COUNSEL: Jenkins, K.C., and Mansfield, for the plaintiffs.

Clauson, for the company.

Waggett, for other residuary legatees.

 

SOLICITORS: Sims & Syms; Freshfields; H. H. Price; Biddle & Co.

 

JUDGE: NEVILLE J.

 

DATE: 1906 Nov. 6.

 

Administration – Contingent Future Liabilities – Return of Assets – Rights of Future Creditor – Distribution – Practice – Parties – Rules of Supreme Court, Order LV., r. 3, sub-ss. (e), (g); r. 5.

 

The executors of a testator whose estate comprised chares of 10£. each in a limited company, of which only 4l. had been called up, took out a summons for a declaration that they were entitled to distribute the estate among the residuary legatees notwithstanding the possible future liability on the shares. The beneficiaries and the company were made defendants:–

 

Held – (1.) that the company could not be brought before the Court adversely on such a question, and the summons as against them must be dismissed with costs; (2.) that it is not the practice of the Court to retain funds in Court for the protection of a contingent future creditor, and it is unnecessary to do so for the protection of the executors, for they are sufficiently protected by the order of the Court in the administration of an estate.

 

Semble, such an order would not protect the executor unless made in the administration of the estate. The summons was therefore ordered to stand over for an inquiry as to debts and legacies. The cases as to retainer of assets and indemnity to executors examined.

 

MARY KING, the testatrix, who died on November 17, 1904, by her will dated March 19, 1900, appointed executors, and devised and bequeathed all her residuary real and personal estate to such of her sisters as should be living at her death, and the children or child then living of any of her sisters who should be then dead in equal shares as tenants in common per stirpes.

 

The testatrix’s estate comprised 524 shares of 10£. each in the South Australian Land Mortgage and Agency Company, Limited, upon which 4l. only was paid up, leaving a gross liability for calls which might thereafter be made of 3144£. Apart from these shares the estate was valued at about 10,000£.

 

The shares were stated to be of no value. The executors had requested the company to register transfers to the several [*73] beneficiaries, who were all sui juris, but the directors, who had an absolute power to refuse to register transfers, had refused.

 

The executors then took out this summons, asking for a declaration that they were entitled to distribute amongst the persons beneficially entitled under the testatrix’s will the estate of the testatrix, notwithstanding the liability of the estate in respect of the uncalled capital on the said 524 shares, upon the persons so entitled severally undertaking to refund the whole or such part (if any) of the estate paid or transferred to them as the Court might direct for the purpose of answering any debt which the defendant company might thereafter establish in respect of the said liability.

 

The company and all the beneficiaries were made defendants.

 

On the summons coming on for hearing,

 

Clauson, for the company, took the preliminary objection that the company were improperly made defendants.

 

Jenkins, K.C., and Mansfield, for the plaintiffs. The summons is taken out under the Rules of the Supreme Court, Order LV., r. 3 (e), “Directing the executors or trustees to do …. any particular act,” and (g) “The determination of any question arising in the administration of the trust.” Rule 5 directs that the persons to be served where the summons is taken out under these sub-sections shall be “the persons, or one of the persons, whose rights or interests are sought to be affected.” The rights of the company will be affected by the order asked for. If the executors distributed the assets without the order of the Court, the company could sue the executors and through them recover from the beneficiaries, or sue the executors for a devastavit. It is the practice of the Court to bring the persons entitled to a future claim before the Court in order that the Court may have full information. The company could not get an administration order, or, as of right, have the fund impounded, but they are within the words of the rule and properly brought here. If they had not been served the Court would have directed that they should be communicated with. We do not dispute that they may be entitled to their costs.

 

Clauson, for the company. It is settled that these rules do [*74] not give the Court any new jurisdiction. Therefore r. 5 must be construed as meaning persons whose rights are sought to be affected who could be properly brought before the Court in an administration action. There is no authority for making a person who has only a future and contingent claim on the estate a party to an administration action. Such persons may come in voluntarily, but King v. Malcott (1) shews that they have no right to ask the Court to impound the fund. It is premature to discuss the effect of the order, but persons cannot be brought here adversely that an order may be made in their presence which they have no right to oppose.

 

Jenkins, K.C., in reply.

 

NEVILLE J. I think that this is a case of some little importance because it is one that may constantly recur. The question is this: A company, the shares of which are not fully paid up, has upon its register a testatrix who has died leaving executors, and the prospective liability upon the shares being still unsatisfied, and the estate being in the course of administration, the executors apply on summons to the Court seeking directions with regard to the distribution of the estate notwithstanding the existence of this possible future claim on the part of the company. That summons is served upon the company with a view of bringing them before the Court in order that they may be present upon the directions given by the Court with regard to the distribution by the executors. It is said that that course is a proper and effective course, upon the authority of the Rules of Court, Order LV., r. 3, which provides for an application by the executors or administrators of a deceased person, directing the executors or administrators or trustees to do or abstain from doing any particular act in their character as such executors or administrators or trustees (sub-s. (e)). This, I think, clearly is an application for a direction with regard to the doing of a particular act or abstaining from doing a particular act in the character of the applicants as executors. By r. 5 of the same order the persons to be served with the summons under the last two preceding rules in the first instance are to be the following: [*75]

 

“in the case of sub-s. (e) of r. 3 the persons, or one of the persons, whose rights or interests are sought to be affected.” It is said that the rights and interests of the company are sought to be affected by the direction asked, and no doubt in a certain sense that may be the case. But, as Mr. Clauson has pointed out, and there is no doubt about it, the jurisdiction of the Court has not been enlarged by the making of the rules, under which a simpler form of procedure is now possible than was formerly in vogue, and no case can be shewn deciding that a person with a possible future claim is a proper party to litigation in respect of the administration of a testator’s or an intestate’s estates. Mr. Clauson has referred me to the case of King v. Malcott. (1) In that case a lessor claimed administration of his lessee’s estate, and asked to have impounded a certain amount to meet liability for future rent; and the Vice-Chancellor dismissed the application, and used language which shews clearly that a person in such a position – and I think that position is analogous to that held by Mr. Clauson’s clients here – has not any right which is enforceable either at law or in equity. If that is so it seems to me that they are not proper parties to litigation in respect of the administration of their possible debtor’s estate as defendants. I think, therefore, that, inasmuch as they could not in my opinion be made defendants to an administration action before the rules, they cannot be served with an originating summons after the rules, and so be brought before the Court. In my opinion they were improperly served, and they must be dismissed from the proceedings with costs.

 

The case was then heard on its merits.

 

Jenkins, K.C., and Mansfield, for the executors. The executors do not ask that any fund should be retained as an indemnity. The beneficiaries have offered a personal indemnity, and the executors have accepted it.

 

Austen-Cartmell, for some of the residuary legatees. It is not now the practice to retain any part of the assets as an indemnity for the executor, for he is sufficiently protected by the order of

 

(1) 9 Hare, 692. [*76]

 

the Court (Carson’s Real Property Statutes, p. 532, note to Law of Property Amendment Act, 1859 (Lord St. Leonards’ Act), 22 & 23 Vict. c. 35, s. 27, where he quotes Dodson v. Sammell). (1) By distributing the fund the Court is not really interfering with the rights of a future creditor, because an executor would always distribute the fund under an order and be protected: Dean v. Allen. (2) The Court has always assumed jurisdiction to distribute the fund without regard to the rights of any future creditor. It is true that in Fletcher v. Stevenson (3) Wigram V.-C. states that the retainer of a fund as an indemnity was for the protection of the future creditor, but that principle has not been followed: see Waller v. Barrett (4); Smith v. Smith (5); Dodson v. Sammell. (1) In all these cases the only point discussed was the right of the executor to an indemnity. In In re Nixon (6) Byrne J. went through all the cases, and explained that an indemnity was never required unless the executor was under a personal liability by reason of privity of estate with a lessor. It may be that an order of the Court only protects him from liability qua executor. The reported cases are all on liabilities under leases, but there is no difference in principle between liability under a lease and the liability in the present case, which is made a specialty debt by the Companies Act. If the Court were to retain a fund for the protection of a future creditor, it would be giving him mero motu a protection which it would refuse if he came to ask for it: King v. Malcott. (7)

 

Waggett, for other residuary legatees.

 

NEVILLE J. In this case the executors seek the direction of the Court to distribute the estate among the residuary legatees notwithstanding the claim of a limited company in respect of unpaid shares, no calls having been made. It appears to be the practice to direct such distribution notwithstanding the existence of contingent claims, and, as the law stands, I think it is clear that the order of the Court in such a case exonerates the

 

(1) (1861) 1 Dr. & Sm. 575.

 

(2) (1855) 20 Beav. 1.

 

(3) (1844) 3 Hare, 360.

 

(4) (1857) 24 Beav. 413.

 

(5) (1861) 1 Dr. & Sm. 384.

 

(6) [1904] 1 Ch. 638.

 

(7) 9 Hare, 692. [*77]

 

executors from ultimate liability to the creditor. The practice appears to have grown up gradually and in a manner which is not to my mind altogether satisfactory. One cannot help seeing that the rights of absent parties of whose claim the Court has notice may be prejudicially affected by the order. Nor are the authorities themselves in a very satisfactory state, but I think the outcome is reasonably clear.

 

The first case I have been referred to is Fletcher v. Stevenson (1), before Wigram V.-C. In that case the Vice-Chancellor directed that the whole of the residuary estate of the testator and the income should be retained for the purpose of providing a fund to satisfy, if necessary, future claims for rent. The Vice-Chancellor says this (2): “The widow’s claim is opposed by two parties, first, by the executor: and, secondly, by the legatees in remainder. So far as the executor is personally concerned, he would, I apprehend, be safe in acting under the direction of the Court; but in considering what degree of protection is due to the absent covenantee, I am bound to consider whether the Court, taking the fund out of the hands of the executor, can do less than it would expect the executor to do if the fund remained in his hands.” That is the ground on which the Vice-Chancellor refused to part with the fund, and I must say that what the Vice-Chancellor says seems to me of very great force. The next case cited in which the matter came before the Court is Dean v. Allen. (3) The side-note is: “Where an estate is administered and the residue is paid over under an order of the Court, the executor will be protected, and a creditor will not afterwards be allowed to sue him at law. The executors of a lessee held entitled to no further indemnity against the covenants than the personal indemnity of the residuary legatees.” That case is a clear authority upon the point that the direction of the Court exonerates the executors from liability to the creditor, but it is not very satisfactory because it provides for indemnity to the trustees, and does not point out or apparently recognize any inconsistency between the doctrine that the executors are entirely

 

(1) 3 Hare, 360.

 

(2) 3 Hare, 370.

 

(3) 20 Beav. 1. [*78]

 

exonerated from liability and the provision of indemnity for them. The point again came before Sir John Romilly in Waller v. Barrett (1), and there the Master of the Rolls gives reasons for what he states to be the practice which are at all events intelligible. He reiterates the doctrine of exoneration. [His Lordship read the head-note to that case, and continued:&#`150;] The Master of the Rolls says (2): “I am at a loss to conceive on what principle a debt which may arise hereafter, but which is not now existing, is to be treated on a footing different to an existing debt. The creditor, although advertised for, may be abroad at the time, he may be ignorant of the whole proceedings, and yet, if he do not come in and claim, his only remedy in this Court is against the legatees. In the case of March v. Russell (3), Lord Cottenham made this observation: ‘Formerly, when legacies were paid, it seems to have been the practice to oblige the legatee to give security to refund, in case any other debts were discovered. That practice has been discontinued, but the legatee’s liability to refund remains. The creditor has not the same security for the refunding as when the legatee was obliged to give security for that purpose, but he has the personal liability of the legatee.’ I hold that this, in fact, is the principle which governs these cases, that it is for the purpose of giving a greater degree of security to the executor (in case a creditor should arise thereafter), that the Court requires what is called ‘an indemnity to the executor’ to be given; but if he has stated the facts to the Court, and has acted under its direction, I apprehend that his indemnity is complete and perfect, so far as he is concerned.”

 

That is an intelligible account of the origin of the practice. I am surprised that Lord Romilly should have professed himself to be at a loss to conceive on what principle a contingent debt can be differentiated from an existing debt, but he does class the two together and declare that the order of the Court exonerates the executor on distribution of the assets. Further, one cannot help feeling that the reason given for the provision of the indemnity is unsatisfactory, because it is curious that an indemnity of this kind should be held to give a greater

 

(1) 24 Beav. 413.

 

(2) 24 Beav. 418.

 

(3) (1837) 3 My. & Cr. 31, 41. [*79]

 

degree of security to the executor than the order of the Court, which exonerates him altogether. However, there it is, and that is something upon which one can proceed, whether the grounds upon which it is founded, as stated by the learned judge, commend themselves to one’s ideas of the general practice of the Court or not.

 

The next two cases to which I was referred are both before Kindersley V.-C. In the first, Smith v. Smith (1), the doctrine of exoneration was referred to, and it was held the executors were not in that case entitled to an indemnity, and the Vice-Chancellor says (2): “Supposing there had been no dealing with the leaseholds by the executors, would they have been now entitled to any indemnity? In following the previous decisions, I have held that executors have such right; but I concur with the Master of the Rolls in thinking that where an executor fairly represents everything to the Court the decree, directing him to deal with and distribute the property, must operate as a complete indemnity to him; and that therefore an executor cannot need any other indemnity. It has, however, been suggested, that there ought to be a fund set apart by way of indemnity, not for the benefit of the executor, but for the benefit of the lessor, in case of there being at any future time a breach of covenant. Now if the lessor is entitled to any such equity as this, it would seem to follow that he might come to this Court to assert such equity, and to ask the Court to set apart a sum of money out of the testator’s assets, to provide for the event of a future breach of covenant, for which he might be entitled to recover damages. But it has been held that a lessor cannot be heard in this Court to maintain any such right. In truth the whole doctrine on the subject is in a very unsatisfactory state; and does not seem to be founded on sound principles.” The case came again before the same Vice-Chancellor in Dodson v. Sammell. (3) In that case a fund which had been set apart to indemnify executors was ordered to be paid out to the residuary legatee, such indemnity since the passing of Lord St. Leonards’

 

(1) 1 Dr. & Sm. 384.

 

(2) 1 Dr. & Sm. 387.

 

(3) 1 Dr. & Sm. 575. [*80]

 

Act (22 & 23 Vict. c. 35) being no longer necessary as a protection to the executor. The Vice-Chancellor said (1): “With respect to the other ground, that it is required for the benefit of the lessor, it is true that in Fletcher v. Stevenson (2), 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 (3) Turner V.-C. decided that there was no such equity.” With great respect, I venture to think that the inference which the learned Vice-Chancellor draws in that case is not a necessary inference, and that the reason given by Wigram V.-C. for retaining a security for the contingent creditor was an intelligible reason which was not open to the observation made by Kindersley V.-C. in that case. However, from that time on it seems to have been the practice not to retain any part of the assets. Then after a considerable number of years – I have not been referred to any case decided between 1861 and 1904 – the case came before the late Byrne J. in In re Nixon. (4) The head-note in that case is, “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.” That I understand to apply to all cases where there is not a personal liability on the part of the executors to pay out of their own moneys the claim of the creditor. The learned judge went through the cases and came to the conclusion stated in the head-note, and I think that, having regard to the authorities, it is necessary for me to proceed on the same footing.

 

It is pointed out in one of the cases that the exoneration must, or at all events may, only operate in the case of an administration action. There may be a distinction in the protection

 

(1) 1 Dr. & Sm. 578.

 

(2) 3 Hare, 360.

 

(3) 9 Hare, 692.

 

(4) [1904] 1 Ch. 638. [*81]

 

afforded by a direction of the Court taken under Order LV., r. 3, without administration. It is obvious that the Court cannot direct distribution of the estate so long as it is not satisfied that there are no longer any immediate claims outstanding. I think, therefore, there should be an inquiry as to debts.

 

The order made directed an inquiry as to debts and pecuniary legacies, and which of them had been paid, and referred the summons back to chambers, with leave to amend and liberty to apply.