Week 5- Remedies/ tracing/ defences Flashcards
What is the liability to account as a trustee and how is this the starting point for personal remedies available to beneficiaries?
Trustee’s liability to account is the starting point for a beneficiaries’ personal remedy- he must account for all property by keeping it separate from his own property and dispose of it in accordance with the terms of the trust. His duty extends to account for the trust by managing the administrative elements of the trust- a failure to account properly may lead to an enquiry by the beneficiary to have the Chancery court review the accounts of the trust document. It must be remembered that a review of accounts is not necessarily a remedy; the position of a trustee makes him liable to account for the trust property throughout its operation, and the beneficiary has the right to order a review. The trust property may be misappropriated and therefore rendered falsified and surcharged. An example of such a misapplication includes payment of trust property to non-objects, or fraudulent appointment.
What happens when an account is falsified and what causes an account to become falsified?
The result of fraudulent misappropriation means the account is falsified; firstly, this imposes a secondary obligation on the trustee for breach, requiring him to try and return the very trust property which he had misappropriated. However, these breaches often involve selling to a bona fide purchaser against whom the beneficiary has no claim, and therefore the beneficiary will not be able to reclaim the exact trust property ‘in specie’. In the case of shares, a trustee won’t be able to recover the exact shares which he has misappropriated but shares of equal value could be recovered. Finally, if neither the property in specie, or a replica of such property (eg equivalent shares) is recoverable, the trust property should be restored to the same monetary value by the wrongdoer/ trustee.
What happens when a trustees account is surcharged and in what circumstances does it occur?
What remedies are available to the beneficiary/ what obligations are imposed upon the wrongdoing-trustee?
A surcharge of the account occurs where the trustee fails to acquaint himself with the trust property, ie he does not disclose all of the trust property which he should be holding on trust for the beneficiary because he has failed to have the property transferred to him. An example would be in the disposition of a will, where the trustee is not the executor, the trustee must make sure that he acquires all of the trust property from the executor.
- An order for specific performance may arise in the above case.
- Substitutional remedies may also arise in many circumstances; THE FOLLOWING EXAMPLES EXIST FOR SUBSTITUTIONAL REMEDIES. This may firstly include accounting for money which the trust subject accrues which the trustee has failed to bring them within the account. Trustees normally required to insure against theft and destruction. A failure to do so, where valuable chattels are destroyed, would require the trustee to pay for the value of the chattels from his own pocket, minus any premiums he would have paid. A power of investment vested in a trustee who subsequently invests negligently may be required to make up the deficit.
When an account is falsified/ surcharged, what is the extent of the losses expected to be made up by the trustee?
Can there be any set-off against the misappropriation of trust property in favour of the trustee, or where the beneficiary is actually better off from the misapplication of the property?
- Note that the trustee is only interested in the trust-related financial interests of the beneficiaries, and such beneficiaries cannot recover any consequential losses incurred by the beneficiary, eg if the beneficiary misses out on dividends from shares and cannot make their own profitable investment, the trustee cannot be expected to make up such an expected profit; it is essentially too remote.
- It is possible that a beneficiary will choose not to call for an account of the trust where the trustee makes a profitable unauthorised use of the trust property; that is a discretionary matter which the beneficiary can exercise themselves; either they can falsify the account or they can adopt the unauthorised transaction, which ever appears to be more beneficial to them.
Facts of Target holdings ltd v Redferns?
Facts- A solicitor held money on a bare trust to be paid out to it’s client once it acquired the necessary mortgage documentation, the client wanting to purchase land with the lenders money- the money being held on bare trust by the solicitor, paid into the trust by the lender (the solicitor acting as solicitor for both client and lender). The money was paid to the client in the absence of this documentation, and in breach of the lenders trust, but the necessary mortgage documents were later acquired before legal proceedings had commenced. The Lenders sought to falsify the account and sold the land at £500,000 when the client defaulted on their mortgage repayment- this was in exercising their first charge over the land, and the sale was only 1/3 of the £1.5 million they had lent to the client, and a result of the subsequent market crash.
What was the significance and outcome of Target holdings v Redfern?
The court held, reversing the decision in the CA that as a result of the subsequent approval of the required documents that Redferns eventually gained, the lenders had not suffered any loss that was attributable to Redferns, and therefore they were entitled to nothing at all.
The ‘breach of trust’ was corrected when the mortgage documents were obtained, despite the money, held on bare trust by Redferns, being paid out in breach of the terms of the trust prior to this. The Plaintiff could only recover compensation so as to put him back into the same position he would have been had there been no breach of trust: the market crash was not attributable to Redferns and in any event the lenders had made a bad bargain, on which the breach of trust had no impact.
How did Lord Browne-Wilkinson explain the Target v Redferns case, and how did LJ Millett go further to explain the outcome of Target v Redferns?
Lord Browne-Wilkinson gave the leading judgement regarding the principles governing compensation.
“Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred… Thus, the common law rules of remoteness of damage and causation do not apply. However there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz the fact that the loss would not have occurred but for the breach… Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”
Lord Millett formulated the decision in another way, in that the account could not be falsified because the disbursement of the trust property was corrected when the plaintiff eventually acquired the land which the solicitor was employed to recover; in terms of causation, there was no actual loss. Only fraud which had to be made out separately, but was not in this case.
“As Millett LJ (1998a) speaking extrajudicially points out:
The solicitor held the plaintiff’s money in trust for the plaintiff but with its authority to lay it out in exchange for an executed mortgage and the documents of title. He paid it away without obtaining these documents. This was an unauthorised application of trust money which entitled the plaintiff to falsify the account. The disbursement must be disallowed, and the solicitor treated as accountable as if the money were still in his client account and available to be laid out in the manner directed. It was later so laid out. The plaintiff cannot object to the acquisition of the mortgage or the disbursement by which it was obtained; it was an authorised application of what must be treated as trust money. To put the point another way; the trustee’s obligation to restore the trust property is not an obligation to restore it in the very form in which he disbursed it, but an obligation to restore it in any form authorised by the trust.
11.52 On Millett LJ’s view, then, there was no loss not because the rules of causation indicated there was none, but because the misapplication was fully corrected when the trust was properly restored according to its terms”
What limited circumstances are substitutive reparations payable/ ordered?
The first is to apply the trust property properly in accordance with the trust deed, paying monetary compensation where the property cannot be returned in specie- this is considered to be substitutive as of yet there is no loss resulting from the misapplication of the trust property. No misconduct has yet taken place, rather the trust property need be accounted for and therefore specific performance may require that the trustee re-acquires trust property in specie or pays out of his own pocket in the absence of this. There is no remoteness, mitigation and contributor fault in such a case, because it is merely an obligation to uphold the trust deed, whether by an order for specific performance of personal repayment.
Facts of AIB v Redler and co 2015?
Facts, as explained by Televantos- The facts of AIB were as follows. Mr and Mrs S had granted a mortgage charge over their house to Barclays in respect of a debt of around £1.5 million. The house had been valued at £4.25 million. Mr and Mrs S sought to borrow a further £3.3 million from AIB (“the bank”) by re-mortgaging the property. As a condition of the replacement loan, a portion of it was to be used to discharge Barclays’ charge, *Conv. 349 which would otherwise have had priority over the banks. The loan monies were paid to Mark Redler & Co, who acted as solicitors for both Mr and Mrs S and the bank (“the solicitors”). They held the £3.3 million on trust for the bank, in accordance with both the general law and the Council of Mortgage Lenders’ Handbook for England and Wales. The solicitors were to ensure that the bank obtained a first charge, that is to say a charge with priority. On that basis, the solicitors were not to pay any sums to Mr and Mrs S without first discharging the entirety of the sums due to Barclays and secured on the house. The latter amounted to £1.5 million. Due to an error, the solicitors only paid £1.2 million to Barclays, thus failing to discharge the entirety of the debt, and leaving Barclays’ with an extant first charge over the house, and the bank with a second charge. The solicitors subsequently paid £2.1 million of the loan monies to Mr and Mrs S. Barclays had original security and therefore they should have received their debt repayment first, so Barclays retained a subsisting charge over the house with respect to the remaining £300,000 required to discharge the debt.
Mr and Mrs S later defaulted on their repayments, and their house was sold by Barclays for a fraction of its estimated value, a mere £1.2 million. After Barclays’ outstanding debt was satisfied, the remainder of the proceeds went to the bank, which received £867,697, leaving the bulk of its debt unsatisfied, considering it had granted £3.3million originally.
What was the outcome and significance of AIB v Redler?
The rule of compensatory damages explained in Target holdings was unanimously affirmed in AIB; and the enforcement of compensatory reparations rather than substitutive reparations for breach of trust were upheld- thus, the losses incurred and recoverable as a result of the breach of trust by Redler were limited to £300,000, the amount required to make up the remaining money which AIB would have received had they acquired a legal charge over the house and therefore sold it upon default by the mortgagees
. Affirming the ruling in Target Holdings, both judges ruled that though (i) the “basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument”, (ii) the “basic purpose of any remedy will be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have had by reason of the breach.
Facts and significance of Bristol and West BS v Mothew 1998 regarding the surcharge of an account?
Facts- The defendant solicitor failed to notify the plaintiff building society that the purchasers had transferred part of their outstanding debts to the mortgage of the new house, and in the absence of this information, the BS entered into a contract with the house buyer by providing a mortgage, which they contend they would not have otherwise entered into. The BS alleged that the solicitor was therefore negligent, and sought to recover the apparently incurred loss;
Held- that the plaintiff had to show that they relied on the statement, not that they would not have entered into the contract had the representation been correct; however, the damages were to be assessed by establishing what loss was actually caused by the solicitor’s negligence and how it was caused by withholding the information regarding the second loan which the purchasers were arranging. The test to be applied here was the ‘but for’ test. Would the building society have entered into the contract with the house buyers but for the information that they did not possess at the time?
Millet LJ: “Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty which may be awarded in lieu of rescission [ie instead of a contract being set aside for self-dealing (13.92 et seq)] or specific restitution [ie instead of an order to return specific property taken from the trust, where, for example, the property is no longer in existence]. [Emphasis added.]”
“In the case of breach of warranty, the comparison is between the plaintiff’s position as a result of entering into the transaction and what it would have been if the facts had been as warranted. The measure of damages is the extent to which the plaintiff would have been better off if the information had been right. In the case of a breach of duty to take care the measure of damages is the extent to which the plaintiff is worse off because the information was wrong. Since he entered into the transaction in reliance on the advice or information given to him by the defendant, the starting point is to compare his position as a result of entering into the transaction with what it would have been if he had not entered into the transaction at all.”
“The society was told that Mr. and Mrs. Towers had no other indebtedness and that no second charge was contemplated. The existence of the second charge did not affect the society’s security. The absence of any indebtedness to the bank would not have put money in the purchasers’ pocket; it would merely have reduced their liabilities. Whether their liability to the bank affected their ability to make mortgage repayments to the society has yet to be established, but given the smallness of the liability its effect on the purchasers’ ability to meet their obligations to the society may have been negligible. It may even be, for example, that the purchasers made no payments at all to the bank at the relevant time, and if so it is difficult to see how any part of the loss suffered by the society can be attributable to the inaccuracy of the information supplied to it by the defendant. It would have occurred even if the information had been correct”
How does Televantos attempt to justify the decision in AIB and in Target?
“Accordingly, the decisions in Target and AIB clarify the rules governing all personal claims against trustees in respect of misapplied assets, by limiting the value of beneficiary claims to loss the beneficiary “would not have suffered but for the [trustee’s] breach”, however pleaded.15
This approach is a sensible one. There are good arguments for giving beneficiary-claimants more extensive relief than those claiming common law damages for breach of contract or tort. After all, the beneficiary of a trust is particularly vulnerable to fraud or misapplication of property by the trustee, and more extensive liability incentivises trustees to adhere to the terms of their authority.16 However, it is harder to argue that the law should go so far as to make trustees liable for the full value of all misapplication without regard to circumstances. As Professor Burrows argues, it is hard to see why this would be desirable in policy terms.17 The law as expounded in AIB is more proportionate in the protection afforded to beneficiaries. This is because it allows beneficiaries relief which is more generous than that available under common law damages principles, but which is limited to loss caused by the relevant breach.”
It seems as though there are not substitutive performance remedies available- only a compensation claim for loss, or for an account of profits, no more can the value of what is missing is available as AIB has not allowed a claim for substitutive performance, only a claim for equitable compensation.
How might the position of the plaintiff be financially different depending on whether damages are assessed as if the plaintiff had never entered into the contract (prior to the contract) and the position the plaintiff would be in but for the negligence/ misapplication of the trust property by the trustee?
Recognise that there is a difference between the position which the plaintiff was in prior to the breach, which is likely to be more advantageous than the position which the plaintiff would have been in but for the breach of duty of the trustee. Unless fraud is made out, a misapplication of property which allows one to falsify a trust will only allow a compensatory claim, to put him in the position he would have been in had the breach not occurred. Therefore the compensation payable in these circumstances is the difference between the plaintiffs current position and the position at the time that the proceedings are being brought; this is why, where someone would have been in the same position had the breach not occurred as they would have had to act in the same way, they can claim no compensation (as in Target, but clearly they could pursue a claim for damages resulting from the fraudulent behaviour ie where it induces them to enter into a contract (deceit- all losses flowing from the deceit, whether foreseeable or not, but this not a matter of trusts).
What 3 different claims against a stranger of the trust (a mixture of personal and proprietary) are often open to a beneficiary when a trustee misapplies trust property and gives it to a stranger of the trust?
“Therefore, against a stranger to the trust, the beneficiary may have three claims in respect of the misapplication of trust property. (1), a proprietary claim for the actual trust property or traceable proceeds that the stranger retains; (2), a personal claim to restore the trust, ie pay over money to the value of the trust property or traceable proceeds he received and then dissipated, ie spent as his own for his own purposes; and, (3), a personal claim for his being an accessory to the breach. Notice in particular the different basis and scope of liability between liability for ‘knowing assistance’ and liability for ‘knowing receipt’. “
What rules with regards to tracing into mixed funds do RE Hallett and Re Oatway establish?
What options does it give the innocent party with regards to tracing withdrawals?
The rule in Re Hallett treats mixed fund deposits on a first come first out basis, whereas Re Oatway suggested that it is “wholly immaterial” the order of priority in which withdrawals and investments have been respectively made.
These two rules are opposite. The effect of the above two cases allows a beneficiary discretion to choose which of the dealings of the mixed money they are to trace their proprietary right into. They may choose to trace it into profitable shares purchased by the trustee, with the intention of purchasing them with his own money in breach of trust. This may be so, even where the trustee does this first ie if the rule in Re Hallett applied, the presumption would be that the trustee was honest in purchasing his own assets before dealing with the beneficiaries. This no longer appears to be the case after Foskett v McKeown.
Facts and significance of Foskett v McKeown 2001 regarding traceable proceeds?
Facts- M controlled a company that obtained money from a number of prospective purchasers to acquire and develop land in the Algarve in Portugal. Although the land was purchased, the development did not take place and the funds were found to have been dissipated. In the meantime, M had insured his life for GBP 1 million and subsequently committed suicide. F and 219 other investors in the Portuguese land development discovered that M had used GBP 20,440 of their investment monies to pay 40 per cent of the insurance premiums on his life policy and claimed a proportionate share of the policy’s proceeds. F appealed against a decision that the purchasers were entitled only to the refund of the premiums together with interest.
Held, allowing the appeal (Lord Steyn and Lord Hope of Craighead dissenting) and dismissing the cross appeal, that the purchasers had a proprietary right to receive 40 per cent of the policy fund/ the insurance payout. The equitable interests of the purchasers were directly traceable into the policy moneys and the court had no discretion in the matter. There was no question of resulting or constructive trusts, nor fairness and reasonableness, just the straightforward enforcement of property rights.
Lord Browne-Wilkinson: “The trustee, by paying the fourth premium out of the moneys subject to the purchasers trust deed, wrongly mixed the value of the premium with the value of the policy. Thereafter, the trustee for the children held the same chose in action (ie the policy) but it reflected the value of both contributions. The case, therefore, is wholly analogous to that where moneys are mixed in a bank account. It follows that, in my judgment, both the policy and the policy moneys belong to the children and the trust fund subject to the purchaser’s trust deed rateably according to their respective contributions to the premiums paid.
Why, in Foskett v McKeown, does Lord Browne-Wilkinson reject the idea of tracing as anything more than an evidentiary tool? Why may he be correct?
Lord Browne-Wilkinson on tracing- “Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. If he held only a security interest in the original asset, he cannot claim more than a security interest in its proceeds. But his claim may also be exposed to potential defences as a result of intervening transactions. Even if the plaintiffs could demonstrate what the bank had done with their money, for example, and could thus identify its traceable proceeds in the hands of the bank, any claim by them to assert ownership of those proceeds would be defeated by the bona fide purchaser defence.”
What options does a beneficiary have against a wrongdoing trustee when he makes a purchase with mixed funds ie his own money and trust property combined?
Which case shows this?
“Accordingly, I would state the basic rule as follows. Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.
Two observations are necessary at this point. First, there is a mixed substitution (with the results already described) whenever the claimant’s *132 property has contributed in part only towards the acquisition of the new asset. It is not necessary for the claimant to show in addition that his property has contributed to any increase in the value of the new asset. This is because, as I have already pointed out, this branch of the law is concerned with vindicating rights of property and not with reversing unjust enrichment. Secondly, the beneficiary’s right to claim a lien is available only against a wrongdoer and those deriving title under him otherwise than for value. It is not available against competing contributors who are innocent of any wrongdoing. The tracing rules are not the result of any presumption or principle peculiar to equity. They correspond to the common law rules for following into physical mixtures (though the consequences may not be identical). Common to both is the principle that the interests of the wrongdoer who was responsible for the mixing and those who derive title under him otherwise than for value are subordinated to those of innocent contributors. As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied. This has the effect of giving the beneficiary a lien for his contribution if the mixture is deficient.”
This is the outcome of McKeown v Foskett- alien is a security/ charge over property acquired by the trustee using the trust money; a debt to be repaid by the trustee, and the newly acquired traceable proceeds of the trust fund as security for this loan.
Facts and significance of Barlow Clowes v Vaughan 1992 regarding the potential of the Rolling charge solution/ American solution to mixed funds?
Why was it rejected here?
Facts- The case concerned a pooled investment scheme and how the remaining assets should be allocated to each investor, after the investment company fell into liquidation. The claims to the fund far exceeded the available pool of money due to the misapplication of the trust fund. The earlier investors appealed after the first in, first out rule was applied to distribute the remaining assets; inequitable because it would not represent the contributions of all the investors.
Held, allowing the appeal, that (1) the first in, first out rule that withdrawals from a blended account were to be treated as withdrawing the money in the same order as it was deposited provided a convenient method of determining competing claims; (2) where the application of the rule would be impractical or unjust because a small number of investors would get most of the funds or the result would be contrary to the investors’ intention, the rule would not apply if a preferable alternative method of distribution were available; (3) in this case investors had intended to participate in a collective investment scheme through a mixed fund and presumably intended that assets available for distribution would be shared pari passu rateably in proportion to the amounts due to them. They take a mixture of the gains or losses where two innocent parties funds are mixed, relative to the proportion of the pooled fund which they have invested.
The counsel forwarded the proposition that the north American solution be followed but it was too burdensome and expensive to calculate, as Lord Woolf recognised:
“This solution involves treating credits to a bank account made at different times and from different sources as a blend or cocktail with the result that when a withdrawal is made from the account it is treated as a withdrawal in the same proportions as the different interests in the account (here of the investors) bear to each other at the moment before the withdrawal is made. This solution should produce the most just result, but in this case, as counsel accept it is not a live contender, since while it might just be possible to perform the exercise the costs involved would be out of all proportion even to the sizeable sums which are here involved.”
What is backwards tracing?
Where a beneficiary traces his equitable interest in trust property into property purchased with money that is not part of the trust fund, but there is a causal and transactional link between the purchase of the asset and the means of paying off the debt incurred to acquire it with the trust fund/ money from the trust fund. The problem arises because the trust property is not misapplied until the debt is repaid, usually to a lender or bank, whereas the beneficiary attempts to obtain an equitable interest in property which he should not have any claim to.
Conaglen: “The question posed by the concept of “so-called backward tracing”7 is whether there might be an exception to this analysis where the trust beneficiaries can show that the debt was originally incurred in order to acquire a specific and identifiable asset. The idea of tracing backwards is that the beneficiaries might, in such circumstances, be able to trace the trust funds through payment of the debt into the asset that was acquired by means of incurring the debt, in order that they might then make some form of proprietary claim to that asset.”
What policy reasons are there for rejecting or heavily restricting the use of backwards tracing in favour of beneficiaries, made by Conaglen?
“When the already precarious position of unsecured creditors is weighed against the concomitantly far better protected position of trust beneficiaries, it is suggested that the law ought not to recognise the possibility of tracing backwards. The unsecured creditors should not have their position worsened further by effectively making them insurers for the beneficiaries against trustee defalcations. Trust beneficiaries whose money has been wrongly applied in satisfaction of a debt can stand in the position of the satisfied creditor (by subrogation), but it is a step too far, in policy terms, to allow them to stand in the position of the debtor and act as owners of property that the trustee acquired before the debt was paid.
“Alternatively, if backward tracing is to be allowed, then the policy concerns that have been highlighted above suggest that the extent to which payment of the debt is considered attributable to acquisition of the asset should perhaps be limited in some way, such as by reference to whether the trustee intended at the time the asset was acquired to (mis)use *311 trust funds to pay for it … That would be consistent with equity’s traditional concern for substance-meaning intention-over form. However, the evidential difficulties inherent in a test that is focused on the defalcating trustee’s intentions provide yet further reasoning for concluding that the balance is appropriately struck by refusing to recognise backward tracing.”
Facts and significance of Bishops gate investment v Homan 1995 regarding the strict approach that courts previously have taken to backwards tracing?
Facts- The liquidators of BIM, a Maxwell pension fund trustee, appealed against the court’s dismissal of BIM’s claim to priority over unsecured creditors of the insolvent Maxwell Communications Corp (MCC) of which H was an administrator. BIM claimed an equitable charge for pension monies paid in breach of trust into MCC bank accounts, asserting a right of tracing. The court rejected the claim because the accounts were either overdrawn when payment was made or had become so between that time and the administrators’ appointment. BIM challenged the ruling and, alternatively, asserted an equitable charge over the credit balance which existed on one account when the administrators were appointed or over assets purchased from the accounts.
Significance- The CA held that the money could not be traced backwards into assets acquired which caused the overdrawn accounts.
Dillon L.J. agreed with Vinelott J. below that “it is at least arguable … that there ought to be an equitable charge”12 where it can be “shown that there was a connection between a particular misappropriation of [trust] moneys and the acquisition by [the trustee] of a particular asset,”13 even if the asset was acquired before the trust funds were misappropriated.” These were unfortunately dicta comments and the case had already been decided in favour of the defendants.
In contrast, Leggatt L.J. considered:
“There can be no equitable remedy against an asset acquired before misappropriation of money takes place, since ex hypothesi it cannot be followed into something which existed and so had been acquired before the money was received and therefore without its aid. The concept of a “composite transaction’ is in my judgment fallacious.” but he accepted that if an asset were used as security for an overdraft, which was then discharged by means of misappropriated money, the beneficiary might obtain priority by subrogation. He therefore considered that the judge came to the right conclusion, although he did not accept that it was possible to trace through an overdrawn account, or to trace misappropriated money into an asset bought before the money was received by the purchase
Facts and significance of Space investment v Canadian bank 1986 regarding the availability of tracing in conjunction with the granting of powers to the trustee in his application of the trust property?
Facts- The bank was the trustee of various settlements which contained a clause permitting the trustee to open and maintain savings accounts with any bank including itself and to deposit trust money to the credit of such account. Pursuant to that power the bank as trustee deposited trust money with itself as banker and credited it to trust deposit accounts. A petition was presented for the winding up of the bank and two liquidators were appointed. On the liquidators’ summons in the Supreme Court (Equity Side), da Costa C.J. held, inter alia, that the trust money deposited with the bank was still impressed with a trust in favour of the beneficiaries, and therefore, the remedy of tracing being available to them, they took priority over the unsecured creditors of the bank. The Court of Appeal upheld that decision.
On appeal to the Judicial Committee by the representative of the unsecured creditors:
Held, allowing the appeal, that although when a bank trustee misappropriated trust money for its own benefit the equitable remedy of tracing was available to the beneficiaries, since the bank as trustee had been empowered by the trust instruments lawfully to deposit trust money with itself as banker, the trust money became the property of the bank and could be used for the bank’s own purposes, subject only to its obligation in administering the trust to apply a sum equal to the amount which had been or ought to have been credited to the trust deposit account in any manner required by the settlement or by law, and to pay that amount to a new trustee on request; and that, accordingly, the beneficiaries were not entitled to an interest in the bank’s assets, but were merely entitled to claim as unsecured creditors for the amount standing to their credit in the trust deposit account at the date of liquidation ranking equally with the other unsecured creditors.
Lord Templeman- “A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee to protect the interests of the beneficiaries, 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… Equity thus protects beneficiaries against breaches of trust. But equity does not protect beneficiaries against the consequences of the exercise in good faith of powers conferred by the trust instrument.”
How might powers vested in trustees supersede an option to trace?
The case shows that the powers vested in the trustees had superseded the availability of tracing to the detriment of the beneficiaries, and whilst the tracing was available to the beneficiaries, the property had not truly been misapplied because of the powers vested in the trustees to lawfully deposit the money with themselves as banker- therefore, they ranked in order of priority at the same level as the unsecured creditors when the bank was served with the winding up order
