Equitable Remedies

Equitable Tracing

Dr. John Chuah 2017

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 Equitable Tracing
The pre-requisite of tracing is equitable interest which may arise
from an express or constructive trust.

Property in original form

Tracing not possible if the 3rd party acquires the property from
the trustee as the beneficiary will be estopped by the principle of
non-derogation from grant – as in the acquisition by trustee‘s
next of kin upon his death. - Re Diplock (2001)

Property which has changed form – still identifiable

Foskett v McKeown
Money from trust fund used to pay premium of life insurance
policy in breach of trust could be traced into the proceeds of the
policy. The enhanced value as represented
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 Property that can be traced
the original amount.

Russell-Cooke Trust Company v Prentis

Trustee solicitor ran an investment scheme where clients’ money
is combined and invested in short term interest loans secured
against real property. Some charges were taken in the name of the
solicitor who thus held them on resulting trust for the investors.
Replacement trustee was appointed and took over the property.
H: the claimants could trace their funds into the hands of the
replacement trustee.

Aluminium Industries Vaasen v Romalpa Aluminium

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 Property that can be traced
Property which is no longer identifiable following a change of
form – trust property changed into money and mixed with other
money.

Space Investments v Canadian Imperial Bank of Commerce

Trust instrument authorized trustee (bank) to deposit trust funds
with itself. The bank is the absolute owner as this is the only way
it can earn money to satisfy its depositors. H: since the mixing of
the bank’s own fund with that of the trustee is entirely lawful –
the beneficiaries had no proprietary interest in the funds
deposited and thus cannot trace in equity. They were mere

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 Property that can be traced
general creditors of the bank. If the mixing is unlawful (ie no
express authorization by the trust deed) then equitable tracing is
possible to all the assets of the bank.

Hogan v Waterhouse (1991) Australian case

Equitable tracing allowed when trust property is lawfully mixed
with property of another as provided under the trust deed – and
provided the mixing is precisely in the manner as envisaged, the
beneficiaries is entitled to the appropriate proportion of the mixed
fund.

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 Unauthorized Mixed Fund- trustee & claimant
Trustee mix the trust money with his own unlawfully and then
draws from the account to make investment. Q: whose money
was utilized first? Several possibilities arise.

1. Honest trustee approach

Re Hallett’s Estate (1880)
Hallett a solicitor, sold bonds of his client and own marriage
settlement and mixed the proceeds of sale in his own account. He
died and the trustees of his settlement and client wanted to claim
the remaining balance of the account.
H: where trustee adds trust money in his own bank account, it is
presumed that he acts honestly by withdrawing his own money
out first for investments and not the trust money. The trustee thus
dissipates his own money and the beneficiary
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 Equitable Remedies - Tracing
was entitled to claim:-
●Equitable title in the assets acquired by the trustee or

●A lien over those assets acquired

It is premised on the fact that the trustee is to act honestly by
passing the benefit of his successful investment to the beneficiary
who has been given the benefit of doubt that successful
investment belongs to them. Here the balance in the fund was
sufficient to satisfy both claims so that any questions of priority
did not arise.
The presumption is that the trustee draws his own funds out first
and the balance in the mixed fund represents the property of the
claimant (subject to the fact that what he claims cannot exceed
his initial share of the trust fund). The case also applies to mixed
shares.
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 Equitable Remedies - Tracing
However the beneficiary’s right to trace was limited to his
original contribution to the purchase price of the property but did
not extend to its enhanced value.
In a mixed fund the interest of the claimant and general creditors
of the trustee are very evenly balanced where any part of the
mixed fund to which the claimant is prima facie entitled has
subsequently been invested in some other assets which has fallen
in value.

*There is no direct authority whether a claimant can elect to

recover an asset which is the product of a mixed fund rather than
taking any balance in the mixed fund to which he is entitled. In
particular if the mixed fund is subsequently invested and the
ensuinf asset increases / decreases in value.**
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 Equitable Remedies - Tracing
The interest of the claimant and general creditors of the fiduciary
are evenly balanced where any part of the mixed fund has been
withdrawn and invested in an asset which has decreased in value.
– Jessel MR in Re Hallett

The discussion above merely rules of presumption which can be

rebutted …..

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 Equitable Tracing- Mixed Funds
2. Beneficiary election approach
If the balance in the mixed fund is insufficient to satisfy the
liability of the trustee (fiduciary) to the claimant then he can
trace the withdraws into any identifiable product (traceable
property) of the mixed fund and establish an equitable charge
over it .
Re Oatway (1903)
Trustee had 4077 pounds in his personal bank a/c and added 3000
trust money inside. The trustee spent 2317 on shares and
dissipated the balance. Beneficiaries wanted to trace the 3000
pounds taken out of the a/c into the shares which value has risen
2474. Further an account of the risen value in the shares were
sought. According to Re Hallett what the trustee had withdrawn
first
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 Equitable Tracing- Mixed Funds
first was his own money and the ensuing investments belong to
him; thus it was trust money which was dissipated. This
argument was rejected.

H: The trustee is not entitled to say that the investment was made
with his own money. Trust money was dissipated. The
beneficiaries were entitled to the investments provided it
constituted an identifiable part of the mixed fund or its ensuing
product. Beneficiary is entitled to elect:-
● The
property purchased be subject to a charge as security for the
amounts owed by the trustees or,
● The authorized investments be adopted as part of the trust fund

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 Equitable Remedies – Tracing
At the end the day – court will protect the beneficiary at all cost
which emphasize the strictness of trustee’s duties.

Re Tilley’s WT (1967)
Trustee took trust money and put into her own bank account
which was in overdraft, and as a result she could continue to
invest on her own behalf.
H: beneficiaries cannot trace into the investments made from the
trustee’s bank a/c as the court construed that the investment was
not made by trust money – which only went to settle the
overdraft.

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Unauthorized Revolving Mixed Fund of Innocent volunteer and claimant

Re Diplock (1948)
The entitlement of an innocent volunteer should rank pari passu
with the rights of the beneficiary when the former mixes money
of his own with that of a beneficiary – each contributor has an
equal charge over the property. This rule applies well over a static
fund.

However what happens to a revolving unlawful mixed fund?

• First in first out approach

• Proportionate shares approach

Unauthorized mixed fund has two claimants then the attribution

of loss and profits between them is held between them rateably –
any withdrawal thereof. Dr. John Chuah 2017
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 Revolving Mixed Fund of Two Claimants
For active unbroken bank a/c (current a/c) the rateble principle
is now replaced by :-First in – first out approach
Clayton’s case (1816)
Money first deposited is used first to acquire property and this is
based on accounting principle. Thus money first paid is money
first to exit account.
Thus:- Money in 1/1/01 = x
Money in 2/2/02 = y
Purchase: Computer – 3/3/03
Box – 4/4/04
DVD – 5/5/05
x will be utilized first until exhaustion then only y. shared
contribution possible once x is exhausted.
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 Equitable Tracing – Mixed Fund of Two Claimants
● The court in Re Hallett rejected the application of Clayton to
mixed funds of claimant and trustee. Where the application
would result in injustice as in relatively small group of
investors who would obtain most of the funds or is contrary to
the express/implied intention of the investors the rule would
not be apply if a preferred method of distribution is available.
● The Clayton rule is applicable to determine the competing
claims where the funds of several beneficiaries is mixed in one
a/c which was deficient or wrongful mixing of different sums
of trust money in a single a/c.

● However Clayton’s rule would be applied if the issue of

priority arises between the two claimants in re Hallett –
Hancock v Smith (1889)
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 Equitable Tracing – Mixed Fund of Two Claimants
Problem of Clayton:-
● Valueof the items bought may increase or decrease in value and
the beneficiaries return will depend on their luck.
●Case is yet to be overruled - only distinguished.

Commerzbank AG v IMB Morgan

Clayton’s case not applied as unjust and impractical as difficult to
decide which payment were derived from which investor and in
which order.

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 Unauthorized Mixed Fund of Innocent Party plus Claimant
● Unauthorized mixed funds of an innocent volunteer and a
claimant withdrawls from the fund mimics that of a fund of
two claimants.

● The issue is whether the claimant can recover his funds in full
irrelevant of what withdrawls have been made by the innocent
volunteer out of the fund?

● In Re Diplock it was stated that the rights of the innocent

volunteer and claimant were pari passu to each other. Thus
profits and losses are attributed rateably – affirmed by Court of
Appeal in Foskett v McKeown

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 Equitable Tracing – Mixed Fund of Innocent parties
Commerzbank AG v IMB Morgan (2004)
Money was taken from the public and mixed in a bank a/c in a
fraudulent scheme by the P’. H: It was unjust and impractical to
apply Clayton’s case as it would result in arbitrary results
between the investors. Further it was impractical as it is difficult
to decide which payments were made in /out of the a/c by which
investors in what order.
Westdeutsche Lansdesbank Girozentrale v Islington LBC
Specific property was not capable of identification as it had been
paid into electronic bank a/c which was subsequently run into
overdraft on several occasions. Once the bank a/c goes od or the
money is spent tracing cannot be made. If the electronic money
has gone from the a/c and cannot be traced in its equivalent
proprietary form, it has assumed to have disappeared.
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 Lowest Intermediate Balance
Lowest Intermediate balance approach
James Roscoe v Winder
Money was taken out of trust fund and put into bank a/c which is
mixed with the money therein, and money was taken out again
causing fluctuations in the said a/c. Q: How much is the claimant
entitled to from the a/c? The mixed fund fell to 25 pounds from
the repeated dissipation but at the death of the claimant the fund
was 358 pounds.
H: Beneficiary only entitled to 25 poiunds as the rest of the
amount paid in after that went to the general creditors.
Assuming that trust money was the last to be paid out of the a/c,
the claimant can only claim the lowest level in the a/c since any
money paid into the a/c after the lowest level had been reached
cannot be considered to have been derived from the trust.
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 Tracing payments made by mistake
Chase Manhattan Bank v Israel-British Bank (London) (1981)
The paying bank made a payment by mistake twice to a recipient
bank which went into insolvency. The second payment was not
repaid to the paying bank.
H:

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 Loss of Right to trace
Tracing cannot be utilized if the trust property cease to exist or
cannot be found. Tracing also cannot be affected if the substituted
property cease to exits.

Ultraframe (UK) v Fielding (2005)

Claimant wanted to trace his intellectual property rights which
were misuse in breach of trust which was used make glazing
components sold for profits. Claimant cannot prove there is
unbroken chain of property rights from claimant to D’.
There was no identifiable property that could constitute the
traceable proceeds of the original trust property – there was no
link between original property and profits made. To trace the
property in D’s hands constitute the traceable proceeds of the
original trust property w/o a break of chain.
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 Loss of Right to trace
Bishopsgate Investment Management v Homan (1995)
●Pension funds under the control of RM was misapplied And
proceeds was paid into a/c held by companies (MCC et al)
controlled by RM. These a/c s were overdrawn after its initial
deposit and trustees sought an equitable charge over the said a/cs.
● H:tracing cannot be made as the a/cs were overdrawn and thus
the traceable proceeds were disappeared. There is no equitable
remedy against an asset which was acquired b4 the
misappropriation of the money took place.

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 Equitable Tracing – Mixed Fund of Innocent parties
Foskett v McKeown (2003)
Trustee took out life insurance of 1 million and paid first two
premiums with own funds. Later he had misused trust fund to pay
5 premium of the said insurance of 20 000 pounds in favour of
his wife and children. Trustee commit suicide after the breach of
trust.
H: Beneficiary could trace into the money paid to life insurance
(since their money had been mixed with trustee’s own) for the
payment of a lump sum for benefit of the children of the trust
upon his death with interest.
The payment of the later premiums had benefited the mother and
children when they had been paid – the hindsight of their
payment unnecessary. Thus the beneficiary is entitled to 2/5th
share of the proceeds of the premium ie a lump sum (400,000
pounds). Dr. John Chuah 2017
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 Equitable Remedies - Tracing
● In a mixed fund, gains and losses are borne by the contributors
rateably and thus the beneficiary can enforce a lien to obtain
repayment.
● The beneficiary’s right to elect is an exception to that rule and
exercisable when the fund is deficit and the claim is made
against the wrongdoer.

Criticism:-
● Is the rateable formulae fair?
● The trust fund contribution of 20 000 pounds constituted 2/5th
of the entire premium which on maturity yielded 1 million
pounds – thus 400 000 was the net proprietary interest.
● Alternatively the beneficiary could simply be paid the 20 000
instead of proportionatelyDr.asJohndecided.
Chuah 2017
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 Equitable Remedies - Tracing
The HL took the rationale that the trustee ought to have invested
the trust fund properly and to have 20 000 stolen from the trust
fund returned w/o appreciation cannot reflect a fair return on their
capital.
Since the beneficiary had their property invested involuntarily –
they deserve a share in their investment. Here two innocent
parties are after the same trust investment after a breach of trust.

Clark v Cutland (2003)

Company (beneficiary) was entitled to trace into pension fund of
trustee and claim proportionately.

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