GORDON CHALMERS AGAINST MARIA JENNIFER MACHIN
SHERIFFDOM OF GLASGOW AND STRATHKELVIN AT GLASGOW
[2017] SC GLA 29
A200/17
JUDGMENT OF SHERIFF S REID Esq
in the cause
GORDON CHALMERS as trustee of the sequestrated estate of the late Colin Machin
PURSUER
against
MARIA JENNIFER MACHIN
DEFENDER
Act: Mr P. Fairbridge, Oracle Law, Glasgow
Alt: Mr B. Smith, Complete Clarity Solicitors, Glasgow
GLASGOW, 2nd May 2017. The sheriff, having resumed consideration of the cause, Repels the defender’s pleas-in-law numbers 5, 6 and 7; Sustains, in part, the pursuer’s plea-in-law number 3 to the extent of excluding from probation the following averments: (i) in answer 5, in the final sentence thereof, the words “and accordingly no debts transferred with the deceased’s one half pro indiviso share in the Subjects to the Defender”; (ii) in answer 6, in the first sentence thereof, the words “under explanation that the current claim on behalf of the Pursuer is incompetent based upon the survivorship destination taking effect immediately as at the date of death on the solvent estate of the late Colin Machin on 25 June 2014”; (iii) thereafter, Allows parties a proof of their respective averments on a date to be hereafter assigned; Reserves meantime the questions of expenses and Appoints parties to be heard thereon (and on incidental questions of procedure) on Tuesday 9th May 2017 at 9.45am before Sheriff Reid.
NOTE:
Summary
[1] This dispute arises from fairly ordinary circumstances.
[2] In May 2009 the defender and her husband bought a flat. Title was taken in the joint names of the spouses “equally between them and to the survivor of them”. Five years later, the defender’s husband died. In accordance with the special destination in the title, the real right to the late husband’s one-half pro indiviso share in the flat vested automatically in the defender as the surviving spouse.
[3] A curiosity then emerges. It is alleged that the late husband was insolvent at the date of his death. As a result, the defender, as executrix of her late husband, was unable to wind up his estate. Over two years elapsed. The defender then applied to the Accountant in Bankruptcy for sequestration of her late husband’s estate. The pursuer was appointed as trustee of the deceased’s sequestrated estate.
[4] The trustee now sues the defender for payment of the sum of £26,998, being the alleged value, at the date of his death, of the deceased’s one-half pro indiviso share of the flat, as acquired by the defender under the survivorship clause in the title. The deceased’s debts are said to exceed this sum.
[5] The defender disputes liability. She maintains that her late husband’s one-half pro indiviso share of the flat never formed part of his estate on death, still less two years later at the date of sequestration, because it vested automatically in the defender on her husband’s death. She denies any personal liability for her late husband’s debts. She denies that any debts transferred to her upon acquisition of the deceased’s one-half share. She also denies the extent of the deceased’s debts at the date of death.
[6] In my judgment, in law the defender is personally liable to the trustee for the subsisting debts of the deceased (so far as they were in existence at the date of death), to the extent of the value of the deceased’s one-half pro indiviso share to which she succeeded under the special destination.
[7] To explain, the debts of a deceased at death are a prior charge on the deceased’s estate before the estate passes to successors, beneficiaries, legatees or heirs. The defender, as the nominated “substitute” under the special destination, is in law an heir of the deceased. She falls within that special category of successor known as an “heir of provision”. In accordance with established authority, the defender, as the deceased’s “heir of provision” under the special destination, incurs a liability in valorem for the deceased’s debts (that is, to the extent of the value of the one-half pro indiviso share to which she thereby succeeded) (Baird v The Earl of Rosebery 1766 Mor. 14.019; McLaren, Wills and Succession, 1284; Fleming’s Trustee v Fleming 2000 SC 206).
[8] Lastly, the precise extent of the deceased’s debts (as at the date of death) remains a contested issue in the present case. This is a matter for proof. The defender’s personal liability to the deceased’s creditors arising at the moment of the deceased’s death cannot have been greater than that of the deceased himself immediately prior to his death. In my judgment, it will be for the pursuer to prove which debts, if any, were in existence as at the date of death.
[9] A separate question might arise (given the passage of time between the death and the sequestration in the present case) as to whether any of the deceased’s debts as at the date of death have subsequently been extinguished by prescription and, if so, whether the defender’s personal liability to creditors would thereby be abated. This possibility was mooted briefly in argument by the defender’s agent, but it was not fully ventilated in the averments or submissions. I need not express a final view upon it. My full reasoning appears below.
The pleadings
[10] The pleadings are brief.
[11] The late Colin Machin was the owner of a one-half pro indiviso share of heritable property forming Flat 2/2, Royal Exchange Court, 85B Queen Street, Glasgow (“the subjects”). The Land Certificate records that title to the subjects was taken in the joint names of Mr Machin and his spouse (the defender) “equally between them and the survivor of them”. Mr Machin died on 25 June 2014. The pursuer is the trustee on the sequestrated estate of the late Colin Machin, conform to an award of sequestration granted by the Accountant in Bankruptcy on 21 October 2016. The subjects have been valued at £150,000. The defender has marketed the subjects for sale; an offer has been accepted (of £178,500, according to the defender’s own pleadings); missives have yet to be concluded; and the net free equity in the subjects, after deduction of a secured debt, is “in the region of £53,995”, of which the deceased’s one-half share is calculated to be £26,998. An estimated statement of affairs (item 5/3 of process) bears to record that the deceased’s debts, at the date of his death, were approximately £49,452.
[12] All of the foregoing is admitted by the defender.
[13] In answer, the defender avers that the deceased’s one-half pro indiviso share of the subjects transferred to and vested in the defender as at the date of his death (answers 3 to 5); that the deceased’s estate had not been sequestrated as at the date of his death (answers 2, 5 & 6); and that the deceased’s one-half pro indiviso share did not form part of the estate of the deceased as at the date of sequestration on 21 October 2016. More significantly perhaps, the defender denies any personal liability for the deceased’s debts (answer 4) and denies that any debts transferred to the defender with the deceased’s one-half pro indiviso share (answer 5).
[14] The defender also denies that the deceased’s estate was insolvent at the date of his death (answer 2) (though, interestingly, it was the defender, as the deceased’s executrix, who applied for sequestration of the estate).
[15] The defender avers that the pursuer’s claim is incompetent and irrelevant et separatim lacking in specification (pleas-in-law 5, 6 and 7). The pursuer also has a general preliminary plea to relevancy (plea-in-law 3) seeking decree de plano.
Submissions for the pursuer
[16] The pursuer’s agent acknowledged that, in terms of the survivorship destination, the real right in the subjects had transferred automatically to the defender upon the deceased’s death. However, it was submitted that the transferred property was encumbered by the debts of the deceased at the date of death. While the defender was infeft in the real right, the trustee was said to be entitled to payment from the defender personally of the debtor’s debts as at the date of death, up to the value of the deceased’s one-half pro indiviso share. The defender was described as the deceased’s “heir of provision” under the survivorship clause, in which capacity she incurred personal liability to the deceased’s creditors (for whose benefit the pursuer, as trustee, now acted). Reference was made to Fleming’s Trustee v Fleming 2000 SC 206; Steele v Caldwell & Ors 1979 SLT 228; Currie on Confirmation of Executors 10-84, 1-24, 13-19; Scottish Law Commission Report on Succession, 20 March 2008, paragraph 6.63.
Submissions for the defender
[17] The defender’s agent sought to distinguish Fleming’s Trustee, supra. In Fleming’s Trustee, the debtor had already been sequestrated prior to his death, with the result that his one-half pro indiviso share had vested in his trustee and already formed part of the sequestrated estate at death. In contrast, in the present case the deceased had not been sequestrated prior to his death, with the result that his one-half pro indiviso share vested in the defender upon his death, and never formed part of his sequestrated estate. It was submitted that, following his death, the deceased had “zero rights” in the property. By virtue of the survivorship destination, he was automatically divested of his share. A subsequently-appointed trustee on his sequestrated estate could acquire no better right than was available to the deceased debtor. It was submitted that the essential common feature of Fleming’s Trustee, supra and Barclays Bank Ltd v McGreish 1983 SLT 344 was that, in both cases, the debtor had been subject to a form of legal diligence: in Fleming, the debtor had been sequestrated; in McGreish, decree had been granted against the debtor. Reference was also made to Povey v Povey’s Executor 2014 SLT 643; the Succession (Scotland) Act 1964, section 36(2); and the Succession (Scotland) Act 2016, section 28(1).
Discussion
[18] Commonly in modern conveyances of heritable property, title is taken in the name of A and B equally between them and to the survivor. This means that one half of the property is disponed to A, whom failing B, and the other half to B, whom failing A. A is both institute (of his own share) and substitute (of B’s share). The same is true of B, only the other way round. This is a typical form of special destination, whereby the granter of the original conveyance is specifically directing or “providing” for the order or series of heirs who are to succeed to the first-named disponee’s share, without regard to the normal order of succession under rules of intestacy.
[19] Often the “substitute” disponees are spouses. But that need not be so. In Hare & Paget, Petitioners (1889) 17R 105, the special destination was to a trustee and to his (unnamed) “successors in office”. In Leslie v McLeod 1878 M (HL) 99 the special destination was to an heir-male of the deceased’s marriage.
[20] In any event, these “substitute” disponees are, in law, properly referred to as “heirs of provision” (A M Bell, Lectures on Conveyancing (3rd ed), page 1099).
[21] In the present case, the subjects were conveyed to the defender and her late spouse “equally between them and to the survivor of them”. In terms of this special destination, the defender acquired a one-half pro indiviso share of the subjects (as institute) and she was also the substitute (or “heir of provision”) of her late husband’s share; and her late husband, likewise, acquired a one-half pro indiviso share (as institute), and was substitute (or “heir of provision”) of his wife’s share. Upon the deceased’s death, the defender succeeded to her late husband’s share – and she did so, indubitably, as heir of provision under the special destination.
[22] Now, the legal liability of an heir of provision is conveniently set out by Professor G.L. Gretton in an article entitled “Death and Debt” 1984 SLT (News) 299. This article was referred to with approval by an Extra Division of the Inner House in Fleming’s Trustee v Fleming 2000 SC 206. In the article, Professor Gretton explains that while the term “heir of provision” may sound odd to modern ears, it is a concept that is “alive and well”, unlike its “siblings”, the heirs of line, which were effectively abolished by the Succession (Scotland) Act 1964.
[23] Once it is appreciated that the defender in the present case is properly characterised as an heir of provision, her liability becomes clear.
[24] An heir of provision succeeding under a special destination incurs a passive liability to the deceased’s unsatisfied creditors, to the extent of the value of the succession. This principle has been firmly established for over two centuries (Baird v The Earl of Rosebery 1766 Mor. 14.019; McLaren, Wills and Succession, 1284 & 2395) and was reaffirmed most recently in Fleming’s Trustee, supra.
[25] In his article Professor Gretton helpfully explains why the principle also has the practical benefit of good sense. While, on the one hand, a destination of a title to heritage is not formally a testamentary writing, on the other hand it is acknowledged to be a device which has testamentary effect, in the sense at least that it takes effect upon death. He states that a special destination:
“… is in other words comparable to a legacy or bequest by the disponee, the institute, to the substitute, the heir of provision. And the general law of succession provides that if a creditor of a deceased is not for some reason paid, he can go against the legatees up to the value of the bequest. This rule is obviously a fair one, for it would be against equity if legatees kept their legacies while the lawful creditors went empty-handed away. The rule, therefore, that a destination cannot defeat the rights of the creditors of the deceased, is not an arbitrary one, but soundly based in the general law of succession.”
[26] It is well-recognised that the debts of a deceased are a prior charge on the estate of a deceased before the estate passes to successors or beneficiaries (Fleming’s Trustee, supra, at 216 per Lord Caplan). A legatee or beneficiary of a deceased who has received payment of his share of the succession prior to satisfaction of the creditors is liable to be sued in an action of repetition by creditors of the executory estate, if the executor has failed to make adequate provision for payment of those debts (though, as a matter of technical propriety, the claim should be constituted against the executor first). The acceptance of a legacy does not infer a universal liability for the debts of the deceased but, rather, a liability to the extent of the value of the legacy or provision. Likewise, an heir of provision is liable in valorem to the deceased’s creditors (that is, to the extent of the value of the property to which he or she succeeded), so far as they remain unsatisfied. (This is to be contrasted with the former absolute or “universal” liability of the deceased’s heir-at-law, unless the succession was declined: McLaren, supra, 2386-2388.)
[27] In submissions for the defender, much weight was placed on section 36(2) of the Succession (Scotland) Act 1964 and its reincarnation in section 28(1) of the Succession (Scotland) Act 2016. (The latter applies only in relation to the estate of a person who dies on or after 1st November 2016, so it is not strictly relevant to the present case.) Section 36(2) of the 1964 Act provides that property subject to an unevacuated special destination is to be treated as not forming part of the deceased’s estate. But this deeming provision (in the context of an interpretation section) operates only “for the purposes of this Act”. The “purposes” of the 1964 Act are to regulate rights of succession and, according to its long title, to amend the law in relation to the administration of deceased persons’ estates. Nowhere can it be discerned that a purpose of the 1964 Act is to restrict the rights of third party creditors. It is uncontroversial that property subject to an unevacuated destination is to be treated as part of the deceased’s estate for the purposes of taxation. Tax is merely one instance of a debt owed to a creditor (See M. Morton, Special Destinations as Testamentary Instructions 1984 SLT 133 at 139).
[28] The defender’s agent also harked back somewhat wistfully to the decision of Lord Stott in Barclays Bank Ltd v McGreish 1983 SLT 344. It has certain similarities to the present case. By virtue of a special destination in the title deed, a widow became infeft in her late husband’s share of their home upon his death. When he died, the husband was indebted to the bank. (Indeed, prior to his death, the bank had obtained a decree against the husband for payment of the debt.) The bank sued the widow for payment of the late husband’s debt, on the basis that, as heir of provision under the special destination, she had incurred a personal liability to the bank, to the extent of the share to which she had succeeded. Following debate, Lord Stott dismissed the bank’s action as irrelevant. He held that the deceased’s debts did not pass to the widow by virtue of the special destination.
[29] However, the decision in McGreish provoked howls of protest from respected academics, it spawned a blizzard of critical legal commentary, and it was eventually over-ruled by the Inner House in Fleming’s Trustee.
[30] Fleming’s Trustee, supra also involved the common form of special destination whereby title to a matrimonial home was taken in name of the spouses and to the survivor of them. The differentiating feature of the case is that, prior to the husband’s death, he had been sequestrated. When the husband died, the trustee sued the widow. He advanced two claims. Firstly, the trustee sought declarator that he remained vested in the (now deceased) debtor’s one-half share of the home. Secondly, in the alternative, he sought declarator that, if the widow was indeed now infeft in the deceased’s one-half share, that she was personally liable to the deceased’s creditors to the extent of the value of that share.
[31] The first claim failed; the second claim succeeded.
[32] The first claim failed because, in short, the sequestration of a debtor does not per se have effect in law to evacuate a special destination in a registered title to heritable property, nor does it confer any real right upon a trustee to the debtor’s heritable property. The effect of the sequestration is to vest in the trustee only a personal right to the debtor’s whole estate (Goudy, Bankruptcy (4th ed), 256) including for example, a personal right to the bankrupt debtor’s rights, as institute, under a special destination to a pro indiviso share of heritable property. Once appointed, and prior to Mr Fleming’s death, his trustee could have defeated the special destination in favour of the spouse by, for example, effectively disponing the debtor’s one-half instituted share, or by formally completing title to the debtor’s instituted share in the Land Register. But the trustee failed to do so. Instead, when Mr Fleming subsequently died, the (as yet unevacuated) special destination was triggered; the debtor’s surviving widow automatically became infeft in the real right to her (now deceased) husband’s instituted half-share; and the trustee thereby lost the opportunity to acquire the real right to the deceased institute’s half-share (by completing title thereto) or otherwise to evacuate the special destination (per Lord Sutherland at 2019-210 and Lord Caplan at 217). To this extent, the trustee had to bear the consequences of his own omission (per Lord Sutherland at 210).
[33] In contrast, the second claim succeeded because Mr Fleming’s widow had succeeded to his one-half pro indiviso share in her capacity as heir of provision under the special destination; and, as such, according to long-established authority, she incurred a personal liability to unsatisfied creditors of the deceased, to the extent of the value of the succession (per Lord Sutherland at 208, citing McLaren, supra, 1284; Lord Caplan at 216). The fact that the deceased’s rights as institute in his one-half pro indiviso share had already vested in the trustee prior to his death merely strengthened the trustee’s claim. Upon sequestration, the debtor’s sequestrated estate (which included the debtor’s rights as institute in a pro indiviso share) became ring-fenced and liable for the debtor’s debts as at that date. In those circumstances, the court was readily able to conclude that although, by virtue of the quirks of feudal law and a compelling policy objective to preserve the integrity of the public register, the real right in the deceased’s instituted share had passed to the widow under the unevacuated special destination, nevertheless, by reason of the preceding sequestration (which had vested in the trustee a personal right to the debtor’s whole estate including his rights in that instituted share), the real right of property that passed to the widow remained “burdened ” by the debts of the debtor (per Lord Sutherland at 212). Since, at the date of his death, the institute’s pro indiviso share formed part of the sequestrated estate and was liable for the institute’s debts, that share passed to the substitute subject to “the same qualifications”. The substitute took “no greater right” than that which was possessed by the institute (per Lord Sutherland, supra).
[34] The present case is simpler. The institute (Mr Machin) died long before his estate was sequestrated. Accordingly, his share devolved automatically to the substitute (the defender). But, according to long-established authority, the substitute also thereby incurred a personal liability to the unsatisfied creditors of the deceased institute, to the extent of the value of her succession. In contrast with Fleming’s Trustee, supra, there is no need to analyse the substitute’s real right as being “burdened” by the deceased’s debts. The substitute (the defender) has simply incurred a personal liability to the deceased’s creditors by virtue of her succession under the special destination. That liability was enforceable directly against the defender at the instance of the deceased’s unsatisfied creditors. The significance of the supervening sequestration is merely to superimpose upon those unsatisfied creditors a statutory process for the enforcement and collection of their debts for the benefit of the body of creditors as a whole. Individual enforcement by creditors of the debtor’s obligations (and, by extension, of the ancillary and derivative liability of the heir of provision) is suspended. Instead, the creditors of the deceased are compelled to submit to the mechanism of collective enforcement of their debts, whereby the trustee in sequestration enforces payment of the debtor’s obligations (including, by extension, the ancillary and derivative liability of the heir of provision) for the benefit of the body of creditors as a whole. In large measure, this is an analysis and outcome driven by pragmatism. In Lord Caplan’s words in Fleming’s Trustee, supra (at page 218), it avoids “an unwelcome scramble” between the creditors themselves to claim directly from the heir of provision.
[35] In conclusion, insofar as the defender disputes liability in valorem for the deceased’s debts by virtue of her acquisition of title under the special destination, the defender’s averments are irrelevant. This results in the exclusion from probation of a series of positive averments asserting that erroneous proposition.
[36] However, that is not quite the end of the matter.
[37] The defender also denies that the deceased was insolvent, and does not admit the extent of the deceased’s debts, at the date of his death. As a result, a material issue of fact remains in dispute. To that extent, a proof will be required.
[38] A separate and, perhaps, more intriguing question (given the passage of time between the death and the sequestration in the present case) is whether any of the deceased’s debts as at the date of death may subsequently have been extinguished by prescription and, if so, whether the defender’s personal liability to creditors would thereby be abated. This issue has not been addressed in the averments and was touched upon only fleetingly in the defender’s submissions. Accordingly, I need not express a final view upon it. For what it is worth, my strictly preliminary thoughts are that the defender’s personal liability to creditors (and, now, to the pursuer as trustee on behalf of the creditors) is essentially ancillary in nature, derived from the deceased debtor’s primary obligation to his creditors. The defender’s personal liability subsists only to the extent that the primary obligation (of the deceased’s estate) to those creditors subsists. Death does not interrupt the operation of the prescriptive period. A debt subsisting at the date of death may nevertheless prescribe during the period of an executry, absent a relevant claim against, or relevant acknowledgment by, the debtor’s executor or trustee. So, if some or all of the deceased’s debts (so far as they may have existed at the date of death) no longer subsist (due, for example, to discharge by payment, compromise, prescription or otherwise) I would have thought that the defender’s ancillary and derivative personal liability to the creditors may, in theory, likewise be abated.
Decision
[39] Accordingly, I have repelled the defender’s preliminary pleas (pleas-in-law numbers 5, 6 and 7); I have sustained the pursuer’s third plea-in-law to the limited extent of excluding from probation particular averments identified above; and thereafter I have allowed parties a proof of their respective averments. I would anticipate that the proof will relate mainly to the quantification and extent of the deceased’s subsisting debts. The issue of expenses is reserved meantime.