LAXMI DEVI

Equity & Trusts II (UEQ3622)

Breach of Trusts (part 2); Tracing

May 2024 The material on

‘breach of trusts’ is dealt with in the following sections:
 Introduction
 Following vs. Tracing
 Common Law Tracing
 Tracing in Equity
o Tracing Rules
o Unmixed Funds
o Mixed Funds
 Remedies
 Limits to Tracing

Reading Materials
Mohsin Hingun & Wan Azlan Ahmad, Equity and Trusts
in Malaysia (2nd edn), Chapter XV 409-421
Alastair Hudson, ‘Choosing remedies in tracing claims’
<http://www.alastairhudson.com/trustslaw/Remediestra
cing.pdf > accessed 26th February 2022
NH Andrews, ‘Tracing and Subrogation’ (1996) 55(2)
Cambridge Law Journal 199-201.
Smith, ‘Tracing, “Swollen Assets Theory” and the
Lowest Intermediate Balance Rule: Bishopgate
Investment Management Ltd Homan’ (1994) 8 TLI 102.

Additional Reading Materials

J E Penner, The Law of Trusts (11th edn), Chapter 11.
 LAXMI DEVI

FOB Babafemi, ‘Tracing Assets: A Case for the Fusion of

Common Law and Equity in English Law’ (1971) 34(1)
The Modern Law Review 12-28.
Janet Ulph, ‘Tracing Money at Common Law and the
Significance of Possession’ (2007) <
https://www.researchgate.net/publication/30053495_Tr
acing_money_at_common_law_and_the_significance_of_
possession> accessed 20th February 2022.

A.Introduction
 When there is a breach of trust:
o There will be loss suffered to the trust property
o The beneficiaries can either go for personal or
proprietary liability in order to replenish the value lost
o Personal- trustee or third party liable ONLY to account
for the loss of trust property in personam
o Proprietary- trustee or third party still has the trust
property or traceable value- action in rem
 Before any action can commence- process of tracing must
be triggered
 Types of tracing:
o Common law
o Equity
 Complex process with no overarching principles but there
are rules in place and subject to complex exceptions as
well
 Why action in rem is preferred in certain instances?
(a) Wrongdoer has insufficient funds
(b) Claims for profits made from trust property
(c) Process of tracing even allows beneficiary to claim
from innocent volunteers
(d) Allows a proprietary action

B.Following vs. Tracing

 Following
 LAXMI DEVI

 Quite simple
 Assets remain the same as it passes through
recipients
o No
o No
 Focuses on whether a new person has acquired the
same item/thing
 Specific piece of property is followed and identified by
its original c/law owner

 Tracing
 To do with substitutions
 Identifies new item as the potential subject matter of
a claim
o On the basis that it is the substitute for an
original thing
 Focuses on same person where that person acquires
a new item
 Identification of property or value which has been
substituted for the claimant’s original property by
means

 Foskett v McKeown [1998] Ch 265

o Millett J

 What is Tracing?
 NOT a claim or remedy but a process
 Foskett v McKeown [1998] Ch 265
o Millett J
 Works in 3 levels:
1. All the owner is seeking to do: recover property from
D
2. Owner might be seeking to recover both original
property and profits which have been realised from
D’s use of property
 LAXMI DEVI

3. Owner may not be able to recover original property

because property has been mixed with other property
or cannot be found or some other person has
acquired good title to it by virtue
 type of tracing to be used depends on the type of
substitution

 What are clean and mixed substitutions?

 Clean Substitutions
o Raw and cleanest form
o ONLY difficulty- cannot be evidenced
 Mixed Substitutions
o Basic premise-1 person’s value is
indistinguishably mixed with another’s in the
new asset

C.Common Law Tracing

 Claimant must have legal title
 Personal claim
 Clean substitutions only
 Banque Balge Pour L’Estrager v Hambrouck [1921] 1 KB
321
 Lipkin Gorman v Karpnale Ltd [1992] 4 All ER 409
 Jones (FC) & Sons v Jones [1996] EWCA Civ 1324
 Agip (Africa) Ltd v Jackson [1990] Ch 265
 Taylor v Plummer [1815] 3 M & S 562

D.Equitable Tracing
 Claimant must have equitable interest
 Proprietary claim
 Allows tracing in mixed substitutions
o Equitable interest- property can be traced even if its
form is changed or mixed with others
 Banque Balge Pour L’Estrager v Hambrouck [1921] 1 KB
321
o Lord Atkin LJ
 LAXMI DEVI

 Re Diplock [1948] Ch 465

 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717
o Millett LJ
 Boscawen v Bajwa [1995] 4 All ER 769

E. Tracing Rules
 Existence of Fiduciary Relationship
 Property must be identified
 Result will not be inequitable
 FAIL against a bona fide purchaser
o Provided consideration- would be unconscionable

 Fiduciary Relationship
 Criticised heavily
 Agip (Africa) Ltd v Jackson [1990] Ch 265
 Traditional basis to enable tracing
 Re Diplock [1948] Ch 465
o Lord Greene MR

 Foskett v McKeown [1998] Ch 265

 Westdeutsche Landesbank Girozentrale v
Islington BC
 AIV v Romalpa

 Fiduciary relationship can be found in:

(a) Express Trust
(b) Property held by ‘quasi-trustees’
(c) Trusts arising by operation of law
(d) By way of equitable charge

 Equitable proprietary interest

 Banque Balge Pour L’Estrager v Hambrouck [1921] 1
KB 321
 LAXMI DEVI

 Chase Manhattan Bank v Israel-British Bank (London)

Ltd [1981] Ch 105
 Re Diplock [1948] Ch 465
o Lord Mustill
 Payments made on account of mistake
 Payments made when the contract is void
 Payments made when the contract is voidable

 Unmixed Funds
 No problem
 Foskett v McKeown [1998] Ch 265
o Millett J

 Mixed Funds
 More complicated
 Foskett v McKeown [1998] Ch 265
o Millett J-emphasised distinction must be drawn
between two different types of tracing:
1. Property mixed with trustee’s own money
2. Property mixed with other innocent volunteers

1. Position/ Claim Against Trustee

 Onus on trustee to prove that part of the mixed fund
is his
 If the trustee is able to show his contribution, then
beneficiaries will share the property with the trustee
 Re Goldcorp Exchange Ltd (In Receivership) [1944]
UKPC 3
o Lord Mustill
 Foskett v McKeown [1998] Ch 265

2. Position/ Claim as between 2 trusts or Trust and Third

Party
 trustee mixed funds with 2 trusts regardless of
whether he mixed his own with them
 LAXMI DEVI

 IMPORTANT to distinguish between

o Trustees and beneficiaries’ monies
o 2 trusts/ trust and innocent volunteer
 Re Tilley’s WT

 Bank Accounts
 Complex
 Series of transactions
 Intangible property-poses a number of problems

 Trustees and Beneficiaries

 1st in, 1st Out Rule
o Based on the ‘series of debts view’
 Clayton’s Case [1816] 1 Mer 572
 PROB: Trustee’s money is presumed to be withdrawn first
o If money dissipated- then beneficiary would want the
1st set of withdrawals (traced to valuable assets
purchased) to be theirs instead
 Pennell v Deffell (1853) 4 De GM & G 372
 Re Hallett’s Estate (1880) 13 Ch D 696

VS.

 Re Oatway [1903] 2 Ch 356

J E Penner- ‘cherry pick’

 Armory v Delamirie (1722) 1 Stra 505

 Lowest Intermediate Balance Rule

 James Roscoe (Boston) Ltd v Winder [1915] 1 Ch 62
 Affirmed in Bishopgate Investment Management Ltd
(in liquidation) v Homan [1995] Ch 211

 LAXMI DEVI

 Overdrawn accounts or backwards

tracing
 Traces into property purchased by the recipient before he
receives value which is traced
Smith, ‘Law of Tracing’ (1997)

J E Penner- ending tracing exercise prematurely


 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717

 Agip (Africa) Ltd v Jackson [1990] Ch 265
 Foskett v McKeown [1998] Ch 265
o Scott-VC
 Law Society v Haider [2003] EWHC 2486 (Ch)
 Bishopgate Investment Management Ltd (in
liquidation) v Homan [1995] Ch 211
 Ralfo Ltd v Varsani [2014] EWCA Civ 360
 The Federal Republic of Bank of Brazil v Durant
[2015] UKPC 35
 Re D’Eye (Thomas v Mariner Properties Ltd) [2017]
BPIR 1174
 Decision led to developments of backward tracing doctrine
in New Zealand
 The Fish Man limited (In Liquidation) v Hadfield
[2016] NZHC 1750
 Intext Coatings Ltd v Deo [2016] NZHC 2754

VS.
 ORB arl v Ruhan [2016] EWHC 850 (Comm)
o Popplewell J

 Swollen Assets Theory

 Space Investment Ltd v Canadian Imperial Bank
of Commerce Trust Co (Bahamas) Ltd [1986] 3
All ER 75
 Referred to Sir Jessel MR in Re Tilley’s
 Foskett v McKeown [1998] Ch 265
 Serious Fraud Office v Lexi Holdings
 LAXMI DEVI

 Re Lehmann Brothers

 Tracing Among Innocents/ 2

Trusts
 Different rules apply
 No presumptions justified by a party’s wrongdoing that can
lie against equally innocent parties
 Trustee- state of mind- IRRELEVANT
 But 3rd parties- state of mind- RELEVANT
o Innocent volunteers- innocent and no consideration
 GR: 1ST in, 1st out rule (Clayton’s Case Rule)
 Re Hallett’s Estate (1880) 13 Ch D 696
 Hancock v Smith [1889] 41 Ch D 456
 Re Stenning [1895] 2 Ch 433
 Mutton v Peat [1899] 2 Ch 556

Smith L- The Law of Tracing (1997)



 Russell- Cooke Trust Co v Prentis [2003] 2 All ER 478

o Lindsay J
 Barlow Clowes International Ltd (In Liquidation) v
Vaughn
o Dillon LJ
o Woolf LJ

 4 ways to AVOID using 1st in/ 1s out rule:

1. Running bank accounts
 Re Goldcorp Exchange Ltd [1995] 1 AC 74
2. Impossible/impracticable
 Re Eastern Capital Futures Ltd [1989] BCLC 371
3. Contra-indication
 Barlow Clowes International Ltd (In Liquidation) v
Vaughn [1992] 4 All ER 22
 LAXMI DEVI

4. Result in injustice
 Barlow Clowes International Ltd (In Liquidation) v
Vaughn [1992] 4 All ER 22
o Woolf J

 Pari Passu/ Proportionate Shares Solution

 Barlow Clowes International Ltd (In Liquidation) v
Vaughn [1992] 4 All ER 22
 Russell- Cooke Trust Co v Prentis [2003] 2 All ER
478
 Commerzbank Aktiengesllschaft v IMB Morgan plc
[2004] EWHC 2771
 Charity Commissions v Framjee [2015] 1 WLR 16
o Henderson J

 Rolling Charge Solution/ North American

Solution
 Re Ontario Securities Commission & Greymac
Credit Corporation (1986) 17 OAC 88 (CA)
 Shalson v Russo [2005] Ch 281
 Steele v Steele [2001] All ER (D)
 Pars Rom Brothers (Pte) Ltd v Australian NZ
Banking Group Limited [2018] SGHC 60

F. Remedies
 Equitable Charge
 A Lien
 Constructive Trust
 Subrogation
 Re Diplock [1948] Ch 465
 Boscawen v Bajwa [1995] 4 All ER 769
 Primlake Ltd (in Liquidation) v Matthews Associates
[2006] EWHC 1227 (Ch)
 Bank of Cyprus UK Limited v Menelaou [2015] 66
 LAXMI DEVI

G. Limits to Tracing/ Right to Tracing is

Lost
 Bone Fide Purchaser
 Credit Agricole and Investment Bank v
Papadimimtriou [2015] UKPC 13
 Sinclair v Versailles [2011] EWCA Civ 347
 Property Dissipated/ Not Identifiable
 Borden (UK) v Scottish Timber Products [1981]
Ch 25
 Change of Position
 Kleinwort Benson v Birmingham CC [1997] QB 380