Tracing and Following

Question 1

Foskett v McKeown

Answer 1

Lord Millet established the general principles of tracing in English law. Tracing is an evidentiary process, the purpose of which is to identify the traceable proceeds of B’s trust property - i.e. where B’s trust property has been substituted for other property, the idea of tracing is to determine where B’s trust property now is.

Note that tracing is just the first stage of the process for making a proprietary claim where trust money has been substituted for another asset - making a proprietary claim is distinct from the process of tracing, which is simply to identify what T’s trust property is.

Question 2

Following

Answer 2

Following occurs where one asset has simply been passed hand to hand, unlike tracing whereby trust property has been exchanged for some other property which B is entitled to trace into.

Two types of mixtures for following where trust assets are mixed:

1) Fungible mixtures
2) Non-fungible mixtures

Fungible mixtures are where the trust property is mixed with identical property, such that from the overall property it is impossible to identify exactly what is B’s trust property. E.g mixing 500L of B’s oil with 500L of other oil. Since it is all the same, B can simply follow the amount they contributed to the overall proportion - e.g. if 200L then dissipated, B can follow their trust property into that = 400L is their trust property.

Non-fungible mixtures are where it is possible to identify what the trust property actually was and what was not trust property.

Question 3

Jones v De Marchant

Answer 3

Generally, for non-fungibles B’s trust property is considered to have been destroyed after the property has been mixed.

However, there is an exception to this where someone wrongfully creates a new asset using trust property - B can follow the trust property into the new asset. So B could trace their 18 beaver skins into the fur coat made by T, because T was wrongdoer in doing so.

Question 4

Re Hallet’s Estate

Answer 4

Where T mixes his own money with B’s trust money in one account and then spends money from the account, the presumption is that T spent their own money first. Evidential uncertainty is resolved against the wrongdoer, so the court presumes that T spent their own money first, meaning that the remaining money in the mixed account is presumed to be B’s property first.

Question 5

Re Oatway

Answer 5

Where T makes a profitable investment (e.g. in shares which have increased in value) using mixed trust money and his own money, then the evidential uncertainty is also resolved against the wrongdoer.

This means that it is presumed that T spent B’s trust property on the shares which have increased in value, because T is under a duty to make profitable investments for the trust property, so courts presume that this was what they were doing when they spent the mixed money on a profitable investment.

In both Re Oatway and Re Hallet’s Estate, the court presumes that T was still acting in B’s best interests when dealing with their trust property (even though mixed), so evidential uncertainty is resolved against the wrongdoer.

Question 6

Sharlson v Russo

Answer 6

B is entitled to cherry pick between the rules in Re Hallet’s Estate and Re Oatway, where T has mixed their own money with B’s trust money and there is evidential uncertainty about where B’s trust money was spent. E.g. if B has £500 of trust property to apportion - they can trace £300 into profitable shares bought by T under Re Oatway, and then trace the remaining £200 into what is left in T’s bank account.

Two reasons to prefer Sharlson v Russo over Turner v Jacobs:

1) There is a general principle that a wrongdoer should not profit from his own wrongdoing
2) Sharlson v Russo came before Turner v Jacobs, but the court did not even cite Sharlson in its decision

Question 7

Turner v Jacobs

Answer 7

Court took a different approach than in Sharlson v Russo and held that where B has the option of using both Re Hallet’s Estate and Re Oatway to resolve evidential uncertainty about where their trust property has gone, they must trace into the mixed bank account under Re Hallet’s Estate, before tracing into any profitable investments through Re Oatway

Question 8

Roscoe v Winder

Answer 8

This sets out the lowest intermediate balance rule - where T and B’s money is mixed in an account and dissipated, and T then puts more money into the account, T cannot trace into the new money in the account because there is evidential certainty here that the new money is T’s since they put it in themselves.

This means that B is only entitled to trace into the lowest intermediate balance where T and B’s trust property was mixed and SOME of this was dissipated - this is the upper limit of what they can trace into in T’s mixed account (cannot trace the rest into T’s own money added, since that is evidentially certain that it is T’s own money).

Re Hallet’s Estate (and Re Oatway) only apply where there is evidential uncertainty.

Question 9

Re Diplock

Answer 9

Where two innocent B’s money under separate trusts is mixed and then dissipated, Bs share the losses and gains pari passu - this means that they share the losses and gains proportionately, relative to how much of their trust property was originally mixed in.

E.g. T mixes £500 from Trust A and £500 from Trust B and then dissipates £200, so £800 left. Bs from Trust A and B share the losses and gains proportionately, meaning they share the losses and gains 50-50 since they both contributed half of the original £1k - therefore each would be able to trace into £400 of the remaining £800.

So where two innocent B’s have their money mixed, apply pari passu - look at the proportions each contributed to the mixed trust fund as a ratio, then look at what is left at the VERY end (after T has spent it). E.g. if A contributed £800 and B contributed £500 to the mixed fund and T dissipates most of the mixed fund so that there is just £400 left after ALL of T’s transactions, then apply the 8:5 ratio to the remaining £400 to determine how much each innocent party can trace into.

Question 10

Clayton’s Case

Answer 10

Traditional rule for mixed innocent funds in a bank account has been different to pari passu. Clayton’s Case set out the ‘first in, first out rule’ whereby whichever innocent trust money was paid into the account first, is presumed to have been the first trust property to leave the account.

However, this rule is obviously arbitrary and unfair, so the courts have limited its scope a lot - focus on applying pari passu in PQ, then do an alternative scenario if it looks like it MIGHT be just to apply Clayton’s Case.

Question 11

The Mecca

Answer 11

Limited the first in, first out rule in Clayton’s Case to apply only to current accounts, and NOT savings accounts

Question 12

Re Sherry

Answer 12

Further limited Clayton’s Case - where trust money from two innocent sources is mixed into the bank account in the same day, then this is treated as being paid in at the SAME TIME. Therefore, first in, first out rule does NOT apply when innocent trust money is mixed into bank account on the same day.

Question 13

Barlow Clowes International v Vaughan

Answer 13

CA affirmed that Clayton’s Cases is still good law and thus is applied, but only where it would impractical to apply it or it would result in injustice between the innocent parties.

Lord Woolf stated that Clayton’s Case only applies where it serves broad justice - this limits its scope a lot, so say that although it is technically good law, it has very limited application in modern tracing process because it almost always results in injustices between the innocent parties.

Question 14

Russell-Cooke Trust v Prentis

Answer 14

Lindsay J explained that it is more appropriate to now regard Clayton’s Case as an exception rather than the general rule, which per Re Diplock for mixed innocent sources in one bank account is pari passu (sharing in losses and gains proportionately). This further shows how Re Diplock pari passu is now the general rule, with Clayton’s Case only applying where it results in no injustice between the two innocent parties (very rare).

Question 15

Barlowe Clowes International v Vaughan - Rolling Charge

Answer 15

Lord Woolf and Legatt LJ said that the rolling charge method might be fairer than applying pari passu, however, ultimately did not apply it or state that it should be the general method used in English law for tracing with innocent mixed trust property

Question 16

Charity Commission v Framjee

Answer 16

Henderson J said that where the rolling charge method is prohibitively expensive and difficult because lots of transactions will be made, then it should not be used - apply pari passu instead.

Question 17

Sharlson v Russo

Answer 17

Rimer J suggested that rolling charge method should be preferred where it is possible to use it because it is the fairest method since it looks at all of the contributions of the innocent parties in relation to each transaction made.

However, this is NOT binding law - just suggested that it might be possible to use in English law.

Question 18

Re Diplock

Answer 18

Where an innocent 3P without notice receives trust property and then mixes it with their own money, then pari passu applies - innocent 3P and B share the losses and gains proportionately of whatever is left in 3P’s bank account at the end.

However, if 3P is a wrongdoer with notice then a) they may be liable for a personal claim in knowing receipt; and b) B gets priority in relation to mixed money in the bank account because evidential uncertainty is resolved against the wrongdoer.

Question 19

Space Investments v Canadian Imperial Bank

Answer 19

Lord Templeman introduced the swollen assets theory - he said in obiter that if T wrongfully takes trust property for himself, then B may be able to trace into ALL of the assets that T has and subject these to a charge for the repayment of the misapplied trust money.

However, this is wrong as is goes against the lowest intermediate balance rule in Roscoe v Winder - courts only resolve evidential UNCERTAINTY against wrongdoers. Since we know that the rest of T’s assets are their own, the swollen assets theory would be resolving evidential certainty against the wrongdoer, which is NOT allowed per Roscoe.

Question 20

SFO v Lexi Holdings

Answer 20

CA rejected Lord Templeman’s dicta on the swollen assets theory on the basis that it went against the well-established principle in Roscoe v Winder that the court only resolves evidential uncertainty - not evidential certainty - against the wrongdoer.

Question 21

Relfo v Varsani

Answer 21

CA implicitly approved backwards tracing through its reasoning, although the court did not explicitly recognise the possibility of backwards tracing in English law.

Question 22

Bishopsgate Investment v Homan

Answer 22

Generally, where money in a bank account goes overdrawn, then B’s trust property is dissipated and the tracing process ends.

However, Dillon LJ suggested that backwards tracing MIGHT be possible where T acquires an unsecured debt and uses this to purchase a new asset with an intention to repay the unsecured debt using trust property - B can trace into the debt through the new asset.

Question 23

Brazil v Durant International

Answer 23

PC confirmed the availability of backwards tracing in English law - where T incurs an unsecured debt with X with an intention to repay this debt using B’s trust money, and then uses this money to purchase a new asset, B may be able to trace into the debt and thus the new asset.

But note that this is only PC, therefore NOT binding under English law - however, it is a persuasive authority which suggests that the SC may confirm backwards tracing in the future if such a case arises.