COUNSEL: Norton, K.C., and E. Ford, for the applicant.

Rowden, K.C., and Davenport, for the executors and the other beneficiaries.

 

SOLICITORS: Cooper & Bake; Cunliffes & Davenport.

 

JUDGE: BYRNE J.

 

DATES: 1904 March 10, 11.

 

 

Administration - Leaseholds - Contingent Future Liabilities - Retention of Assets - Executor - Indemnity - Privity of Estate - Distribution.

 

On making an order for the distribution of the estate of a testator amongst his residuary legatees the Court will not set aside any part of his assets to indemnify his executors against possible liabilities which may arise in respect of leases formerly held by him, unless there is privity of estate between the executors and the lessors.

 

FURTHER CONSIDERATION.

 

John Nixon by his will gave all his residuary estate to trustees upon trust for sale and conversion, and died in 1899. His executors and trustees issued the statutory advertisements; paid all his debts and legacies; set apart a sum of 180,000£. to answer an annuity of 5000£. given by him to his wife for life, a sum of 10,000£. in respect of a legacy settled by his will, and a sum of 65,900£. which they claimed to be entitled to retain, with the accumulated income thereof up to 1000£. per annum, for the purpose of indemnifying themselves against contingent liabilities which might arise in respect of leaseholds formerly the property of the testator. The question now in dispute was whether they were entitled to retain this sum. The testator had in his lifetime been engaged in two businesses as a colliery proprietor under the names of Nixon, Taylor & Cory and the Western Merthyr Coal and Fuel Company. The firm of Nixon, Taylor & Cory was carried on till 1881 by fourteen partners, and a number of mining leases were held by Mr. Nixon and various members of the firm on behalf of the partnership. In 1882 a company called Nixon’s Navigation Company, Limited, was formed to take over the business. By the articles of the company part of the unpaid capital of the company, amounting to 31,200£., was constituted a special fund to indemnify the late partners against (inter alia) liability in respect of the leases. Most of the leases, including the [*639] only one of which the testator was sole lessee, were assigned to the company, but a few were retained by the partners, as licences to assign them could not be obtained. Of these leases the lessees executed declarations of trust as joint tenants in favour of the company, the result being that none of these leases devolved upon the testator’s executors. By an indenture of March 18, 1882, the company covenanted with the partners and each of them to discharge the liabilities of the partnership, and to pay the future rents and royalties reserved by and perform the covenants contained in the leases, and to indemnify the partners in that respect, and, further, that the above-mentioned part of unpaid capital should be charged with payments due under the covenant of indemnity. The partners covenanted by the same deed with all and each of the other partners that any losses borne by them by reason of their being trustees of the leases and not met by the company should be paid by themselves in proportion to their capital. There were a large number of mining leases of which the testator was a lessee. Some of them had been acquired by him by assignment, and of some he was an original lessee. Many of them were for long terms and at heavy rents.

 

The testator similarly held other leases in respect of his firm of the Western Merthyr Coal and Fuel Company. In 1881 his interest in the firm was assigned to other persons, who jointly and severally covenanted with him to pay the rents and perform the covenants of the leases. One of these persons, Mr. J. G. Kershaw, had since died, and in an action for the administration of his estate the Court made an order in December, 1900, that securities of the face value of 42,182£. 10s. should be set apart to answer any liability that might arise under the leases.

 

In April, 1903, upon an originating summons an order was made for accounts and inquiries and the administration of Mr. Nixon’s estate.

 

In July, 1903, the executors repeated the advertisements to creditors, but they had not received any claim in respect of liability under any of these leases.

 

The action now came on on further consideration, and one [*640] of the residuary legatees asked that the executors might be ordered to distribute the 65,900£. instead of retaining it.

 

Norton, K.C., and E. Ford, for the applicant.There were joint and several covenants in these leases by which the executors are still bound, although the leases never actually vested in them. But we submit that no assets ought to be retained to meet this liability. The case is governed by the law as it stood before Lord St. Leonards’ Act (22 & 23 Vict. c. 35). That Act does not apply, for these leases did not come to the executors as such, nor have the executors assigned them to purchasers, within s. 27; and the executors had notice of the liability as mentioned in s. 28. Both before and after the Act the Court has never been in the habit of setting aside assets to meet such a remote possible liability: Jervis v. Wolferstan (1); Reilly v. Reilly. (2) No Court has ever gone so far as to direct an inquiry whether a testator had ever at any time of his life been possessed of a lease. No such inquiry has ever been considered necessary, and no assets have ever been set apart to meet a liability under a lease unless the lease had actually become vested in the executors. The principle on which funds were set apart cannot be clearly ascertained from the authorities. In King v. Malcott (3) it is said that a lessor has no right to have any of his lessee’s assets impounded to answer future rent and covenants; if any funds are appropriated for that purpose it is from the right of the executor to indemnity. That is probably the true reason, although in Dodson v. Sammell (4) the principle is said to be doubtful. The authorities shew that the law on this subject is in an unsatisfactory state, but we submit that it is only when there is privity of estate between the lessor and the executor that the Court directs assets to be appropriated as an indemnity. It makes no difference whether the testator was an original lessee or an assignee of the lease. If he has covenanted to indemnify the assignor his liability to the lessor is the same, although the lessor may find it more difficult to recover. In

 

(1) (1874) L. R. 18 Eq. 18, 25, 26.

 

(2) (1865) 34 Beav. 406.

 

(3) (1852) 9 Hare, 692.

 

(4) (1861) 1 Dr. & Sm. 575. [*641]

 

the present case all the leases were parted with in the testator’s lifetime, and there is no privity of estate between the executors and the lessors. If executors are in possession of leaseholds there must be something accruing due from them to the lessor from day to day; they therefore require protection, for the order of the Court to distribute the estate will not protect them in respect of that liability. If these leases had become vested in the executors and had been assigned by them, they would have been protected by Lord St. Leonards’ Act, and no indemnity would have been necessary. Why should they be in a worse position because the testator parted with the leases in his lifetime? Executors are entitled to an indemnity if, and only if, the leaseholds are in their hands. They are then the primary persons to pay these liabilities, and cannot plead plene administravit.

 

It is unnecessary to reserve funds for this purpose. If an executor fairly represents everything to the Court, a decree directing him to distribute the property must operate as a complete indemnity to him, and he cannot need any other indemnity: Smith v. Smith (1), which was not a case under Lord St. Leonards’ Act; Carson’s Real Property Statutes, pp. 532, 535; Dodson v. Sammell. (2) That was the rule before Lord St. Leonards’ Act was passed: Waller v. Barrett. (3)

 

If the executors have distributed the estate the lessor can sue the residuary legatees without making the executors parties: Hunter v. Young. (4)

 

[BYRNE J. If the estate is distributed and the executors are no longer under any liability, how can they assert in favour of their cestuis que trust their right to be indemnified by the purchasers of the leaseholds?]

 

The executors would be treated as trustees of the right to indemnity for the residuary legatees. They could assign the right to them or keep it as trustees for their benefit: In re Perkins. (5)

 

In the present case there is an ample margin of assets, and there will be no risk in distributing the 65,900£.

 

(1) (1861) 1 Dr. & Sm. 384, 387.

 

(2) 1 Dr. & Sm. 575.

 

(3) (1857) 24 Beav. 413.

 

(4) (1879) 4 Ex. D. 256.

 

(5) [1898] 2 Ch. 182. [*642]

 

Rowden, K.C., and Davenport, for the executors and the other beneficiaries. We do not oppose this application, but it is our duty to see that all the circumstances are laid before the Court. We admit that the suggested order would be a sufficient protection for the executors, and that Lord St. Leonards’ Act does not apply. But the liabilities are very heavy, and the leases themselves are not of sufficient value as an indemnity. There are not in this case clear covenants to indemnify the testator; there are cross-covenants by him also.

 

The settled practice of the Court has always been to set aside assets as an indemnity, and there is no trace of a suggestion that the principle upon which the Court has acted was to distinguish between cases where there was, or was not, privity of estate. In Lewin on Trusts, 10th ed. pp. 509, 510, it is said that the doctrine does not seem to be founded on sound principle.

 

Executors are always indemnified if there is any liability: Garrett v. Lancefield. (1) In the old administration orders inquiries about leaseholds and the liabilities thereunder were usual: Seton on Decrees, 4th ed. p. 889. There seems to have been a doubt on what principle that was done: Fletcher v. Stevenson. (2) King v. Malcott (3) was only a decision that the lessor could not claim to have funds retained as an indemnity.

 

Moule v. Garrett (4) shews that the distinction drawn by the Court really rests upon privity of contract. Where the testator was an original lessee the indemnity was never dispensed with. In Bunting v. Marriott (5) an indemnity fund was set aside for the benefit of the lessor, although that was not followed in Sowdon v. Marriott. (6)

 

Norton, K.C., in reply.

 

BYRNE J. The testator in this case left a very large estate. There is a sum of 180,000£. still remaining vested in the trustees and executors which is appropriated to meet an annuity of 5000£. for the testator’s widow, reducible in the

 

(1) (1856) 2 Jur. (N.S.) 177.

 

(2) (1844) 3 Hare, 360.

 

(3) 9 Hare, 692.

 

(4) (1872) L. R. 7 Ex. 101.

 

(5) (1861) 7 Jur. (N.S.) 565.

 

(6) (1873) 21 W. R. 808. [*643]

 

event of her subsequent marriage to 1000£. a year. There is a sum of 10,000£. set apart for legacies; and, further, there is a sum of 65,900£. which has been kept as an indemnity fund against possible liabilities in respect of certain leasehold interests which the testator formerly held. The applicant represents three twenty-fourths of the residuary estate. He has one twenty-fourth, and is also acting in the interest of others who hold two twenty-fourths. The remainder of the estate is represented by the opponents. I call them opponents because, although they have recognised the fact that if I make such an order as is asked for the executors will be amply protected, yet they have thought it their duty, and properly so, to bring before me certain considerations shewing why I ought not to part with the fund in question without providing an indemnity.

 

Now in this case there have been advertisements issued for creditors, and there has been an inquiry, the result of which has shewn that there are a considerable number of leasehold properties which were formerly vested in the testator either jointly or alone, as to which by virtue of certain covenants there is a possible liability to a very large amount, but that some of these were assigned by the testator in his lifetime to a company which is known as Nixon’s Navigation Company. The rest of the leases were vested in the testator and his partners as joint tenants. His surviving partners still hold them, but as trustees for Nixon’s Navigation Company. There were other leaseholds held by the testator in connection with another business which were assigned to an assignee named Kershaw in the lifetime of Mr. Nixon. So there is no question of dealing with leasehold interests which have fallen to the executors and are vested in them, in which case there would be privity of estate between the executors and the lessors.

 

The real point that lies at the root of the argument which I have heard is this. It is said that the practice which has constantly been acted upon by the Court of retaining funds to answer possible liabilities arising under leases applies only where there is privity of estate, and not in cases where the liability subsists only because the testator formerly held the [*644] leases. A great many authorities have been cited, and with this result. Most undoubtedly the origin of the reason for retaining funds has been attributed to various causes by different judges at different times. On the one hand, it has been frequently put as being for the indemnity of the executors lest they should be sued; and, on the other hand, it has been said that the principle really is that the Court in administering assets is looking after the interests of persons who, although they have no present right to claim anything and may never have any claim against the estate, still are persons who may in the happening of certain events have claims which ripen against the estate. Of the cases cited I think I can fairly select two as shewing best how the matter stands apart from Lord St. Leonards’ Act. I ought to say at once that Lord St. Leonards’ Act has no application to the present case, because it applies only to a case where there has been an assignment by executors to a purchaser. That is admittedly not the position in the present case.

 

The first case I desire to refer to is King v. Malcott (1), before Turner V.-C. There there was a claim by a lessor for the administration of the estate of his lessee, and he asked to have a sufficient amount out of the assets impounded to answer future possible breaches of covenant in the lease. The Vice-Chancellor dismissed the bill, and in the course of giving judgment he says (2): “If the testator were a tenant of leasehold premises, and no rent be due from him, no debt is proveable by the lessor under that decree in respect of any such rent. The Court, in the administration of the estate, deals with the legal rights of the parties; and the Court in such a case finds nothing in fact due at law to the lessor from the testator or his estate. But, suppose that rent afterwards becomes due, and that proceedings are or may be taken by the landlord, what is then the course of the Court? The proceedings must be against the executor; and on the application of the executor, the Court refers it to the master to ascertain what is due to the lessor and what provision should be made for the future in respect of the obligations arising from the

 

(1) 9 Hare, 692.

 

(2) 9 Hare, 694. [*645]

 

lease; and a sum of money is commonly set apart to answer what may be required. This course is taken, not because of any right which the creditor has to come in under the decree, but in consequence of the right of the executor to an indemnity against legal liabilities out of the assets. The creditor, not being so at the time of the decease of the testator, but having afterwards become a creditor by reason of the testator’s covenant, was not entitled to go in under the decree.” The Vice-Chancellor proceeds to inquire why the lessor should have any such right, and considers it is not the result of the relation between landlord and tenant. Then he says: “Why should a Court of Equity give a more extended effect to the obligation contracted between a landlord and tenant than is given by a Court of Law?”

 

Kindersley V.-C. on more than one occasion had to consider the meaning of the practice as established. I refer to the case of Dodson v. Sammell (1), which was a case where a fund which had been set apart out of residue to indemnify executors in respect of leaseholds of the testator was ordered to be paid out to the residuary legatee, “such indemnity, since the passing of the Law of Property Amendment Act, being no longer necessary.” An application was made for payment out. The Vice-Chancellor says (2): “The law upon this subject is in a very unsatisfactory state. For a long time it has been the practice of the Court, where the property comprised in the lease did not of itself furnish a sufficient security, to set apart out of the residuary estate a reasonable sum to cover any liability, which might in any reasonable probability arise, by reason of a future breach.” Then the Vice-Chancellor proceeds to say: “As to the ground of indemnity to the executor or administrator, it is difficult to reconcile such a ground with the acknowledged principle, now at least well settled, that a decree or order of the Court directing the administration and application of the assets is of itself a complete and perfect indemnity to him, provided he keeps back nothing which ought to be disclosed to the Court.” Further on he says: “With respect to the other ground, that it is required for the

 

(1) 1 Dr. & Sm. 575.

 

(2) 1 Dr. & Sm. 577. [*646]

 

benefit of the lessor, it is true that in Fletcher v. Stevenson (1) Wigram V.-C. thought that although the decree of the Court would be a sufficient indemnity to the executor, it was right to set apart a sufficient part of the assets for the protection of the covenantee; meaning, of course, that the covenantee had that equity. Now if the covenantee had such an equity, it would necessarily follow that he could file a bill to enforce it. But in King v. Malcott (2) Turner V.-C. decided that there was no such equity, and dismissed a bill filed by the lessor to enforce it; and this seems to determine that the covenantee’s right to protection is a ground that cannot be maintained.” I find it difficult to resist the logic of the passage which I have just read, even if I wished to do so, and it appears to me that the truer ground, as far as I have been able to gather it from the authorities, is that of indemnity to the executors.

 

I should feel myself bound to follow an established practice, although there was no authority for it in the way of direct decision, or in the way of statutory enactment, but as matters stand there is no such practice established in a case like the present. Notwithstanding the industry of counsel, no case has been produced by which it can be shewn that assets have ever been retained unless in a case where there is privity of estate between the executors and the lessors. It is quite true that the real state of the facts in some of the authorities is not positively ascertainable. So far as appears none of the decisions relate to a case like the present where the executors have no privity of estate with the lessor. It is quite clear that, if the Court makes an order distributing this 65,900£., the executors will be under no liability to the lessors should they hereafter be sued. It also, I think, may be taken as clear that there is no statute which requires any fund to be set apart for indemnity for the protection of the executors. In my opinion the authorities only shew that it is necessary to do so where there is privity of estate.

 

Then it is suggested (and I have not heard any good argument to the contrary) that the reason why, when there is privity of estate, something is set apart to protect the executors,

 

(1) 3 Hare, 360.

 

(2) 9 Hare, 692. [*647]

 

is because the administration of the estate by the Court would not prevent an executor in possession of his testator’s leaseholds from being sued as assignee under the lease. That does appear to be a ground for differentiating the one class of case from the other. To adopt a contrary view and to seek to indemnify the executors against possible future action on the part of the lessors, and to set apart such a sum as might be required for that purpose in an estate of this kind, would be, or might be, virtually, to lock up a very large fund for an indefinite number of years, really and truly only to preserve a fund in favour of persons who have no present claim. The lessors have not by virtue of their contracts between landlord and tenant bargained for any right to have property retained out of the testator’s estate to answer future liabilities. I think, therefore, on the whole, that I am justified in saying that in a case like the present a fund ought not to be retained to the detriment of the beneficiaries under the will. I am bound to add that I think this is one of those cases in which the executors will be perfectly justified, if they see fit, although they would get protection under this order, in taking another opinion upon this question.