Third Party Recovery
Recovering Assets
Where an asset is wrongly taken, it is recoverable under the law of conversion and detinue. These civil wrongs/ torts protects the property rights of the owner.
This is not restitution in the strict sense. The right to recover the asset is a property right which holds good against all third parties, other than those who have a better title.
Where the asset passes under an apparent contract, which is wholly void, or where the transferor has no title, it may be recovered from third parties, including a wholly innocent third parties who has paid for it. In other cases, where there is a defect in the contract, which makes it voidable, rather void.
A voidable contract may be avoided and restitution may be had, unless and until certain things occur. If a third party gives value in good faith without knowledge of the circumstances, it becomes too late to avoid the contract and the third party obtains good title.
The personal right to compensation against the wrongdoer remains. However, in many cases, particularly where there has been wrongdoing, the wrongdoer or innocent party involved will not have the means to compensate the person entitled.
Monies Had and Received
If B makes a payment from A’s funds to C, A is presumptively entitled to recover the monies or the asset, provided the C is not a bona fide purchaser. This requires that the purchaser has acted in good faith (without knowledge of the wrongdoing) and has paid for the goods (not a gift / free transfer).
The principle applies where a person wrongly pays money to which another is entitled, to a third person. The person entitled to the money may claim it as money had and received to his use.
For example, if a company receives money that are properly payable to a receiver after it goes into receivership, it must account to the receiver. Equally, an administrator who receives and distributes money where there is in fact a will, must account to the true owner for it.
The claim for money had and received does not generally hold good against a good faith purchaser for value without knowledge of the issue. If the holder or any of his predecessors have given value in exchange, the monies may not be recovered from them.
Substitution & Limits
If B transfers A’s assets to C, A is presumptively entitled to recover the the asset, provided the C is not a bona fide purchaser. This is common law substitution.
In a claim for substitution, it is necessary to identify the proceeds or the substitute asset. The asset must be one of which the claimant was wrongly deprived and the substituted asset or monies must be the result of a direct or indirect exchange. There must not be mixing.
Apart from this, if a person wrongfully takes another’s property and exchanges it for something else, the owner of the first property does not acquire a direct property right in the exchanged asset. Instead, he has a right to make a claim against the person concerned.
The right at common law, to claim a substitute asset will not hold good as against an innocent third party. The innocent recipient may rely on the defence of change of position, where he has acted to his detriment in reliance. To the extent that it has done so, it is not liable to make restitution.
Equitable Tracing
The common law remedy of substitution is supplemented by the equitable remedy of tracing. This is more flexible, but it is more limited in some respects.
Equitable tracing allows for recovery where a property has been exchanged and turned into something else. Equitable tracing is a proprietary claim. It is a claim to ownership of or an interest in the substituted or traced asset, so that it is available even if the holder has become insolvent.
A person who has received assets or monies, other than as bona fide purchaser, may be liable to a claim for tracing by the true owner, when they represent the substitute of assets which belonged to the true owner.
Limits
The limits of the remedy of tracing are not entirely clear. The claim may be allowed where there is a definite asset retained by the third person and the claimant can maintain an equitable claim to the assets concerned.
There must be a direct connection between the asset held and the original property it represents. Equitable tracing may be asserted against an innocent third party, who has not given value. The claim to tracing will be lost not only to a bona fide purchaser of the legal title to the asset, but also the equitable title.
Where monies are lent, the lender has no property interest in them. In highly exceptional circumstances, a so called “Quistclose” trust may arise. This will only apply where monies are advanced for a definite purpose and are largely held. See the sections on security and lending, where the principle sometimes apply.
Constructive Trust
Tracing is available where the court holds that monies are held for a third party either under a resulting or constructive trust. See separate sections on equitable remedies.
The principles of constructive trusts are flexible and their full extent have not been worked in full out by the courts. Misappropriated or wrongly diverted trust assets or assets held in a fiduciary capacity, are more likely to be the impressed with a constructive trust which continues to apply to their proceeds.
Fiduciaries include company directors, agents and employees who owe fiduciary obligations arising from their position, in respect of assets. The beneficiary of a trust or of an obligation owed by a fiduciary may enjoy greater rights to trace, than the legal owner.
Mixed Funds
The equitable right to trace persists, even though assets are mixed. In contrast, this would be a bar against the common law remedy of substitution.
In the context of bank accounts, it is presumed that the first drawings by the “wrongdoer” reduce the first sums deposited. There are exceptions to the principle. For example, where monies are invested in a general pool, where the investor know that they are mixed from the outset, each ranks equally.
Where a wrongdoer mixes his own assets with trust property, the presumption operated against his interests. If, for example, he invests mixed monies in a spread of shares which rise and fall in value, the innocent party person may claim against the assets which have risen in value.
The claimant has a lien against the remaining parts of the mixed monies or the assets purchased with it. Where a trustee has mixed his own money with those of trust money, he cannot claim to have lost the trust money while leaving his own money.