. 751.

At advising—