Tracing

Question 1

Who gave the significant speech in Sinclair v Brougham? What did he say?

Answer 1

Lord Sumner: “What ought to be done I think is clear; the only difficulty is how to describe the principle and how to affiliate it to other legal or equitable rules.”

Question 2

What are two criticisms of tracing?

Answer 2

1. Lack of coherence.

2. Artificial distinction between the common law remedy, and the equitable remedy.

Question 3

What is tracing at common law?

Answer 3

Not a proprietary right, but a right to assert against another a personal claim of some kind by reason of his receipt and retention or disposal of the asset.

Question 4

What did Millett J say in Agip (Africa) v Jackson?

Answer 4

“Tracing at common law… serves an evidential purpose. The cause of action is for money had and received. Tracing at common law enables the defendant to be identified as the recipient of the plaintiff’s money and the measures of his liability to be determined by the amount of the plaintiff’s money he is shown to have received.”

Question 5

What are the problems of common law tracing?

Answer 5

1. If the property is no longer identifiable, the personal action will abate in bankruptcy.
2. If legal title did pass, tracing at common law will be unavailable.
3. Common law gets very confused about mixtures and bank accounts!

Question 6

In which case does Lord Ellenborough address identification of property? What does he say?

Answer 6

Taylor v Plumer: Lord Ellenborough: “…the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description. [Money as recognised in fact must be] an undivided and undistinguishable mass of current moneys.”

Question 7

What can be noted about the decision in Agip?

Answer 7

Each court gave different reasons as to why it failed- trials judge because there was no paper involved in the transaction and so nothing to trace, plus the receiving bank credited the account before the sending bank debited the corresponding account; court of appeal because the money was mixed with other money so could not be traced at common law. But could trace in equity.

Question 8

What did LJ Atkin say in Banque Belge pour L’Etranger v Hambrouck?

Answer 8

“The question always was, Had the means of ascertainment failed? But if in 1815 the common law halted outside the bankers’ door, by 1879 equity had had the courage to lift the latch, walk in and examine the books: Re Hallet’s Estate. I see no reason why the means of ascertainment so provided should not now be available both for common law and equity proceedings.”

Question 9

What is the reason for division in the Court of Appeal and Banque Belge?

Answer 9

LJJ Bankes and Atkin believe both common law and equity may trace, even where money has gone through more than one bank. LJ Scrutton believes only equitable tracing could succeed.

Question 10

What is a source of uncertainty following Banque Belge?

Answer 10

The issue of personal current accounts, into and from which moneys are regularly deposited/withdrawn.

Question 11

What was the ratio of Lipkin Gorman v Karpnale?

Answer 11

HoL: when a person has received stolen property he must hand it back to the rightful owner because otherwise he would be unjustly enriched. Thus tracing was possible at common law against a casino where the ‘bad’ solicitor had gambled and lost the money from his client accounts, but a defence of change of position was available to the casino in respect of the proportion of the money which it had paid out to other customers as winnings.

Question 12

What is the rule of Clayton’s Case?

Answer 12

That which is first deposited in a bank account is to Ve set against that which is first withdrawn: first in, first out.

Question 13

What was significant about the decision in Trusts of the Property of F.C. Jones (a firm) v. Jones?

Answer 13

Going further than Lipkin Gorman, Nourse L.J. says the claimant could trace both the original property and the profit made on that property received; to let the defendants keep the profit would be unconscionable.

Question 14

What is the sole requirement for establishing an equitable proprietary right for tracing property?

Answer 14

A fiduciary relationship.

Question 15

What legislative basis exists for an equitable proprietary right?

Answer 15

Insolvency Act 1986 s283

Question 16

What is the significance of Re Goldcorp Exchange?

Answer 16

That ordinary commercial transaction are unlikely to afford any of the claimants am equitable proprietary right.

Question 17

Why did the Privy Council in Attorney-General for Hong Kong v Reid not apply Lister v Stubbs?

Answer 17

(a) ​ A fiduciary must not be allowed to benefit from his own breach of duty.
(b) ​ A fiduciary should account for a bribe as soon as he receives it.
(c) ​ Equity regards as done that which ought to be done.

Question 18

What does MR Greene say in Re Diplock to support the notion that…?

Answer 18

To argue that equitable tracing is available to legal as well as beneficial owners: “…equity may operate on the conscience not merely of those who acquire a legal title in breach of some trust, express or constructive, or of some other fiduciary obligation, but of volunteers provided that as a result of what has gone before some equitable proprietary interest has been created and attaches to the property in the hands of the volunteer.”

Question 19

Which cases appear to deny the notion that beneficial owners may claim equitable tracing?

Answer 19

Banque Belge; Lipkin Gorman
In latter: there was an express finding of fact that the rogue Cass was the legal owner of the money he stole from the client account, yet the solicitors also had legal title; one way of rationalizing this is to say that the money is traced in equity (although that is not what the HoL did); on facts could only trace at common law

Question 20

What does Re Hallett and Clayton’s Case say about following:
A is a sole trustee of two funds holding the first for B and B’s children and the second for C and C’s children. A paid into his own bank account, which then had a credit balance of £800, dividends of £500 belonging to B’s fund. He then paid into the same account £1,500, the proceeds of sale of investments belonging to C’s fund. Subsequently. A withdrew first £700, which he invested in securities now worth £1,050, and then £1,000 with which he purchased a car now worth £600. A then went bankrupt leaving £1,100 remaining in the account.

Answer 20

​Applying the rule in Clayton’s Case and Re Oatway the first withdrawal is treated as £500 belonging to B and £200 belonging to C. Applying Re Tilley’s WT the £350 profit made on the £700 will be divided proportionately between Band C, £250 belonging to B and £100 belonging to C. Thus B will recover £750 and C will recover £300.

Question 21

What does Re Hallett say about the following:
A is a sole trustee of two funds holding the first for B and B’s children and the second for C and C’s children. A paid into his own bank account, which then had a credit balance of £800, dividends of £500 belonging to B’s fund. He then paid into the same account £1,500, the proceeds of sale of investments belonging to C’s fund. Subsequently. A withdrew first £700, which he invested in securities now worth £1,050, and then £1,000 with which he purchased a car now worth £600. A then went bankrupt leaving £1,100 remaining in the account.

What happens to the Roscoe v Winder rule?

Answer 21

​Applying the rule in Re Hallett the second withdrawal is treated as £800 belonging to A and £200 belonging to C. C is entitled to a charge for £200 on the car.

​C is entitled to the £1,100 in the account. The rule in Roscoe v. Winder does not apply.

Question 22

What happens to the following, pre- and then post-Westdeutsche?

2.​X, a thief, stole £1,000 from Z, a stranger and mixed it with his own current bank account, which then had a credit balance of £500.
​X then went bankrupt.

Answer 22

Pre-:
​Personal action would abate. Fiduciary relationship would not exist.

Post-:
​The equitable tracing rules assist because the thief is treated as being constructive trustee.

Question 23

What cases have said something important to question “is fiduciary relationship necessary?”

Answer 23

Jessel MR in Re Hallett said so- treated it as necessary to trigger the application of equity so as to allow tracing into a mixed bank account. It creates an equitable owner/beneficial owner who can pursue a proprietary claim in equity. Can almost always find an initial fiduciary relationship. But note Goldcorp- PC refused to find one in a commercial contractual relationship because would interfere too much with insolvency: and HOL in Westdeutsche refused to accept that parties to a void contract have an initial fiduciary relationship, allowing recovery of money paid by mistake only through personal common law restitutionary claim.

Question 24

What does Sinclair v Brougham say regarding the fiduciary relationship?

Answer 24

Fiduciary relationship need not exist between the parties to the action; there just needs to be an initial fiduciary relationship.

It was agreed that the outside creditors should be paid off first.

Lord Dunedin: Equity will intervene to help the rightful owner wherever the property has, without justification, got into another’s hands.
The House of Lords held that there was a fiduciary relationship between the depositors and the directors. The directors had mixed funds and the depositors had a right to trace into the funds of the Society, recognising an equal claim belonging to the shareholders, with whom they shared pari passu.

Question 25

What is the significance of Re Diplock to mixing by innocent volunteers?

Answer 25

The “equitable proprietary interest” was established by the equitable claim by the plaintiffs as next of kin against the executors and this gave the plaintiffs the right to trace against the charities.

Question 26

When is Clayton’s Case applied with regards to mixing by innocent volunteers?

Answer 26

Clayton’s Case applied in the case of an active banking account otherwise the pari passu rule applied.

Question 27

What defences are available to tracing?

Answer 27

​- bona fide purchaser
- ​fund dissipated.

Where tracing would be inequitable:

• ​fund applied in making improvements or alterations to the land of the innocent volunteer.
• ​fund used by the innocent volunteer to pay his debts.
• ​if, in claims arising from the administration of an estate the claimants have already recovered in an action against the executors.

Question 28

What three reasons would have made tracing into improvements inequitable in Re Diplock?

Answer 28

1. improvements might not actually have increased the value of the property
2. difficult to decide which part of the improved property would belong to claimant
3. innocent volunteer ranks pari passu with those tracing, so forcing sale of property would put an unfair burden on D

Question 29

What was the decision in Reading v Attorney-General?

Answer 29

The House of Lords held that a staff sergeant in the British Army, as a non- commissioned officer, was in a fiduciary relation to the Crown and was therefore under a duty to account for profit wrongly made.

Question 30

What are a) the facts of Chase Manhattan Bank v Israel-British Bank, and b) the decision in that case?

Answer 30

A) Chase Manhattan Bank by mistake of fact made a double payment of $2,000,000 to another New York bank for the account of the defendant’s bank which carried on business in London. The defendant’s bank became insolvent, and the question was whether Chase Manhattan should prove with the other creditors in the insolvency, or whether it had a right to trace the money into the defendant’s assets in priority to the general creditors.

B) Goulding J.: “ I hold that the equitable remedy of tracing is in principle available, on the ground of continuing proprietary interest, to a party who has paid money under a mistake of fact.”

Question 31

When did Millett J say there is receipt of trust in commercial fraud, in [?]?

Answer 31

In Agip v Jackson, he says: There is a receipt of trust property when a company’s funds are misapplied by a director and, in my judgment, this is equally the case when a company’s funds are misapplied by any person whose fiduciary position gave him control over them or enabled him to misapply them.”

Question 32

What is the significance of Westdeutsche for Chase Manhattan and Sinclair v Brougham?

Answer 32

Both of those cases have been overruled.

Question 33

What is Re Tilley’s Will Trusts authority for? What case does it not follow?

Answer 33

Is authority for the principle of proportionate entitlement as between two people entitled to trace into a fund. Contrary to Re Hallett.

Question 34

What rule arises where Hallett, Oatway and Tilley apply?

Answer 34

Where fraudster has mixed the trust property with his own (good with bad) in a bank account then whatever is left will belong to the trust and whatever has been dissipated will be the fraudster’s money, so that he does not profit form his wrong/become unjustly enriched.

Question 35

What does the Report of the Review Committee on Insolvency Law and Practice (1982, Cmnd. 8558) paras. 1076-1080 express a preference for?

Answer 35

A rateable distinction.

Question 36

What is the significance of Space Investments Ltd. v. Canadian Imperial Bank of Commerce Trust Co. [1986] 1 W.L.R. 1072?

Why is it to be read with caution?

Answer 36

Lord Templeman obiter said that if the beneficiaries could not trace their money into any particular asset belonging to the trustee bank, equity would allow them: “…to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank.”

This is called backward tracing. But no court has ever applied it directly- it is all obiter and academic comment.

Question 37

What does Bishopsgate Investment Management Ltd. v. Homan [1994] 3 W.L.R. 1270 say?

Answer 37

That an overdrawn and therefore non-existent bank account cannot be traced into.

Question 38

Who has something of interest to say on backwards tracing?

Answer 38

Smith, ‘Tracing into the Payment of a Debt’ (1995) 54 C.L.J. 290 at 292-295.

Question 39

What is the significance of Boscawen v Baja for change of position?

Answer 39

Where D has used the trust money to pay off a debt, then tracing will not be possible into the debt. However the remedy of subrogation may be available in the future, subject to a defence of change of position; this means that the claimant would be able to assert the rights of the lender against the defendant.

Question 40

What is the significance of Scottish Equitable v Derby?

Answer 40

Recovery of money paid under a mistake of fact. Change of position was not available where D had spent the money on his mortgage, since he would have had to make the payments anyway. But the defence did apply to money which he had spent on ‘modest improvements to his lifestyle.’

Question 41

What is the significance of Dextra Bank and Trust Co Ltd v. Bank of Jamaica [2002] 1 All E.R. (Comm) 193? Which case applies Dextra?

Answer 41

Change of position defence depends on whether it is inequitable in the circumstances for the claimant to recover against the defendant, and may apply even where D changes his position beofer he receives any funds.

Papamichael v National Westminster Bank [2003} 1 Lloyd’s Rep 341.

Question 42

Which principles apply to determine if defence of change is position, even if claim is in common law?

In which case are these principles elaborated?

Answer 42

1. key question is whether it would be unjust to allow restitution
2. it will be unjust where an innocent defendant’s position has so changed that the injustice of requiring him to repay outweighs the injustice of denying the claimant restitution
3. the defence is not available to a person who acted in bad faith or is otherwise a wrongdoer.

Niru Battery Manufacturing Co v Milestone Trading Ltd (No 1) [2004] EWCA CIV 546.

Question 43

What actions are possible in a breach of trust situation?

Answer 43

-personal action against trustees fro breach of trust
-imposition of constructive trust for eg profits
-tracing at common law (personal)
-tracing in equity (proprietary)
-liability of strangers for dishonest assistance as if CT
-liability of strangers for unconscionable receipt as CT
-personal action against recipient- possible (Ministry of health v Simpson, Westdeutsche)
BUT probably only in non-trust cases where all other remedies have been exhausted

Question 44

What is the approach to take for problem questions?

Answer 44

-personal or proprietary? Ie solvent or insolvent defendants
-legal or equitable owner suing?
- defences?
-mixing of funds?
(eg) Re diplock- won’t work at common law
dishonest or honest mixture?
Dishonest- Hallett, Oatway, Tilley

Honest- Clayton, Barlow Clowes, Barlow Clowes was favoured in Russell-Cooke v prentis (2002)