HOUSE OF LORDS SESSION [2004] UKHL 8 OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE

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1 Judgments - Burnett's Trustee (Respondent) v Grainger and another (Appellants) HOUSE OF LORDS SESSION [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,

2 1. 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, 2. 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. 3. 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." 4. 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. 5. 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. 6. 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. 7. 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,

3 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. 8. 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, 9. 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. 10. 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? 11. 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 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

4 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 12. 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." 13. 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. 14. 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

5 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. 15. 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 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 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. 16. 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." 17. 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

6 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. 18. 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 ( ), 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." 19. 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 20. 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. 21. 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

7 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 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 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 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, 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

8 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. 25. 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. 26. 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. 27. 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

9 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 28. 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." 29. 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). 30. 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, in the opinion prepared for the majority by Lord Corehouse. 31. 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

10 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." 32. 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 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 34. 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. 35. 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

11 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 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 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 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." 37. 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. 38. 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." 39. 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."

12 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. 40. 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. 41. 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. 42. 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. 43. 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?

13 44. 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. 45. 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. 46. 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, 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, 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. 48. 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

14 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. 49. 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 50. 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. 51. 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,