Tracing

Lord Millett: Foskett v. McKeown

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.

- Cf. Tracing and following
- Foskett v McKeown: Following is the process of following the same asset as it moves
from hand to hand. Tracing is the process of identifying a new asset as substitute for
the old.
- The rules of following and tracing are evidential in nature, and are distinct from rules
which determine substantive rights. Following and tracing are concerned with
identifying property in other hands or in another form; claiming concerned with the
rights that a claimant can assert against the property in its present form.

Tracing at common law and in equity

The distinction between legal and equitable ownership is fundamental to English property
law. This historic bifurcation has led to the development of two separate bodies of rules for
tracing property, one operative for tracing ownership at common law and the other, for
tracing the equitable ownership which arises under a trust.




Significance of a proprietary claim:
1. The person presently holding the identified assets may be insolvent. If the identified
assets are subject to a proprietary claim they will not fall to be distributed amongst
his general creditors, and as such, a claiming owner will enjoy a priority which could
not be achieved through a personal claim.
2. The identified assets may be more valuable than the original property which has been
traced into them. If so, a proprietary claim will enable the original owner to take the
benefit of the appreciation that has occurred.
Common law tracing Equitable tracing
Re Diplock: operates in a strictly materialistic
way. It could treat a persons money as
identifiable as long as it had not been mixed
with other money.

- The common law has limited forms of
relief. Specific relief as distinct from
damages (the normal remedy at common
law) was confined to a very limited range of
claims as compared with the extensive uses
of specific relief developed by equity.

Re Diplock: Equity adopted a more
metaphysical approach. It can regard a
composite fund as an amalgam which is
capable, in proper circumstances, of being
resolved into its component parts. It is this
metaphysical approach of equity coupled
with and encouraged by the far reaching
remedy of a declaration of charge that
enabled equity to identify money in a mixed
fund.

- Equitable rules are considerably more
generous and facilitate tracing through more
complex transactions. The equitable rules
also have a moral dimension, operating more
harshly against a wrongdoer who
misappropriates property than an innocent
party.

Nature of Tracing:
1. Restitution
Burrows: Restitution is the response which consists in a defendant giving up to a
plaintiff an unjust enrichment which he has received at his expense. It can be effected
by restitution in the first measure which is the value received, the extent to which he
was unjustly enriched, or restitution in the second measure (proprietary measure)
which is the value surviving in the defendants hands.
Rejects a proprietary analysis because of the perceived danger of a geometric
multiplication in the Ps wealth as he gains interests in all the exchange products for
his property as well. (#, inhibited by no double claiming, cannot trace to bona fide
purchaser.)
2. Proprietary process
Pearce: while the use of tracing as a means of identifying the receipt of enrichment is
unquestioned, it is submitted that the relegation of tracing to a mere process without
proprietary implications is unduly reductionist and at odds wit both authority and
principle.

Value cannot exist in the abstract but only in the form of specific assets or
property. The leading cases (Lipkin Gorman, Jones) support the view that tracing
operates by descent of title so that a plaintiff can trace his property through mixtures
and substitutions. If at any point he ceases to be owner, his right to trace comes to an
automatic end, as when trust property is acquired by a bona fide purchaser.

Foskett v McKeown: Lord Millet the trasmission of a claimants property rights
from one asset to its traceable proceeds is part of our law of property, not of the law
of unjust enrichment. There is no unjust factor. The claimant succeeds if at all by
virtue of his own title, not to reverse unjust enrichment.

Common law tracing

Clean substitution

The common law rules of tracing are clearly capable of following the ownership of property
through a clean substitution, through an exchange which did not involve any mixing of the
original property with other property.

Common law tracing through clean substitutions operates on the basis of the preservation of
the plaintiffs title to the property being traced. The plaintiff had legal title before any
clean substitutions took place, and such substitutions were not able to deprive him of his title.

Leading case: Taylor v Plumer
The money could be traced into the bullion and securities and deemed the property of the
claimant as it makes no difference in reason or law into what other form, different from the
original, the change may have been madefor the product or the substitute for the original
thing still follows the nature of the thing itself.

The implication of R v Preddy seems to be that a direct transfer of
money between bank accounts are not traceable by common law.
However, as Pearce notes, this is fundamentally inconsistent with the
other cases, and should not be followed Banque Belge, Jones, Lipkin
Gorman.

Banque Belge (money can be traced at common law into a bank account)
Facts: a man who obtained cheques by fraud from his employers, which were paid into his
bank account. He then passed the money to his mistress, who paid it into her bank account.

Held: Previously it had been thought that common law would not trace money into a bank
account at all, but the court held that, following the equity case of Re Hallets Estate, there
was nothing to prevent the court from examining the details of the bank account. Bankes J
held that as there had been no mixing of money in the bank accounts concerned, it was
possible to trace the money at common law because it was a clean substitution.

Tracing into substitutes and products

Lipkin Gorman
Facts: a solicitor had misappropriated money from his firms client account in order to
finance his gambling at the play boy club. His firm sought to recover restitution from the
club of the misappropriated money it had received.

The relationship of the bank with the solicitors was essentially debtor and creditor and such a
debt constitutes a chose in action which is a species of legal property belonging to the
solicitors at common law. The plaintiff firm of solicitors was entitled to trace money
misappropriated from their client account as there is no reason why the solicitors should not
be able to trace their property at common law in that chose in action [clients account], or
in any part of it, into its products, ie, cash drawn by Cass from their client account at the
bank. Such a claim is consistent with their asserting that the money so obtained by Cass was
their property at common law and it further follows that the solicitors can follow their
property from the hands of Cass into the hands of the respondents when it was paid to them
at the PBC.

(However, the common law rules will not permit tracing once money had become mixed with
other money of the club. However, common law tracing rules did establish that the money
that the club received belonged to the firm, and thus entitled them to maintain a common law
action for money had and received.)

Tracing into profits

Trustees of FC Jones v Jones (money can be traced into profits made using ones money)

Facts: The D had received money drawn from the bank account of a firm which had
committed an act of bankruptcy before it had been adjudicated bankrupt. The money was
invested in an account held by a firm of commodity brokers which dealt in potato futures. The
investment was highly successful and the account contained 5 times the money initially
invested. The trustees went after the D not only for the money withdrawn, but the profits.

Held: D had no title to the money, and as it was simply in her possession. The trustee was
entitled to trace his funds (including his profits) by applying common law principles because
the money and profits belonged to him at law. As such she could not retain the gains made
from the Potato futures, and the Trustees could trace the money at common law into the
account with brokers and subsequently into the account with Raphaels.

[But, still an action in debt though the court said you can claim for the increase in value
because the D had no legal title to the shares. THW: alternatively can construe the claim that
there was a breach of fiduciary duty by Ds husband by giving the money away]

Tracing of tangible property (exception?)

The common law is able to trace tangible property which is mixed with identical property so
as to create a bulk. Where such mixing occurs the owners of the goods which have been
mixed become tenants in common of the whole in the proportions which they have
contributed to it: Spence v Union Marine Insurance. (egs. Crude oil Indian oil co ltd, oil
mixed with a different grade or specification Glencore International)


Tracing of money through mixed funds

It was only possible to follow assets through clean substitution where they are able to be
ascertained to represent the original property, and such ascertainment becomes impossible
when the subject is turned into money, and mixed and confounded in a general mass of the
same description.

Means of transfer through a clearing system

Agip Africa v Jackson
Tracing not possible in common law where money has been transferred between bank
accounts and the means of exchange has inevitably involved some element of mixing.

- Millet J at the lower court
- 1) Denial of nature of transfer: Not possible to trace through telegraphic transfer in
common law tracing, common law tracing requires clean substitutes: nothing passed
between Tunisia and London but a stream of electrons. (Rejected in CA as it did not
matter that the transfer had been by order rather than cheque)
- 2) Mixing: Not entitled to trace at common law because money must have been
mixed with other money when the transfer took place through the New York clearing
system between Agip and Lloyds correspondent banks. (accepted)
- The CA held that the fact that it was electronically transmitted did not matter to
common law tracing, but tracing failed because the money must have been mixed
with other money when the money passed through the New York clearing system.
However, MR Zdiri was a fiduciary as chief accountant and hence could trace the
money in equity.

Bank Tejarat v Hong Kong
- Applied the principle identified in Agip (Africa) Ltd and held that as the plaintiffs
money would inevitably have become mixed with other money through the Frankfurt
deutschmark clearing system, it was impossible to trace the money at common law
into the hands of the defendants.

(Cf. Jones: the mere transfer of money between accounts held at different domestic banks is
effected through the clearing system and yet does not seem to have prevented common law
tracing. Millet LJ: the trustee does not need to follow money from one recipient to another or
follow it through the clearing system; he can follow the cheques as they pass from hand to
hand. It is sufficient for him to be able to trace the money into the cheques and cheques into
their proceeds.)

Pearce: No reason why the court should have been concerned with the means of transfer
through the clearing system (use the Jones rationale). Surely it is enough to identify a
debit from one account echoed by a corresponding receipt by another. This is as much a
swap of a chose in action for another as if a cheque had physically changed hands. The
refusal to allow common law tracing on the grounds of inevitable mixing during the process
of transfer of funds involves an unduly literalistic analysis of the tracing process.
Whenever transfers occur between banks, there should simply be an evidential presumption
that the money in question has passed from one account to another. The means of transfer
should not prevent such an inference.

Claiming at Common Law

Clean Substitution
- Historically: personal remedies- action in debt, conversion. Unjust enrichment.
- Pearce: it is now clear that where a legal owner can identify assets in the hands of a
third party as representing his original property, he will be entitled to claim them as
his own.
- Lipkin Gorman: Lord Goff stated that the legal owner of property was entitled to
trace his property into its product.
- Jones FC: a person who can trace his property into its product, provided that the
product is identifiable as the product of his property, he may lay legal claim to that
property.
- Where an owner is entitled to claim specific assets at common law, he will be entitled
to take advantage of any appreciation in value which they have received.

Where tangible property has been mixed to form a bulk
Where the bulk can be divided, the claimant will be entitled to claim a proportionate share.
However, where the bulk cannot be divided, although admittedly rare, the original owner will
be entitled to claim the entire bulk: Jones v De Marchant.

Claiming personal restitution
A proprietary claim will not be available where the property has been dissipated. A
proprietary claim can only subsist in relation to some specific identifiable asset. As Lord Lane
CJ observed in AG Reference, there can be no proprietary remedy unless there is an asset
which can be identified as a separate piece of property. The original owners may however, be
entitled to claim personal restitution form the recipient. Tracing operates as a process by
which it can be demonstrated that a defendant was in fact enriched at the expense of the
original owner by receipt of his property.

A personal restitutionary claim may also be more advantageous to an original owner than a
proprietary claim even where the property has not been dissipated if the assets which
represent his property have subsequently fallen in value, since the measure of restitution will
be determined by the value of the property at the point of receipt.

Lipkin Gorman: The common law rules would not permit tracing once the money had become
mixed with other money of the club. However, common law rules of tracing did establish
that the club had received money which belonged to the firm, and thus entitled them to
maintain the common law action for money had and received. (refer above why tracing
worked crucial because the firms ability to trace the money from clients account to PBC
vital to establishing that the money at the PBC was their property even though their claim was
a personal basis).

Tracing in equity

The fiduciary relationship requirement
Case law suggests that a fiduciary relationship is necessary for the operation of tracing in
equity. In Re Diplock, the CA examined the judgments of the HOL in Sinclair v Brougham
and concluded that a fiduciary relationship was a pre-requisite to tracing. Although the HOL
in Westdeutsche overruled Sinclair v Brougham, Lord Browne Wilkinson stressed that this
did not amount to a rejection of the requirement of a fiduciary relationship stated in Re
Diplock.

Where trust property has been misappropriated or misdirected, the essential requirement of
a fiduciary relationship will be satisfied. In Chase it was suggested that although the two
banks were commercial organizations dealing with each other at arms length and did not
stand in a fiduciary relationship, the mistaken payment brought about a fiduciary relationship
which entitled Chase Manhattan to trace the moneys: A person who pays money to another
under a factual mistake retains an equitable property in it, and the conscience of that other is
subjected to a fiduciary duty to his proprietary right. However, this rationale was disapproved
in Westdeutsche as Browne Wilkinson could not agree that the mere fact that payment had
been made by mistake meant that the payor retained equitable interest in the money paid
when it had previously not been subject to a trust. Rather, the fact that the defendant knew
about the mistake gave rise to a constructive trust. (Pearce #: reasoning as spurious. If the
mistaken payment effected a transfer of ownership when it was received, no reason why a
trust should be imposed later when the bank discovered that the mistake had occurred.
Tracing should only be possible if the money was paid under a mistake of fact so fundamental
as to prevent property passing.)

The requirement for a fiduciary relationship has been criticized by Millet J in Foskett as there
is no logical justification for allowing any distinction between common law tracing and
tracing at equity to produce capricious results in cases of mixed substitutions by insisting on
the existence of a fiduciary relationship as a precondition for applying equity's tracing rules.
The existence of such a relationship may be relevant to the nature of the claim which the
plaintiff can maintain, whether personal or proprietary, but that is a different matter.

Criticism of fiduciary relationship requirement
The requirement is artificial, the court being willing to find, or discover a fiduciary
relationship whenever they feel tracing is justified, as in Chase Manhattan. Hayton: in
Westdeutcsche, Lord Browne Wilkinson seemed to imply that a thief owes a fiduciary duty to
his victim, with the result that the victim can invoke equitable rules in order to trace through
the thiefs sale of the stolen property and mixing of the proceeds in a bank account.

Hayton: Given the objections to the fiduciary relationship requirement together with the dicta
in Foskett v McKeown where Lord Steyn and Lord Millet both considered that there is now
only one set of tracing rules in English law applicable to common law and equitable claimants
alike. It seems likely that this obiter will be followed in future cases.

Pearce: Follow Collins J in Commerzbank which sees the right to trace as existing because of
the continuing proprietary rights of the true owner. The requirement of a fiduciary
relationship conceals the true basis of equitable tracing which is the identification of a trust. A
person will only be entitled to trace property in equity of which he was the equitable owner.
Submits that the trust analysis should be adopted in place of the current requirement of a
fiduciary relationship. However, such a development would not lead to any significant change
in the operation of equitable tracing as there is such close connection between equitable
ownership and a fiduciary relationship that the two terms could be seen as almost
synonymous. [THW: The difficulty however is that this proprietary analysis is predicated on
the splitting of title. However, the prerequisite to saying that one is a trustee (and hence the
splitting of title) is that he is a fiduciary.]

Equitable tracing

1. Clean substitutions

Where trust property has been exchanged for other property, beneficiaries are entitled to
trace.

2. Tangible property into mixed bulk

Trace the trust property into the bulk and entitled a share of the equitable ownership
proportionate to their contribution.

3. Money through a mixed fund

Unlike common law rules of tracing, the equitable rules of tracing permit the trust property to
be traced to a mixed fund of money and into assets acquired from it.

El Ajou v Dollar Land Holdings
Victims of fraud can trace in equity through mixed bank accounts because equity treats such
accounts as charged with the repayment of their money. Hence, Millett J held that although
they could not trace at common law because the money had been mixed, they could trace in
equity because there was a fiduciary relationship between them and their agent who was
bribed.

Foskett v McKeown
Case concerned a Mr Murphy who had taken out a unit-linked life insurance policy which
provided for the payment of a death benefit of 1 million. The initial annual premiums due
under this policy were paid by Mr Murphy but subsequent payments were paid from a bank
account which he held on trust for the customers of a company he controlled which had
contracted to buy land on their behalf. The proceeds of the life insurance policy were written
in trust for the benefit of his children. When Mr Murphy died and his death benefit paid, the
issue was whether the beneficiaries were entitled to trace their misappropriated money into
the proceeds of the policy.
Held: The HOL held by a bare majority that the beneficiaries were entitled to a share of
the proceeds proportionate to the contribution of trust money to the payment of their
premiums.
Lord Millet: the beneficiaries were able to trace their trust money to the insurance policy
itself and thence, into the proceeds of the policy. If a claimant can show that premiums
were paid with his money, he can claim a proportionate share of the policy.
- Question is whether the assets claimed are attributable to the original trust
property seemed to indicate that since this was a property claim, you will be
entitled to vindicate your property rights by tracing.
o The fact that the premiums did not in fact affect the value of the entitlement
to the death benefit should not matter because ownership had to be assessed
before the death of the trustee, not after.
- Used a proprietary analysis to say that the beneficiary can trace unmixed money into
its proceeds and assert ownership of the proceeds where the claimants property has
contributed in part 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.

- Cf. Lord Hope (dissenting), who argued that causation is relevant to the extent that
the particular terms of the policy involved sub-divided units
o Since the later premiums did not affect the value of the entitlement to the
death benefit, there is no causal link there; the purchasers were only entitled
to claim the amount of the premiums paid using their funds.
- It is unclear whether causation is really out of the pictureit is arguable that Lord
Milletts usage of the concept of attribution is really the concept causation in a
different, more general form.

- Alan Toy in Caterbury Law Review: the concept of attribution was simply the
sophisticated form [of causation] in disguise. Presentation of tracing process as
wholly neutral is fiction!

[cf. THW: policy motivation unarticulated: fiduciaries cannot use moneys in this way to
provide for next of kin]


4. Money through the banking system

Whether the balance in the bank account can be identified as the product of trust money
operate differently depending upon whether the mixture consisted of trust money and the
money of wrongdoing trustee/money of the trust and of another innocent party.

(a) Mixture in bank account consisting of the trust property and trustees own property

When a wrongdoing trustee has mixed trust property with his own property in a bank account,
the rules operate harshly against him. Hayton: Equity resolves the evidential problem (as to
whose money spent on what) against the wrongdoer by allowing the beneficiaries to cherry
pick from two rules in order to reach the best result for themselves.

[Hayton: Definition of wrongdoer includes a recipient who takes the property with knowledge
of breach of trust and hence owes duty as a constructive trustee to account for trust property
but yet mixes his property with his own property. (Boscawen v Bajwa)]

Re Halletts Estate
If the mixed fund has been partially dissipated, any remaining balance are presumed to belong
to the trust. The burden is on the wrongdoer to show that the asset represents his own money.

Facts: A solicitor, who was a trustee of his own marriage settlement, was entrusted with
money by a client for investment. He paid money from the trust and his clients money into
his bank account, which also contained some of his own money. He later made various
payments out and dissipated the money in the account. On his death, the issue was whether
the money in the account could be said to be property of the trust and client, in which case
they would gain priority over the general creditors.

Held: The Court held that trustee must be presumed to have spent his own money first, and
that the trust monies are preserved in the account. Jessel MR: it seems to me perfectly plain
that he cannot be heard to say that he took away the trust money when he had a right to take
away his own money. Pearce: This presumption could create problems if the trustee acquires
assets with money withdrawn and thereafter dissipates all remaining assets in the account. He
could claim that all the assets belong to him as he was presumed to spend his own money
first. Therefore, the better interpretation is that this presumption is not absolute but a specific
application of the maxim that everything is presumed against the wrongdoer.

Re Oatway
Opposite presumption to Re Hallet applied. The trustee was presumed to have spent trust
money first.

Facts: Lewis Oatway was a solicitor and the trustee of a will. He misappropriated money from
the trust and paid this into a bank account where it was mixed with his own money. He
purchased shares using money from the account. At the time of purchase, he had enough of
his own money in the account to purchase the shares. After the purchase, he dissipated the
balance and died insolvent. The shares had by now appreciated in value. If the rule in Re
Hallet was applied, Oatway would have been considered to have spent his own money on the
shares, thereby making the shares his own.

Joyce J held that the shares did not belong to Oatways estate, but were to be regarded as the
product of the trust money. A trustee cannot after dissipating the balance, maintain that
the investment represents his money alone, and that which has been spent and no longer
be traced was money belonging to the trust. (THW: alternatively use agency principles. As
principal you ratify your agents wrongdoing and hence take benefit of the shares)

Pearce: This decision and Re Hallett are not contradictory even though they had different
outcomes based on similar fact patterns. This is rather the application of a general principle
that the trustee is estopped from asserting that he has dissipated trust money before his
own. This principle will operate differently depending on the individual facts of each
situation.

Re Tilleys Will trust
Where the property has increased in value, the charge will not merely be for the amount for
the trust moneys but for a proportionate part of the increased value

(b) Mixture in bank account consisting of the trust property and property of an
innocent volunteer
In such cases, we cannot presume anything against the volunteer as he is not guilty of any
wrongdoing, the rules reflect te moral blamelessness of the parties whose money as been
mixed and aim to do substantive justice between them. Hence, gains and losses are generally
shared pro rata as the beneficiaries will have equally strong claims to a rateable share of gains
and equally weak claims to avoid taking a rateable share of losses to the mixed fund.

Equitable lien over the property (if deficient) not possible though, a pro rata share in the
property only: Foskett below.

CURRENT ACCOUNT NOT CURRENT ACCOUNT
Claytons Case
This case presumes that money is paid out of
a current account in the same order in which
it had been paid in. In other words, that the
first money to be spent from the account
represents the first money that was paid in.
This rule is known as the First in, First out
rule

However, this presumption is not absolute
and will not be applied if the result is unjust
starting with Barlow clowes, the trend of
recent cases has been to apply the rule only in
most exceptional circumstances. This
approach is premised on the notion that
the Claytons case rule is merely a
convenient evidential rule in some cases
and should not be applied when it causes
injustice. In Rusell- Cooke Trust Co v.
Prentis, Lindsay J went so far as to suggest
that the fact that the FIFO principle will not
usually be applied where beneficiaries have
shared a common misfortune means that it
might more accurate to refer to the exception
Where the mixing of the trust property and
the property of an innocent volunteer takes
place in a bank account other than the current
account, the rule in Claytons case will not
apply.

In Sinclair and Re Diplock, it was held that
parties will share parri passu in any assets
that have been purchased out of the mixed
fund and any balance remaining in the
account. They will also bear any increase or
loss in value proportionate to their
contributions.

that is, rather than the rule in Claytons case.

In Barlow, some investors argued that
Claytons Case should be applied, with the
consequence that the earlier investors would
get their money back but the later investors
would recover nothing. Claytons Case
affirmed as good law. However, Woolf LJ
stated that the rule is only applied when it is
convenient to do so and when its application
does broad justice taking into account all
competing claims.

It is not applied just because the beneficiaries
want it to be applied. It is also not applied
when the cost of applying it is likely to
exhaust the fund available for the
beneficiaries such that some beneficiaries
have nothing left to claim.

Held: it would be inequitable to apply the
rule in Claytons case as it would mean some
investors recovering everything to the
exclusion of the rest (without any relation to
the equities of the case), and instead, the
investors should share pari passu in what
remained as they had experienced a common
misfortune. [cf. rolling charge suggestion in
Hayton pg 540]

Claytons case not applied in Commerbank
too as it would be impracticable and unjust to
do so and the balance in the account should
be divided in proporiton amongst clients as
that was the only fair way.


(c) Tracing into substituted asset purchased out of a mixed fund

Claiming assets which were acquired from a mixed fund: prior to Foskett a distinction
appeared to be drawn between the rights of beneficiaries where assets identified as
representing the original trust property were acquired from a mixed fund with an innocent
partys funds or one mixed with the property of the wrongdoing trustee. HOL: Lord Millet
held that no distinction was to be drawn between the right of beneficiaries to claim a
proportionate share of assets acquired from a mixed fund.

Re Diplock
CA suggested that the use of trust property to improve a house where improvement added no
value to the house or even caused a loss of value would amount to a dissipation preventing
tracing as there would be nothing to trace, as the money will have disappeared leaving no
monetary trace behind.

CA also considered that there should be no tracing if an innocent volunteer used trust
property to improve land. To impose a charge over the land for the increase in value in such
circumstance would not in the courts view, produce an equitable result. The reason for this is
that a charge is enforceable by sale, and the result is that the innocent volunteer could be
compelled to sell his house.
- There was suggestion in Re Diplock that the use of trust property to improve a house
where the improvement added no value to the house, or if it caused a loss in value,
would amount to a dissipation preventing tracing. In such circumstances, there is
nothing to trace because the money will have disappeared leaving no monetary trace
behind.

Whether it will be inequitable to trace will depend on the circumstances of the case. Re
Diplock concerned charities who were innocent volunteers. As Goff and Joes suggest, the
result might have been different if the innocent volunteer had been a rich banker who had
used trust money wisely to increase the value of his country house and has ample liquid assets
to dispell the charge. What if it was the fiduciaries who improved the property?

Restrictions on equitable tracing

Restrictions on equitable tracing
- There must be a limit on equitable tracing. If there are no limits, then it gives the
beneficiaries indestructible rights.
- One rule is that you must be able to point to a discrete asset to show that it is a
representation of an asset that you have lost. It is not enough to say that you have received my
property.

(1) Bona fide purchaser for value without notice
(2) Dissipation of the asset or fund

General Rule: Once money has been dissipated, there can be no tracing because there is
clearly no asset which represents the original property. Equitable remedies presuppose the
continued existence of the money either as a separate fund or as part of a mixed fund or as
latent in property acquired by means of such a fund. If the money ceases to exist, equity is
helpless: Re Diplock

- If property has been used to discharge a debt, nothing would be left that could be said
to represent the trust property. A debt is a chose in action and once it is paid, it ceases
to exist. In Re Diplock, it was held that it was impossible to trace trust money
wrongfully transferred to two charities who had used it to discharge debts.
- Money paid into an overdrawn account cannot be traced as such payment only
reduces the amount of the overdraft. This is simply a debt owed by the customer to the
bank and such monies are considered dissipated and as such cannot be traced: Re
Tillys Will Trusts and Bishopsgate v. Homan.
- Swollen Assets Theory: In Bishopgate, as the plaintiffs could not identify which
particular asset represented the trust moneys, they tried to argue that the beneficiaries
had a charge over all the assets of MCC based on Obiter Dicta by Templeman LJ from
a PC case Space Investments v. Canadian Imperial Bank. This theory states that where
it is impossible to trace monies into any particular asset, then the money could be
traced to all the assets and an equitable charge could be placed over all the assets. The
Swollen Assets Theory was doubted by Dillon LJ in Bishopsgate v. Homan and he held
that it was strictly Obiter.
- THW: This makes sense because with the Swollen Assets Theory, the
beneficiaries just have to prove receipt to be able to enforce their rights.
- Hayton: Serious Fraud Office v Lexi Holdings for an equitable charge to attach
[to assets in the trustees hands] it must attach to assets in existence which derive
from the misappropriated trust funds. There must be a nexus. Were it otherwise,
the principles of following and tracing could become otiose.

- Doctrine of specification the asset is deemed to be destroyed where the asset is
combined with other items to form a wholly new product - Borden UK v Scottish
Timber Products: The right to trace will be lost where tangible property is not
merely mixed to form a bulk but is consumed in the manufacture of an entirely
new product so as to lose its identity altogether i.e. the original product had been
dissipated. The plaintiffs claim to recover resin could not be traced into the chipboard
that the resin was used to manufacture s the chipboard was a wholly new product.
[However, cf. Jones v De Marchant where a husband wrongfully took 18 beaver skins
from his wife and used them together with his own skins to make up a fur coat which
he gave to his mistress. The court held that the wife was allowed to trace her property
to the new coat. Hayton: this is explained on the basis that the mixing in Jones was
done by the wrongdoer and hence, the owner of the assets which are wrongfully used to
create a new aset can follow his property into his new asset. The mistress as a volunteer
derived her title from the wrongdoer and hence could not get better title than her
predecessor.]

Exceptions
1)
Where a beneficiarys money is used in breach of trust to discharge a secured debt, the
beneficiary will be entitled to be subrogated to the position of the secured creditor and
therefore can recover the amount of the discharged loan from the debtor: Boscawen v. Bajwa

2) Backward tracing
- Can misappropriated money can be traced in equity into an asset acquired before trust
property was received?

In Bishopgate, Dillon LJ was willing to accept that in some circumstances trust money could
be traced into a pre-acquired asset. The first instance judge had suggested that tracing would
be possible if property had been acquired with borrowed money, either by way of loan or
overdraft, and there was an inference that when the borrowing was incurred it was the
intention that it should be repaid with the misappropriated money. He considered that the
beneficiary would be entitled to a charge over the asset acquired provided the connection
between the misappropriation and the asset was sufficiently proved.

In contrast, Leggatt LJ entirely dismissed the possibility of such backward tracing: 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.

In Foskett v McKeown, Scott VC expressed the opinion that it should be possible to trace into
assets acquired with borrowed money if the trust money was used to repay the borrowing and
it has always been the intention that the trust money would be used to acquire the asset.

(3) Lowest intermediate balance
Whether a fund consists of a mixture of trust money with the wrongdoers own or the money
of an innocent volunteer, if money has been dissipated from the account and hten further
money is paid into the account, the trust has no claim to any of that other money. The trust is
limited to what is the LIB as it is impossible that anything in the account above that figure
represents trust property.

James Roscoe: A wrongdoer misappropriated 455pounds and paid it into his own account.
After a few days, the balance was reduced to 25 pounds. When he died, the balance had risen
to 358 pounds. It was held that a charge could only cover 25 pounds.

The principle in Re Hallett would only apply to consider the lowest balance in the account
standing to the trustees credit as representing the remnants of the trust money. Subsequent
payments into the account cannot be considered. Payments into a general account cannot be
considered as the replacement of trust money which has been improperly mixed with that
account and drawn out unless there is proof of express intention that these payments were
specifically intended to replenish trust funds.

- *This has been approved in Bishopsgate v. Homan. Dillion LJ approved of
Roscoe v. Winder and held that the maximum amount that could be traced was
the lowest balance of the account standing to the credit of the trustee in the
intervening period.

Claiming in equity

Assert a proprietary claim to the assets identified/an equitable lien to restore the trust
fund/personal claim to restitution.

Claiming assets which are acquired from a mixed fund.
General rule right to elect between claiming a proportionate share of an asset acquired
from a mixed fund and enforcing an equitable lien: Lord Millet in Foskett

Proprietary claim: enable priority over general creditors in an insolvency, take advantage of
any increase in value of the assets. Such proprietary claim will not however, be advantageous
if the assets acquired from the mixed fund have fallen in value, since it will force the
beneficiaries to bear a rateable share of the loss. In that case Equitable lien: Claim to
enforce an equitable lien against the mixed fund to secure ones personal claim against the
trustee to have the trust fund restored (Re Hallet and Foskett).

However, lien only available where the mixed fund consists of a wrongdoing trustees
own property and not where it consists of property of equally innocent parties. This is
because innocent contributors must be treated equally inter se and there is no basis upon
which any of the claims can be subordinated to any of the others.

Assets that are dissipated
Where assets dissipated so that there are no longer any assets remaining which can be
identified as its traceable proceeds, beneficiaries will not be able to assert a proprietary claim.
personal restitution in equity. In this context the rules of tracing operate as a process by
which it can be established that a stranger had in fact received trust property.

Unitary System in law and in equity

Strong authority arguing that there should be no different rules for tracing in law and in
equity, but however, the law as it stands still sees a distinction.

- Millet J in Jones: there is no merit in having distinct and different tracing rules at
law or in equity, given that tracing is neither a right nor a remedy but merely a
process by which the plaintiff establishes what has happened to his property.

Criticisms:
- There is no reason why the common law cannot recognize joint title to a mixed fund
through a tenancy-in-common. This has been recognized in Spence where bales of
wool were mixed but court held that there was a tenancy in common. In principle the
recognition of a tenancy in common at law should enable the common law to trace
through mixtures.
- The inability of common law to trace into mixed funds has had the effect of turning
plaintiffs to seek relief in equity since equitable rules permit tracing through a mixed
fund. As equitable tracing is dependent on the existence of a trust relationship, the
desire to trace in equity tended to lead to an expansion of the circumstances in
which the misappropriated property will be treated as subject to a constructive trust.
Pearce: no reason in principle or in practice for common rules to be emasculated. If
the rules were to develop, there would be less need for an expansion of equity, trusts
and fiduciary relationships into the commercial sphere as adequate restitutionary
remedies would be available to a plaintiff whose property had been misappropriated.

Foskett v McKeown
Steyn LJ and Millet reasoning
Steyn LJ quoted from Professor Birks who said:
- Tracing is neither a claim nor a remedy. It is a process through which a claimant
establishes his claim. It is distinct from claiming and does not affect or establish a
claim.
- Tracing is genuinely neutral as to the rights exigible in respect of the assets into
which the value in question is traced and hence, there is nothing legal or equitable
about it.