3. Tracing & Liability of Strangers Flashcards
TRACING
The PROCESS of identifying a new asset as the substitute for the old (Foskett v McKeown per L Millet)
T: Personal or Proprietary Claim?
Personal Claim
- EQUAL ranking with claims of other creditors as claim against individual, NOT property itself.
- 6 year limitation period to bring claim for breach of T (Limitation Act 1980).
- NOT possible to claim for increase in value of an asset that T’ee purchased with T property.
- NO USE against 3rd parties/E’sD.
Proprietary Claim
- prop. remedy has PRIORITY over claims of unsecured creditors as claim attached to property itself.
- – Asset considered to be property of B, not the bankrupt T’ee, so not subject to creditor’s claims.
- NO limitation period (s21(1)(b) Limitation Act 1980)
- IT IS possible to claim increase in value of an asset purchased with T money, also potential ability to claim interest in an asset T purchased with their own money.
T: To Trace in E or Common Law
Tracing in E certainly preferred because:
COMMON LAW LIMITATIONS
- Legal title required, B CANNOT use common law tracing.
- Typically, mixed funds CANNOT be traced (Agip v Jackson)
- NOT possible to obtain a charge over the asset (Re Diplock)
- Property must be physical AND identifiable
- – Money identifiable where paid into bank account and remains unmixed (Banque Belge v Hambrouck)
- – Tangible property may be identifiable even when mixed (India Oil v Greenstone Shipping)
- T’ee may use change of position defence!
EQUITY ADVANTAGES
- C CAN trace into mixed funds.
- Proprietary claim more readily available
- Range of remedies available is greater
- – Subrogation
- – E ownership
- – Equitable charge or lien
T: REQUIREMENTS FOR E TRACING
There are two requirements (Re Diplock):
- An E Proprietary Interest
- A Fiduciary Relationship
Two additional requirements:
- Traceable Recipient
- Identifiable Property
T: Requirements - AN E PROP. INTEREST
C must hold an E proprietary interest in the property. This can be an E interest under either (Re Diplock):
- a TRUST, OR
- an ESTATE (a will)
T: Requirements - FID. RELATIONSHIP
There MUST be a fid. relationship between C and D OR transferor of property to the D. Established Fid. Relationships: - T/B (Re Oatway) - Executor/B of an estate (Re Diplock) - Administrator of an estate/B - Transferor/transferee of funds (Chase Manhattan Bank) - Solicitor/Client (Re Hallett) - Accountant/Employer (Agip v Jackson) - Thief/true owner (Black v Freedman)
T: Requirements - TRACEABLE RECIPIENT
Recipient of property MUST be traceable. Property can be traced to the following:
- T/wrongdoer
- A recipient with knowledge
- An innocent volunteer (Re Diplock)
- – “volunteer”, one who has provided no consideration. “innocent”, has NO KNOWLEDGE of the source of the property.
- – These individual do have defences available however.
NB, it is NOT possible to trace assets bought by a BONA FIDE PURCHASER FOR VALUE WITHOUT NOTICE (Equity’s Darling.
- it may be possible to obtain the monetary value of the property (sale proceeds) from T’ee.
T: Requirements - IDENTIFIABLE PROPERTY
The property must be identifiable (i.e. not dissipated). If not, then a proprietary claim is impossible (Re Diplock)
Property will be DISSIPATED if spent on:
- Food that is then consumed (Re Diplock)
- Ongoing expenses (Re Diplock)
- – Like gas or electricity bills.
- Non-substantial improvements to a property (Re Diplock)
- – improvements will be “non-substantial” if they don’t significantly increase the value of the property.
If B’s property is money it will be dissipated if it is:
- Paid into an overdrawn bank account (Bishopsgate Investment v Homan)
- – unless overdraft is secured.
- Used to pay off unsecured debts (Re Diplock)
T: Scenario - T’ee transfers C funds into own account, UNMIXED
Remedy:
C can issue a charge over T’ee’s bank account for the funds (Re Hallett)
T: Scenario - T’ee transfers C funds into own funds, MIXED
Remedies:
C can claim either (Foskett v McKeown)
- a proportional share of the mixed funds
OR
- a lien over mixed funds for vlaue of their own.
T: Scenario - T’ee purchases asset with ONLY C’s funds
Remedies: C can claim either (Re Hallett) - The property itself --- preferred where increase in value. OR - a lien over the property --- preferred where decrease in value.
T: Scenario - T’ee purchases asset with mixture of own/C’s funds
Remedies:
C can claim either (Foskett v McKeown)
- a % share of the property, share corresponds to the contribution of C’s funds.
— preferred where increase in value.
OR
- a lien over the property for the sum of C’s funds used.
— preferred where decrease in value.
T: Scenario - T’ee gives C funds to an INNOCENT VOLUNTEER
Remedies:
C could make a PROPRIETARY CLAIM
- Property can be traced to an IV if has not been dissipated.
A RE DIPLOCK PERSONAL CLAIM (Re Diplock; Ministry of Health v Simpson)
- REQ:
- – C must attempt to sue wrongdoer first.
- – C can only sue for principal sum, i.e. not interest can be claimed.
- can ONLY be brought against an IV where C is B under a will (Re Montagu’s Settlement).
(- Typically no defences to this claim. Though has merely been suggested in (Lipkin Gorman v Karpnale) that the ‘Change of Position’ defence may be available.
- – where IV changed position after receiving C’s property in such a way that it would be unjust to make them repay.
- – REQ (Lipkin Gorman v Karpnale)
- IV spent money in reliance of receiving funds.
- – anticipation of above can suffice (Dextra Bank v Bank of Jamaica)
- Extraordinary expenditure
- – IV spent money they would not otherwise have done
- – Things purchased need not be extraordinary (Philip Collins v Davis)
- – Payment of debts is NOT extraordinary (Scottish Equitable v Derby)
- IV must have acted in good faith (Lipkin Gorman)
- – Negligence will not make something in bad faith (Niru Battery v Milestone Trading) )
T: Scenario - T’ee uses C funds to pay off debt
Remedies:
(simple) SUBROGATION (Boscawen v Bajwa)
- SECURED debt that T’ee paid off is ‘revived’ and C given lien over the property. C now the creditor.
- The terms of this revived debt must be the same as the original and must not prejudice the lender.
NB if debt is UNSECURED, money is dissipated.
T: Scenario - T’ee sells asset belonging to C
Remedy:
C entitled to proceeds of the sale but NOT the property itself (E’sD).
T: Scenario - C funds MIXED with IV’s asset
Remedy depends on whether the money spent has INCREASED the value of the asset.
- NO: C funds are dissipated (Re Diplock)
- YES: lien may be obtained to recover funds used by IV (Foskett v McKeown OBITER per Lord Browne-Wilkinson).
- – NB, risk that would be considered INEQUITABLE as would force sale of IV’s property (Re Diplock).
If IV PURCHASES an asset with mixture of own/C’s funds, asset is shared RATEABLY (Re Diplock).
T: Scenario - C funds MIXED with T’ee’s asset
Remedies:
C may either (Foskett v McKeown per Lord Millett)
- Obtain lien over T’ee’s account for the funds (Re Hallett)
OR
- Take a proportion of the property (Re Tilley)
— includes original property and any PROFIT.
— Preferred where increase in value.
T: Scenario - C funds withdrawn from mixed account (only T’ee’s funds)
Remedies:
GR: The Presumption of Honesty (Re Hallett)
- Court assumes that T’ee has spent own money as far ass is possible, before using C’s funds.
- C can obtain lien over account for REMAINING funds (Re Hallett)
- Where D spent the funds on an asset, not possible for C to claim asset whilst sufficient funds are in the account to cover their loss (Foskett v McKeown)
EX 1: T’ee purchases a traceable asset THEN dissipates the funds (Re Oatway)
- typically full dissipation required.
- With partial dissipation of C funds, C may cherry pick funds (Shalson v Russo), but ONLY if insufficient funds remain in the account (Turner v Jacob)
- – C can (Re Tilley; Foskett)
- – claim a charge over the asset (if increase in value)
- – claim a proportion of ownership (if likely decrease)
- The primary aim here is that the C receives the asset whilst the wrongdoer suffers as much of the dissipation as possible.
NB - the Lowest Intermediate Balance Rule (Roscoe v Winder; Re Goldcorp Exchange)
- Where T’ee adds own additional funds to mixed account, C may ONLY claim from fund total before the addition of the new funds, UNLESS T’ee added the new funds to replace C’s funds that they removed.
- C cannot make any claim in tracing if in the intermediate period the account was exhausted (Bishopsgate Investment Management v Homan)
T: Scenario - C funds withdrawn from mixed account (someone other that T’ees funds)
Remedies will vary DEPENDING ON THE BANK ACCOUNT TYPE.
SAVINGS ACCOUNT - remaining funds shared RATEABLY (in proportion to each part’s original contributions to the sum before dissipation (Re Diplock; Foskett v McKeown)
CURRENT ACCOUNT - “First In, First Out” rule (Re Clayton’s Case)
- whichever B’s money went into the account first is regarded as the first money to leave it.
- will NOT apply where contrary to intention of Cs. impractical or causes injustice/is inequitable. (Barlow Clowes International v Vaughan)
- – if rule doesn’t apply because of the above, funds split rateably (Russell-Cooke Trust Co v Prentis)
NB: where mix of T’ee AND multiple B’s money, starting point is always Presumption of Honesty, move to the above if T’ee money doesn’t cover it.
LIABILITY OF STRANGERS
GR: C should sue the T’ee/D under personal/proprietary claim in order to recover loss.
BUT, where not possible, C may sue 3rd parties involved in the appropriation of funds/property if they were:
- T’ees DE SON TORT, or
- DISHONEST ASSISTANCE, or
- KNOWING RECEIPT
A personal claim CANNOT be brought against an IV unless they knew it was trust property before they dissipated it (Re Montagu’s Settlement; Independent Trustee v GP Noble)
LofS: T’EE DE SON TORT
Where a person interferes with or assumes the duties of a T’ee, may become a constructive T’ee and be liable in the event of a breach of trust (Mara v Browne)
LofS: KNOWING RECEIPT
Def: 3rd party liability for receiving T property with KNOWLEDGE that it is RECEIVED IN BREACH OF T.
TEST: 3 REQs (El Ajou v Dollar Land Holdings per Hoffmann LJ):
- Assets must be disposed of in breach of T/FidD.
- Recipient must receive/purchase assets belonging to C that are TRACEABLE.
- Recipient must KNOW that they have received/purchases assets as a result of breach of T/FidD.
- – TEST: their state of knowledge must be such that it would be unconscionable for them to retain the benefit (BCCI Akindele). There is no requirement for dishonesty.
- – Recipient may deal with the property as they like, provided that they don’t know it belongs to C (Independent Trustee Services; Re Montagu’s Settlement)
- – Recipient need not be particularly rigorous in asking questions or be ‘unduly suspicious’ (El Ajou). Entitled to proceed on assumption of ‘dealing with honest men’ (Macmillan v Bishopsgate Investment Trust per Millett J)
LofS: DISHONEST ASSISTANCE
Def: 3rd party liability for assisting in the breach of a T.
REQ:
- Breach of T/FidD must have been by someone other than the 3rd party
- they must have provided ASSISTANCE in the breach
- – Must be a causal link between their actions and the BREACH (NB the breach, not the loss (Grupo Torras v Al-Sabah (No. 5))). No defence to say it would have happened anyway (Balfron Trustees v Peterson)
- – Assistance could be the facilitating of the breach, its preparation or concealing a breach.
- – They need not fully understand the nature of T’ee’s duties (Ultraframe v Fielding)
- They must have been ‘DISHONEST’
- – TEST: did D act as an honest person would, taking into account their qualifications, expertise, knowledge, skill etc (Barlow Clowes v Eurotrust)
- – NB both OBJ. and SUBJ. elements to the test.
Following would likely constitute dishonest assistance (Brunei Airlines v Tan per Lord Nicholl)
- knowing participation in breach
- deliberately not asking appropriate questions
- deliberately being ignorant of a breach.
