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A Strange Genesis: Section 2 of the Trusts (Scotland) Act 1961

Document Cited authorities 6 Cited in Related
Vincent
Pages323-341
Published date01 September 2020
Date01 September 2020
DOI10.3366/elr.2020.0648
INTRODUCTION

When a trustee transfers property in breach of trust, any third party who receives that property will be protected against the claim of a beneficiary only if in good faith. That is the law, at least, in most jurisdictions where the trust is recognised. Yet in Scots law, a third party will be secure even if in bad faith.1 This protection, introduced by section 2 of the Trusts (Scotland) Act 1961, is thus uniquely broad in scope.

How the section 2 protection arose is in many ways a remarkable story. To tell it, this article briefly reviews the operation of section 2 in its comparative context before exploring the origins of the provision in detail. This examination sheds light on one of the most distinctive aspects of the Scots law of trusts as well as on the haphazard process of law reform by which it was formulated.

Operation of the <span class="vid_spn">Section 2</span> Protection

Section 2 of the Trusts (Scotland) Act 19612 provides:

Where, after the commencement of this Act, the trustees under any trust enter into a transaction with any person (in this section referred to as “the second party”), being a transaction under which the trustees purport to do in relation to the trust estate or any part thereof an act of any of the descriptions specified in paragraphs (a) to (ee) (eb) of subsection (1) of section four of the Act of 1921 (which empowers trustees to do certain acts where such acts are not at variance with the terms or purposes of the trust) the validity of the transaction and of any title acquired by the second party under the transaction shall not be challengeable by the second party or any other person on the ground that the act in question is at variance with the terms or purposes of the trust:

Provided that in relation to a transaction (other than a transaction such as is specified in paragraph (ea) of that subsection) entered into by trustees who are acting under the supervision of the Accountant of Court this section shall have effect only if the said Accountant consents to the transaction.

Nothing in subsection (1) of this section shall affect any question of liability between any of the trustees on the one hand and any co-trustee or any of the beneficiaries on the other hand.

 Section 2 is reliant in its operation on the Trusts (Scotland) Act 1921: it extends protection only to those transactions specifically enumerated in certain paragraphs of 4(1) of that Act. Read together section 2 of the 1961 Act and section 4 of the 1921 Act thus create six ‘protected’ transactions: the sale of trust property, the granting of leases, the borrowing of money by the trustee, the creation of rights in security over trust property, the excambing (exchange) of heritable trust property, the investment of the trust estate, and the acquisition of heritable property for any other reason.3 According to section 2, none of these transactions or the title acquired by a transferee as a result thereof may be challenged as invalid “on the ground that the act in question is at variance with the terms or purposes of the trust”

The protection conferred by section 2 is expressed in blanket terms. In principle, then, it extends both to transactions made for no consideration as well as to those where the transferee is in bad faith.4 But it is the protection against bad faith, not lack of consideration, which is the defining feature of section 2.5 This is because each of the six protected transactions presupposes that consideration of some kind is provided in order for the transferee to receive a right in the trust property and so come within the scope of the provision.6 Questions of the protection by section 2 of transactions made for no consideration accordingly become irrelevant.

 The Protection in Context

As has already been suggested, the extent of the protection conferred by section 2 makes Scotland unique among jurisdictions in which the trust exists. The vast majority of those jurisdictions make the application of comparable protections conditional upon, inter alia, good faith on the part of the transferee who takes in breach of trust. Others impose higher requirements still. In English law, for example, only a good faith purchaser without notice of the beneficiary's equitable interest enjoys protection.7 The same rule applies in South Africa.8 In many other jurisdictions, the rule has been placed on a statutory basis9 and, though such statutes do not invariably impose an explicit requirement of good faith, none goes so far as to protect a bad faith transferee of trust property taking in breach of trust.10

It is not necessary, however, to venture beyond the confines of Scots law to show that the protection conferred by section 2 is exceptional in nature. Prior to the enactment of section 2, the rule – which rested upon common law – required that a transferee be in good faith and provide onerous consideration to be secure against the beneficiary's claim.11 Further, in a number of other circumstances where a transaction between a trustee and transferee may be open to challenge, the transferee must be in good faith in order to receive unimpeachable title. Thus, where a transfer of trust property is based upon a procedural impropriety such as a failure to consult one or more of the trustees, a transferee is protected only in the event that he or she is in good faith12. A similar protection, again conditional upon good faith, applies where a transferee receives property from an executor whose confirmation has been reduced or who has incorrectly distributed executry property.13

How the section 2 protection arose against a background of this near universal requirement of good faith is the subject of the remainder of the article. The story of the provision, which today can be examined with reference to its preparatory materials preserved in the National Records of Scotland,14 begins exactly 40 years before the passage of the 1961 Act.

 <a href="https://vlex.co.uk/vid/trusts-scotland-act-1921-808105737">THE 1921 ACT</a> PROBLEM <span class="vid_spn">Section 4</span> and Trustee Powers

The origins of section 2 lie in another important 20th century statute on the law of trusts in Scotland, the Trusts (Scotland) Act 1921.15 That Act set out to consolidate and amend existing legislation on trusts which had developed piecemeal, mainly in the later part of the 19th century.16 In common with a number of the statutes from which it was derived, the 1921 Act conferred express power on trustees to deal with the trust property in certain ways. The critical provision in this respect was section 4 of the Act (‘General powers of trustees’) which began:

(1) In all trusts the trustees shall have power to do the following acts, where such acts are not at variance with the terms or purposes of the trust, and such acts when done shall be as effectual as if such powers had been contained in the trust deed, viz.: —

The act then lists various powers: the first of these is the power to “sell the trust estate or any part thereof, heritable as well as moveable”.17

The requirement that the exercise by the trustees of the powers conferred by the section should not be “at variance with the terms or purposes of the trust” was to prove problematic. Although this condition was not a novel one, it was used in the 1921 Act for the first time to qualify the powers of trustees and judicial factors to sell trust property.18 As will be seen, it gave rise to a number of applications to the court seeking a declaration that a proposed sale of property was not, according to section 4, at variance with either the terms or the purposes of the trust in question. The problem was particularly acute in relation to judicial factors, who – though treated as ‘trustees’ for the purposes of section 4 – were generally appointed by a court decree containing little or no detail as to the factor's powers to deal with trust property.19 The existence of a duty upon most classes of judicial factor to conserve the estate under their administration served only to compound the difficulty.20

 Problems of Interpretation

Of the cases decided immediately after the passing of the 1921 Act, some supported the notion that a judicial factor (or, as the case may be, a trustee) had considerable discretion to determine without an application to the court whether the exercise of a power was at variance with the terms or purposes of the trust. Thus in Thomson (McKay's Judicial Factor), Petitioner21 the court appeared to support the proposition that the 1921 Act conferred a blanket power of sale upon judicial factors:

I am prepared to lay down the general proposition that, by the provisions of the 1921 Act, every judicial factor who is appointed by the Court, and whose duties are supervised by the Accountant of Court, is entitled to sell the heritable portion of the factorial estate without the sanction of the Court.22

More influential for the interpretation of section 4, however, were those decisions which limited any discretion conferred by section 4 and so...

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