Tracing Cameron Stewart Sydney Law School. Proprietary remedies — tracing Tracing is available as...

Tracing

Cameron StewartSydney Law School

Proprietary remedies — tracing

• Tracing is available as a remedy in common law as well as in equity. Common law tracing differs from equitable tracing in that equity rec ognises that a beneficiary retains his or her property rights over trust property in cases where the trust property is mixed with other property or converted into a new type of property

Proprietary remedies — tracing • Foskett v McKeown [2000] [2001] 1 AC 102 at 128, Lord

Millet:

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

Fiduciary duties?

• The existence of a prior fiduciary relationship is an essential pre requisite to a claim of tracing in equity

• The effect of grounding tracing in the exclusive jurisdiction is to substantially limit its availability. Many commentators have been critical of this view of tracing’s origins because, in the absence of a prior fiduciary relationship, any person whose property is stolen by a thief will be unable to trace that property in common law or equity, if the thief mixes the property

Fiduciary duties?

• In Foskett v McKeown both Lord Millett and Lord Steyn were critical of the necessity for a fiduciary relationship to exist as a precondition to tracing, but their comments fell short of removing the requirement. In Shalson v Russo [2005] Ch 281, Rimer J stated that even after Foskett the traditional differences between common law and equity remain and the requirement for a pre-existing fiduciary relationship still existed.

Fiduciary duties?

• In Australia there appears to be more movement towards jettisoning the requirement.

• In Commonwealth Bank of Australia v Saleh at [29], Einstein J said that `the better view' was that tracing protects property rights, rather than enforcing fiduciary relationships.

• But no case yet directly on point

Property

• In addition to the requirement that there be a pre-existing fiduciary duty between the parties, a claimant seeking to trace trust property must also establish that he or she had an equitable interest in the property prior to the breach of fiduciary duty and that the property now lies in the hands of the defendant.

Property

• To that extent it is necessary to ascertain the trust property and identify it as being held by the defendant.

• In equity it does not matter, for the purpose of identification, that the property has become mixed with other property: Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696.

• Nor does it matter that trust funds have been used to purchase other property.

• Equity presumes that the trust property continues to exist in both situations: Re Diplock [1948] Ch 465 at 531–2; [1948] 2 All ER 318 at 352–3.

Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135

• Raulfs entered into a partnership agreement with Fishy Bite Pty Ltd (Fishy Bite).

• Fishy Bite was owned and controlled by Ajaka. • Raulfs paid $400,000 as a contribution to the capital of the

partnership. • Ajaka withdrew the money and used it to pay out a mortgage over

a house he owned with his de facto partner, Ablett. • The commercial partnership broke down quickly and consent

orders were entered for a winding up. • Around the same time, Ajaka and Ablett's relationship broke down

and they entered into a termination agreement in accordance with Part 4 of the Property (Relationships) Act 1984 (NSW).

• Ablett became the sole registered owner of the house. • Raulfs claimed that she could trace her partnership contribution

into the house and sought to secure her rights by way of a charge over the house.

Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135

• The New South Wales Court of Appeal found that Raulfs could not trace the proceeds.

• When the money was paid to the partnership it became a partnership asset and it was no longer hers.

• Raulfs had no claim over the money once the money was paid and, as such, she had no property to trace.

Overdrafts

• When trust funds are placed in another account and that account is exhausted or overdrawn, equity treats the trust property as being dissipated: Bishopsgate Investment Management Ltd (in liq) v Homan [1995] Ch 211; [1995] 1 All ER 347; Viscariello v Bernsteen Pty Ltd (in liq) [2004] SASC 266.

Overdrafts• In Chong v Chanell [2009] NSWSC 765, large sums of money

held on trust had been gambled away leaving nothing to trace into (although fortunately for the plaintiff some of the moneys could be traced into a house).

• Similarly, payment into an overdraft account will also destroy the possibility for tracing, as an overdraft account is a debit account: Re Rowena Nominees Pty Ltd [2006] WASC 69; Grocers of Wyong v Retech Global [2004] NSWSC 488; Re Goldcorp Exchange Ltd [1995] 1 AC 74; [1994] 2 All ER 806.

• In Williams v Peters [2010] 1 Qd R 475, a purchaser of a luxury car was unable to trace the purchase moneys as they had been deposited in an overdraft account (in addition to there being no intention for the moneys to be held on trust).

Overdrafts• In Re Global Finance Group Pty Ltd (in liq) at

408, McLure J found that subsequent deposits by a trustee into a mixed fund will be impressed with the trusts in favour of the beneficiaries if the trustee intended to make restitution to the trust by appropriating the funds to the replacement of the trust moneys.

Overdrafts• In Australian Receivables Ltd v Tekitu Pty Ltd

[2011] NSWSC 1306 at [154], Ward J agreed and said:

• Insofar as the allocation of withdrawals and treatment of payments out of a mixed account of this kind is based on a presumption as to the trustee's intention, an actual intention by the trustee (or the third party) to treat moneys subsequently paid in as replenishing the trust fund would permit the conclusion that the trust connection was not lost.

Backward tracing

• `Backward tracing' is where the moneys placed into an overdraft are used to reduce the overdraft so that further funds can be withdrawn to purchase an asset. In backward tracing the beneficiaries claim the ownership of the asset purchase with the reduction in overdraft.

Backward tracing

• In Hagan v Waterhouse (1992) 34 NSWLR 308 at 358, Kearney J said:

• Just as it is no answer to a beneficiary's claim to an investment acquired with moneys drawn from a mixed current account in credit to say that the trustee's own moneys in the mixture could have sufficed to effect the purchase, so it is no answer in the case of such a purchase from an overdrawn account for the trustee to rely upon the extensive nature of his overdraft arrangements.

Backward tracing• In Bishopsgate Investment Management Ltd (in liq) v

Homan [1995] Ch 211 at 216–7; [1995] 1 All ER 347 at 351, Dillon LJ, when referring with approval to the trial judge's suggestion, said:

• The judge gave as an instance of such a case what he called `backward tracing' where an asset was acquired by [the defendant] with moneys borrowed from an overdrawn or loan account and there was an inference that when the borrowing was incurred it was the intention that it should be repaid by misappropriations of [the plaintiff's] moneys. Another possibility was that moneys misappropriated from [the plaintiff] were paid into an overdrawn account of [the defendant] in order to reduce the overdraft and so make finance available within the overdraft limits for [the defendant] to purchase some particular asset.

Backward tracing• Possible in Australia?• In Conlan v Connolly [2011] WASC 160 at [80],

Simmonds J found similarly, agreeing that the exception was available but finding that there was insufficient evidence to support the claim.

Tracing property into the hands of trustees

• If trustees misappropriate trust prop erty and use it exclusively to purchase other property in their own name, equity allows the beneficiaries to trace the funds into the newly acquired property

• The beneficiaries can choose to enforce their beneficial interests in the new property by either asserting beneficial ownership of it, or by bringing a personal claim against the trustee for breach of trust. This claim can be enforced by an equitable lien or charge over the new property

Lake v Bayliss [1974] 1 All ER 1114

• A trustee sold trust property and bought a ring with the proceeds. The ring was then given to a friend who sold it and banked the proceeds into a savings account.

• The beneficiary was entitled to trace the trust property into the proceeds, then the ring and then into the savings account.

Election

• Beneficiaries can choose to enforce their beneficial interests in the new property by either asserting beneficial ownership of it, or by bringing a personal claim against the trustee for breach of trust.

• This claim can be enforced by an equitable lien or charge over the new property: Foskett v McKeown AC at 109; All ER at 122; Chong v Chanell at [39]; Dennis Hanger Pty Ltd v Brown [2007] VSC 495 at [36].

Profit

• If beneficiaries choose to keep the property, and the newly acquired property has appreciated, they are entitled to keep the gain for themselves, as the trustee is not entitled to retain any profit from a breach of trust.

Mixed property — the rule in Re Hallett’s Estate

• Equity presumes in such circumstances that, once funds are mixed in an account, any following transactions come from the trustee’s per sonal funds first. Any funds remaining in the account are treated as trust funds

Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696

• A solicitor-trustee sold trust property and mixed the funds from the sale with his own money in a bank account.

• The solicitor later died insolvent and a dispute arose between the beneficiaries and other creditors of the estate over who was entitled to the funds remaining in the account.

• Sir George Jessel MR found that the beneficiaries had a right to trace the proceeds of sale into the remaining account funds. Equity presumes in such circumstances that, once funds are mixed in an account, any following transactions come from the trustee's personal funds first. Any funds remaining in the account are treated as trust funds.

Brady v Stapleton (1952) 88 CLR 322

• The High Court said at 337–8, :• [I]t would be a great mistake to suppose that the great case of Re

Hallett’s Estate … lays down a doctrine peculiar to money. On the contrary, it extends to money paid into a bank account, and so losing its identity as money, a doctrine which equity would never have had the slightest hesitation in applying to money physically existing or to any other kind of personal property to which it could, as a matter of practical possibility, be applied. And there is no difficulty, and we do not think that equity would ever have had the least difficulty, in applying the same doctrine to shares or bonds … Equities are not defeated if a trustee mixes trust moneys with his own moneys and with the mixture purchases a grey horse and a black horse, or a grey horse alone. In such a case equity imposes a charge on the two horses or the one horse. But, where it is possible to give effect to the rights of a cestui que trust by simply taking out so much money or so many bonds or so many shares, the cestui que trust may elect whether he will take property in specie out of the mass or have a charge on the mass.

The lowest intermediate balance rule

• How do you calculate beneficial proprietary interests in cases where deposits and withdrawals are made over time to accounts of mixed funds?

• The lowest intermediate balance rule states that the beneficiaries’ claim is limited to the lowest account balance in the period starting from the date of mixture to the date of the claim against the account.

James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62

• A debt collector deposited over £400 of his clients' money into his own account.

• Over a period of time a number of withdrawals and deposits were made.

• The lowest balance recorded during the period was £25. At the time of the claim there was over £300 in the account.

James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62

• The beneficiaries sought to employ the rule in Re Hallett’s Estate to claim the remaining funds.

• However, the court found it could not presume that the deposits made after the mixture were intended by the fiduciary to reimburse the trust.

• The only available balance was the lowest balance in the intermediate period between the breach of fiduciary duty and the claim, that being £25.

Valuable purchases

• If the fiduciary makes a purchase of valuable property from the mixed fund and then proceeds to dissipate the rest of the account the fiduciary is not entitled to use the rule in Re Hallett’s Estate to prevent tracing into the valuable property.

Re Oatway [1903] 2 Ch 356

• A trustee misappropriated trust funds by placing them in his account and then proceeded to use two-thirds of the money to buy shares.

• The rest of the account was then dissipated. • The court found that the trust property

should be traced into the shares, overturning the presumption in Re Hallett’s Estate that transactions come from the trustee's personal funds first.

Young v Lalic [2006] NSWSC 18• A woman gave $50,000 to her fiancé and future

mother-in-law to contribute towards the costs of construction of a new house on the mother-in-law's land.

• The money was expended but the marriage later broke down.

• The husband and mother-in-law refused to pay back the $50,000.

• Brereton J allowed the woman to trace the funds into the land and granted her a charge over the land worth $50,000

Shepard v Mladenis [2011] NSWSC 1431

• Dr Wallman, a recently divorced obstetrician and gynaecologist was defrauded by an introduction agency, called Hearts United.

• Wallman paid $200,000 for personal relationships counseling. Hearts United arranged for Wallman to be introduced to `Lily', who was described as being Australian/Chinese with blonde hair with a surname `Bolivique'.

• She may or not have been a fictitious person.


• Hearts United convinced Wallman to pay large sums of money to enable him to marry Lily.

• Lily then requested larger sums ($200,000) that she could borrow from Wallman to help her organise the release of her father's estate in Croatia.

• Further amounts were requested which totaled two million dollars.

• All the moneys were paid to Hearts United.


• Mladenis, the director and owner of Hearts United used the funds to purchase a number of items including real estate, a Porsche, a Lexus, a BMW, and a Lamborghini.

• Pembroke J found that the money was held on a Quistclose trust and that the funds could be traced to the purchases.

Election

• Once funds have been traced into the newly acquired property, the beneficiaries cannot elect to take total beneficial ownership of the property (like they may when property is purchased solely with trust funds).

• Instead, the beneficiaries can only assert a lien or charge over the property, which is equal to the value of the trust moneys. The reasoning behind this limitation is that the property was not solely purchased using trust moneys.

Election• In The Uniting Church in Australia Property Trust (NSW) v

Vincent [2009] NSWSC 375 at [9], Einstein J summarised the position as follows:

• Where a trustee acquires property using exclusively trust money, the beneficiary has a proprietary interest in the property acquired, however, where a trustee acquires property using trust money mixed with his own the beneficial owner does not have a proprietary interest in the property because it was not acquired only with trust property. Instead the beneficiary is entitled to a charge over the property to secure the amount of the fiduciary's liability … The charge gives rise to an entitlement to have the property restored to the beneficiary by restitution and arises as soon as the wrongful conversion or mixing occurs (references omitted).

Election• But what about taking a proportionate share of the

appreciating property?• In Foskett v McKeown at AC at 131; All ER at 123–4, Lord

Millett confirmed that beneficiaries could elect between claiming proportionate beneficial ownership and asserting a charge or lien:

• 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

Election• Can you elect to do this if there are funds still in the account?• In The Uniting Church in Australia Property Trust (NSW) v Vincent

[2009] NSWSC 375 at [9], Einstein J thought that it should and said:

• Where a fund mixed with trust money is used to acquire other property, the beneficiary is entitled to charge both the fund and any property acquired from that fund, Re Oatway [1903] 2 Ch 356 at 361; Sutherland Re; French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 at 386. The charge may be asserted over both the fund and the property to its full value in the sense that the beneficiary must exhaust either first before recouping the full balance out of the other … The rationale for this is that until the trustee has fulfilled his fiduciary duty to restore the trust property he will not be heard to claim his own interest in the acquired property, Westpac Banking Corporation v Ollis [2007] NSWSC 956 at [58].

Proportionate share?• Why should the trustee get any profit at all?• Shouldn’t fiduciaries have to disgorge all their profits?• This indeed has been the finding in some cases where

fiduciaries have made profitable purchases with a mixture of trust funds and bank loans: Paul A Davies (Australia) Pty Ltd v Davies [1983] 1 NSWLR 440; Australian Postal Corp v Lutak (1991) 21 NSWLR 584.

• However, the general position outside of this type of case appears to be that only a proportionate share of profit will be made available to beneficiaries and specific evidence has to be led regarding the nature of the contributions made by the defaulting trustees before the proportionate approach is displaced: Mavaddat v Lee [2007] WASCA 141.

Tracing mixed funds into appreciating property

• In cases where trustees mix funds and profitably invest the mixture, beneficiaries will ordi narily be entitled to a proportionate share of any gain made by the investment

Re Stillman and Wilson (1956) 15 ABC 68

• Clyne J said at 72 :• I think, though with some hesitation, that where a

trustee has the control of a mixed trust fund belonging to a number of beneficiaries and he purports to withdraw from this fund money on behalf of one of the beneficiaries and then uses this money not on behalf of the beneficiary but for his own purposes, the money so withdrawn should be regarded as that of the beneficiary on whose behalf it purported to be withdrawn. The matter depends upon the intention of the trustee.

Re Global Finance Group Pty Ltd (in liq) (2002) 26 WAR 385

• McLure J said at 424 that there were three reasons for following the trustee's intention in the case before her:

• First, and most importantly, the trust ledger records are reliable … Prima facie, they provide a substantially accurate factual foundation for moulding an appropriate solution to the competing proprietary claims. All payments into and out of the trust account can be tracked. Secondly, the trust account records reflect the trustee's contemporaneous intentions. Thirdly, reliance on the record is consistent with the statutory framework in which the trustee is permitted to mix trust funds coupled with a requirement to account separately for the moneys the subject of different trusts.

Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337 • A clerk working for a firm of solicitors stole

over four million dollars from one of the firm's trust accounts over 13 years.

• The accounts were reliable and accurate and it was clear which beneficiaries had lost money.

• Given the degree of certainty, Debelle J ordered that the funds be distributed as according to their balances.

Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337

• Debelle J, at 373, said:• There are instances where a pro rata distribution is

appropriate. I have already mentioned the case where money has been misappropriated from a trust account but not debited against the ledger of any particular client or clients. In that case, there is no other course available. It is also the only available course where records are not available so that it is impossible to identify the money belonging to each person who has contributed to a common or mixed fund. A typical example is an investment scheme where it is impossible to identify the funds of any particular investor with a particular investment …

Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337

• The pro rata distribution was approved in Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 at 461. I do not understand the reasoning in that case to stand in the path of a distribution according to the balances shown in the trust account ledgers in a case where misappropriations have occurred over as long a period as 13 years. In some cases, it is possible to trace the moneys invested to one or more particular investments but it is not possible to do so in the case of most investors. In that instance, the court will attribute an investment to those whose money can be identified with an investment but distribute the balance of the fund remaining pro rata among the remaining investors: see Australian Securities Commission v Buckley (19967) 7 BPR 15,024 and Russell-Cooke Trust Co v Prentis [2003] 2 All ER 478…. It is clear that the remedy must be tailored to the facts of each individual case. There is no principle of universal application. By contrast with the cases just mentioned, the record-keeping in this case was so complete that the only proper method is to distribute according to those records

Mixed property in the hands of trustees from more than one trust

• Unfortunately, it is not unusual for defaulting trustees to mix funds from more than one trust. In this situation two rules can be applied to apportion whatever property remains between the different beneficial interests traced into the mixed fund.


• The general approach — pari passu For example, if $3000 from Trust A together with $2000 from Trust B were used to purchase 500 shares of equal value, 300 shares would be held in favour of Trust A and 200 shares in favour of Trust B.

Parri passu

• Alternatively, if funds have been taken out of a trust account in breach of trust but only part of those funds taken can be attributed to particular beneficiaries, then the court may attribute that loss to the beneficial interests which can be identified, but then distribute the balance of the remaining funds on a proportionate basis: Australian Securities Commission v Buckley (1996) 7 BPR 15,024; Russell-Cooke Trust Co v Prentis [2003] 2 All ER 478.


• The rule in Clayton’s case It displaces the pari passu rule and states that all beneficial interests in a mixed bank account are subject to a ‘first in, first out’ rule.


• Presume that a trustee mixes $1000 from Trust A with $2000 from Trust B and $3000 from Trust C, in successive days, totalling $6000.

• On the next day the trustee withdraws $2000 from the account, leaving a balance of $4000. Under the rule in Clayton’s case the withdrawal is presumed to come from Trust A’s funds and from Trust B’s funds.

• The remaining funds in the account are therefore said to be traced to Trust B for an amount of $1000, and Trust C for an amount of $3000.


• The rule in Clayton’s case is difficult to apply where the facts concern large estates with complex bank accounts. It also works unfairly against the first victims of a breach of trust, by practi cally eliminating their attempts to trace.


• In Australia it has been found that if there are large numbers of beneficiaries it is better to apply the pari passu rule to prevent injustice: Re Australian Home Finance Pty Ltd [1956] VLR 1.

• More recently, Campbell J overviewed the entire history of the rule in Clayton’s case and decided that it should not be applied in Australia:

Re French Caledonia Travel [2003] NSWSC 1008

• A travel agency which had become insolvent and placed under administration and then liquidation.

• The company had received funds held on trust, but adequate records had not been kept.

• Claims totalled $1.43 million but the trust account held only $97,000. The only other account was a cash deposit account totaling $75,000.

• The liquidator sought directions from the court as to how to distribute the funds.


• In the circumstances, Campbell J found against the application of Clayton’s case as a matter of principle, regardless of whether there was enough information upon which to allocate withdrawals to particular deposits.

• Additionally, Campbell J found that the rule was not appropriate to the situation at hand where money was drawn from the account to pay the expenses of particular travellers, regardless of whether that traveller's moneys had been the first in, last in or somewhere in between.


• In Re Magarey Farlam Lawyers Trust Accounts (No 3), the breaches of trust had occurred over 13 years but records as to trust balances were very accurate. In that case the judge relied on the trust account ledger rather than Clayton’s case to determine what trust monies were still available. Debelle J, at 376–7, doubted the utility of the rule:

• The rule in Clayton’s Case might have a limited utility in respect of appropriating payments into bank accounts as between trustee and beneficiary but it has been held in a number of jurisdictions in Australia to have no utility as between competing beneficiaries whose moneys have been deposited in a mixed fund.

Tracing property into the hands of third parties

• Bona fide purchasers for value without notice of the breach of trust are immune from tracing claims

• However, if a third party recipient has actual or constructive knowledge of the breach of fiduciary duty, or if the recipient is a volunteer, the property may be traced into his or her hands.

Commonwealth Bank of Australia v Saleh [2007] NSWSC 903

• where trust property is transferred to a volunteer who takes without notice, and there is no question of mixing, then the volunteer will hold the property on trust for the rightful beneficiaries;

• where the trust moneys were used to pay off a secured creditor, the trust was not entitled to be subrogated to the rights of the secured creditor who was repaid;

• if the volunteer purchased property with a mixed fund including trust moneys then the beneficiary would be allowed a charge over the property in order to secure repayment of the trust moneys used for the purchase;

• if an asset is purchased with mixed funds and it increases in value, the beneficiary will not be entitled to any proportionate share in that increase in value. In this respect, careful consideration needs to be given to renovations or improvements made upon real property.

Foskett v McKeown [2001] 1 AC 102

• Timothy Murphy was the main person in charge of a development scheme where people could buy plots of land in Algarve in Portugal.

• Under the terms of the scheme people could purchase the land and the proceeds would be held on trust.

• If the land was not transferred to them within two years the money had to be repaid with interest.


• Two hundred and twenty people purchased lots but the lots were never developed.

• Murphy dissipated the funds. • Part of the funds (£20,440) were used to pay

premiums on a life insurance policy. • Premiums were paid in 1986, 1987, 1988, 1989

and 1990. The first two premiums had been paid using Murphy’s own funds. There was a dispute about what money had been used to pay the third premium, but it was clear that the last two premiums had been paid out of the purchasers’ trust.


• The policy provided for a death benefit which was in favour of Murphy’s wife (who received a 1/10th share) and his three children (who received the rest in equal amounts). The right to the death benefit arose after the second premium was paid.

• Murphy killed himself in 1991.

Foskett v McKeown [2001] 1 AC 102• The purchasers claimed that they were entitled to trace

their money through the policy into the sum paid out to the children (they did not pursue the amount paid to Mrs Murphy). They believed they were entitled to a proportionate share of the policy money which was equivalent to two-fifths.

• The majority of the Court of Appeal upheld the purchasers’ claim but limited it to an amount in restitution which was equivalent to the amount of the two premiums together with interest. The beneficiaries were denied a proportionate share of the policy proceeds.

• The majority found no causal link between the misappropriation of the funds and the right to the policy proceeds, as the right to whole-of-life cover arose after the first two premiums, and was not causally related to the misappropriated funds.


• A majority of the House (Lord Browne-Wilkinson, Lord Hoffman and Lord Millet; Lord Steyn and Lord Hope of Craighead dissenting) found that the purchasers money could be traced. The purchasers’ rights were proprietorial and not based on restitution.


• Lord Millett, at AC 137; All ER 129, dismissed the causal arguments raised by the Court of Appeal as follows:

• In my opinion there is no reason to differentiate between the first premium or premiums and later premiums. Such a distinction is not based on any principle. Why should the policy belong to the party who paid the first premium, without which there would have been no policy, rather than to the party who paid the last premium, without which it would normally have lapsed? Moreover, any such distinction would lead to the most capricious results.


• Lord Browne-Wilkinson said at 102:Lord Browne-Wilkinson said at 102:Therefore the critical question is whether the assets now subject to the express trusts of the purchasers trust deed comprise any part of the policy moneys, a question which depends on the rules of tracing. If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no room for any consideration whether, in the circumstances of this particular case, it is in a moral sense ‘equitable’ for the purchasers to be so entitled


• Lord Hoffmann also agreed with the speech of Lord Millett

• Lord Steyn and Lord Hope dissented on the grounds that the children's right to policy moneys arose with the first premium and that there was no link between the misappropriated funds and the children's right to the policy money.

Re Diplock; Diplock v Wintle [1948] Ch 465

• Diplock had created a will giving his executors discretion to distribute large sums to over 100 charities.

• The moneys had been mixed with the charities' own funds or used to improve assets (by making renovations or discharging debts).

• A settlement was reached with the executors but the beneficiaries decided to bring recovery actions against the charitable recipients.

Re Diplock; Diplock v Wintle [1948] Ch 465

• The beneficiaries were allowed to recover sums against charities who still held the funds separately and

• They were entitled to recover a proportionate amount from mixed funds and valuable purchases from the mixed funds

• The other moneys, which had been expended on capital improvements or on debt reduction, were not recoverable, as this would have worked an inquity on the charities.

The rule against subrogation into securities

• Subrogation is an equitable process whereby one person is taken to have received the rights of another without an assignment, because they have reduced that liability and it would be unconscientious not to allow the payer to take up the rights of the recipient.

• Unlike tracing, the beneficiary does not follow his/her own property into the security, but rather is substituted for the existing security holder.

• In cases of tracing, subrogation might allow beneficiaries to stand in the shoes of the mortgagee whose debt was paid with trust moneys

Boscawen v Bajwa [1995] 4 All ER 769

• Moneys were advanced to fund the purchase of property on the condition that the funds were only to be released to fund the completion of the sale and were to be returned should the sale fall through.

• The funds were released prior to sale and were used to reduce a mortgage liability.

• The sale fell through and the moneylender sought to be subrogated to the rights of the mortgagee

Millet LJ

• If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this, the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff.

Millet LJ

• But this is only one of the proprietary remedies which is available to a court of equity. If the plaintiff's money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant's land has been enhanced by the use of the plaintiff's money. And if the plaintiff's money has been used to discharge a mortgage on the defendant's land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff.

Cook v Italiano Family Fruit Company Pty Ltd (in liq) (2010) 276 ALR 349

• Finkelstein J at 369–70, • In my view, the Boscawen approach is to be

preferred to that in Diplock. I would only make a few additional comments in relation to Diplock. First, the reasoning in Diplock should be confined to land and, perhaps, other property of a special nature. Principles regarding specific performance might be relevant by analogy. Thus, if, for example, the subrogation claim related to paying off a debt incurred to fund an investment, the claim would have been allowed in Diplock.


• Second, as Millett LJ said in Boscawen (at 783), in Diplock an order might have been framed to avoid the perceived injustice of forcing a sale of land under a charge. For example, the charities might have been given reasonable opportunity to obtain finance to meet the beneficiaries' claims. This would have put the charities back as close as possible to their original position and prevented them retaining a windfall at the beneficiaries' expense. Third, there is much to be said for the view that Diplock was not intended to create an absolute rule, and should be confined to its peculiar facts: see eg George v Biztole Corporation Pty Ltd (unreported, Supreme Court of Victoria, Ashley J, 26 February 1996). Fourth, in applying Diplock it is important to distinguish between tracing and subrogation. It is undoubtedly the case that a claimant cannot trace into funds which have been paid by a volunteer to discharge a debt - the assets have ended up in the hands of a bona fide, for value and without notice, creditor


• . But it is altogether a different matter whether there remains a right of subrogation against the volunteer. Cases establishing the non-entitlement to tracing are sometimes cited, erroneously in my opinion, for similarly denying a right of subrogation: see for example Re J Leslie Engineers [1976] 2 All ER 85 … Fifth, there is considerable force in the argument that if a volunteer has applied misappropriated funds to discharge a debt, the volunteer should not be in a better position than if he had applied the funds to purchase an asset. In either case, the volunteer's assets have effectively been swollen. This is not to suggest that the circumstances in which subrogation and other equitable remedies are available should be identical.

Heperu Pty Ltd v Belle (2009) 76 NSWLR 230

• A fraudster had misappropriated cheques and deposited them into his wife's accounts.

• Funds were withdrawn from those accounts and used to make mortgage repayments for the wife (amongst other things).

• The victims of the fraud sought to recover the funds from the wife who was innocent of wrongdoing

Heperu Pty Ltd v Belle (2009) 76 NSWLR 230

• the Court of Appeal felt that there were actions in both law and equity to trace the funds into the wife's property to recover whatever value remained in her hands, given her status as a volunteer.

• Allsop JA, at NSWLR 262; ALR 759, giving the judgment of the Court of Appeal, stated that the views of Millett LJ in Boscawen v Bajwa were to be preferred to the views expressed in Re Diplock.

Heperu Pty Ltd v Belle [2011] NSWSC 1151

• Slattery J examined the claims for tracing. During the relevant period a total of $1,744,402.50 was misappropriated. During the same period the total mortgage payments made out of the account totaled $211,040.23.

• Heperu sought to recover the whole amount of these payments on the basis that it could be inferred that this amount was totally used to pay the mortgages.

• Slattery J refused to make such an inference and said that he was bound to use the ordinary rules of tracing to determine which payments were made from the stolen monies to pay the mortgages.

• On that analysis only $118,932.10 could be traced from the stolen funds to the mortgage payments. However, the mortgage payments included amounts for interest as well payments for the principal debt. Slattery J, at [51]–[54], found that Belle should only be liable for the reduced amount of principal debt, not the interest payments

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