Third Party Recovery
Cases
Taylor v. Plumer
(1815) 3M & S 562, King’s Bench Division
Lord Ellenborough CJ: The plaintiff in this case is not entitled to recover if the defendant has succeeded in maintaining these propositions in point of law, viz. that the property of a principal entrusted by him to his factor for any special purpose belongs to the principal, notwithstanding any change which that property may have undergone in point of form, so long as such property is capable of being identified, and distinguished from all other property. And, secondly, that all property thus circumstanced is equally recoverable from the assignees of the factor, in the event of his becoming a bankrupt, as it was from the factor himself before his bankruptcy. And, indeed, upon a view of the authorities, and consideration of the arguments, it should seem that if the property in its original state and form was covered with a trust in favour of the principal, no change of that state and form can divest it of such trust, or give the factor, or those who represent him in right, any other more valid claim in respect to it, than they respectively had before such change. An abuse of trust can confer no rights on the party abusing it, nor on those who claim in privity with-him. The argument which has been advanced in favour of the plaintiffs, that the property of the principal continues only so long as the authority of the principal is pursued in respect to the order and disposition of it, and that it ceases when the property is tortiously converted into another form for the use of the factor him self, is mischievious in principle, and supported by no authorities of law. And the position which was held out in argument on the part of the plaintiffs, as being the untenable result of the arguments on the part of the defendant, is no doubt a result deducible from those argu ments: but unless it be a result at variance with the law, the plaintiffs are not on that account entitled to recover. The contention on the part of the defendant was represented by the plain tiff’s counsel as pushed to what he conceived to be an extravagant length, in the defendant’s counsel being obliged to contend, that ‘if A is trusted by B with money to purchase a horse for him, and he purchases a carriage with that money, that B is entitled to the carriage.’ And, indeed, if he be not so entitled, the case on the part of the defendant appears to be hardly sus tainable in argument. It makes no difference in reason or law into what other form, different from the original, the change may have been made, whether it be into that of promissory notes for the security of the money which was produced by the sale of the goods of the principal, as in Scott v. Surman, Willes, 400, or into other merchandize, as in Whitecomb v. Jacob, Salk. 160, for the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascer tainment fail, which is the case when the subject is turned into money, and mixed and con founded in a general mass of the same description. The difficulty which arises in such a case is
a difficulty of fact and not of law, and the dictum that money has no ear-mark must be under stood in the same way; i.e. as predicated only of an undivided and undistinguishable lll&II of current money. But money in a bag, or otherwise kept apart from other money, guineas, or other coin marked (if the fact were so) for the purpose of being distinguished, are so far ear marked as to fall within the rule on this subject, which applies to every other description of per sonal property whilst it remains, (as the property in question did,) in the hands of the factor, or his general legal representatives. He has repossessed himself of that, of which, according to the principles estab lished in the cases I have cited, he never ceased to be the lawful proprietor; and having so done we are of opinion, that the assignees cannot in this action recover that which, if an action were brought against them the assignees by the defendant, they could not have effectually retained against him, inasmuch as it was trust property of the defendant, which, as such, did not pass to them under the commission. If this case had rested on the part of the defendant on any sup posed adoption and ratification on his part of the act of converting the produce of the draft or bank-notes of the defendant into these American certificates, we think, it could not have been well supported on that ground, inasmuch as the defendant, by taking a security by bond and judgment to indemnify himself against the pecuniary loss he had sustained by that very act, must be understood to have disapproved and disallowed that act instead of adopting and con finning it; but upon the other grounds above stated, we are of opinion that the defendant is enti tled to retain the subjects of the present suit, and of course that a nonsuit must be entered.
Trustee of the Property of F.C. Jones and Sons (a firm) v. Jones
[1996]3 WLR 703, Court of Appeal
Millett LJ: … The trustee’s case, as presently formulated, is simplicity itself. The money in court represents the proceeds of the defendant’s successful speculation with the £11,700 which she received from her husband. The £11,700, in turn, was paid to her out of the joint account of two of the partners who were afterwards adjudicated bankrupt. The money was drawn from the joint account after the date of the act of bankruptcy on which the receiving order was made. All this is undisputed. But, says the trustee, the money in the joint account had already vested in him, for under section 37 of the Bankruptcy Act 1914 his title to the assets of the bankrupts related back to the date of the act of bankruptcy. Accordingly the defendant never acquired any title to the money. The money which she received from her husband belonged to the trustee, and the money in court represents the proceeds of her successful speculation with his money.
Counsel for the defendant concedes that the trustee’s claim is bound to succeed in relation to the original sum of £11,700 with interest thereon. But, he submitted, the trustee cannot recover the profits which the defendant made by the use of the money because he cannot maintain a proprietary claim in equity, and he cannot maintain a proprietary claim in equity because he cannot ·establish the existence of a fiduciary relationship between the defendant and the trustee.
Counsel for the defendant submitted th,at all claims by a trustee or liquidator to recover payments to third parties, whether as fraudulc!nt preferences (which are voidable) or as dispositions by a company made after the commencement of the winding up (which are void), must be made by way of an action for money had and received; that this, being an action at law, is a personal claim; that it does not matter whether the transaction which is impugned was void or merely voidable; and that, in the absence of a constructive trust or fiduciary relationship which would justify the intervention of equity, the trustee cannot recover the proceeds of the profitable investment by the recipient of the money which he received.
The judge thought tha_t the defendant was a constructive trustee. He said:
‘… the trustee really has no problem in establishing a fiduciary relationship. In my view where, as here (due to the effect of the doctrine of relation back), A pays B’s money to C, B retains the beneficial title· to the money and C becomes a bare trustee (see Chase Manhattan Bank v. lsrael-Bri1ish Bank [1981] I Ch. 105, 119.’
Founding himself on that reasoning, the deputy judge applied the equitable rules of tracing. It is, however, in my view plain that the defendant did not receive the mone)’ in a fiduciary capacity and that she did not become a constructive trustee. The deputy judge’s conclusion pre supposes that A, who in this case is the bankrupt, had a legal title to transfer. In the present case, however, the bankrupts had been divested of all title by statute. Mr F. W. J. Jones had no
title at all in law or equity to the money in the joint account at Midland Bank, and could con fer no title on the defendant. While, however, I accept the submissions of counsel for the defen dant that she did not become a constructive trustee, I do not accept the proposition that the trustee in bankruptcy is unable to recover the profits which the defendant made by the use of his money unless she can be shown to have received it in one or other of the two capacities men tioned; nor do I consider it necessary for him to invoke the assistance of equity in order to maintain his claim. In short, I do not accept the main submission of counsel that the only action at law which was available to the trustee was an action against the defendant for money had and received.
It is, in my view, unhelpful to categorize the payment of the £11,700 to the defendant as either ‘void’ or ‘voidable’. Neither term is strictly accurate. In order to see why this is so it is necessary to consider the effect of the doctrine of relation back under the old bankruptcy law.
Accordingly, as from the date of the act of bankruptcy the money in the bankrupts’ joint account at tile Midland Bank belonged to the trustee. The account holders had no title to it at law or in equity. The cheques which they drew in favour of the defendant were not ‘void’ or ‘voidable’ but, in the events which happened, they were incapable of passing any legal or equi table title. They were not, however, without legal effect, for the bank honoured them. The result was to affect the identity of the debtor but not the creditor and to put the defendant in possession of funds to which she had no title. What is the result? If the cheques had passed the legal title to the defendant but not the bene-
ficial ownership, she would have received the money as constructive trustee and be liable toa proprietary restitutionary claim in equity (sometimes, though inaccurately, described asa trac ing claim). The defendant would have been obliged, not merely to account for the £11,700 which she had received, but to hand over the £11,700 in specie to the trustee. Her position would have been no different from that of an express trustee who held the money in trust for the trustee; or from that of Mr Reid in Attorney-General fer Hong Kong v. Reid [1994)1 AC 324, whose liability to account for the profits which he made from investinga bribe was based on his obligation to pay it over to his principal as soon as he received it. The existence of any such obligation has been disputed by commentators, but no one disputes that, if the obligation exists, it carries with it the duty to pay over or account for any profits made by the use of the money.
But the defendant was not a constructive trustee. She had no legal title to the money. She had no title to it at all. She was merely in possession, that is to say, ina position to deal with it even though it did not belong to her. Counsel for the defendant says that it follows that she can not be made liable to any kind of proprietary claim.
The present case is entirely different. The defendant had no title at all, at law or in equity. If she became bankrupt, the money would not vest in her trustee. But this would not be because it was trust property: it would be because it was not her property at all. If she made a profit, how could she have any claim to the profit made by the use of someone else’s money? ln my judgment she could not. If she were to retain the profit made by the use of the trustee’s money, then, in the language _ofthe modem law of restitution, she would be unjustly enriched at the expense of the trustee. If she werea constructive trustee of th moneya, court of equity, as a court of conscience, would say that it was unconscionable for her to lay claim to the profit made by the use of her beneficiary’smoney. It would, however, be a mistake to suppose that the common law courts disregarded considerations of conscience. Lord Mansfield CJ, who did much to develop the early law of restitution at common law, founded it firmly on the basis of good conscience and unjust enrichment. It would, in my judg ment, be absurd ifa person with no title at all were in a stronger position to resista proprietary claim by the true owner than one with a bare legal title. In the present case equity has no role toplay. Thetrustee must bring his claim at common law. It follows that, ifhe has to trace his money, he must rely on common law tracing rules, and that he has no proprietary remedy. But it does not follow that he has no proprietary claim. His claim is exclusively proprietary. He claims the money because it belongs to him at law or represents profits made by the use of money which belonged to him at law.
The trustee submits that he has no need to trace, since the facts are clear and undisputed. The defendant did riot mix the money with her own. The trustee’s money remained identifi able as such throughout. But of course he does have to trace it in order to establish that the money which he claims represents his money. Counsel for the defendant acknowledges that the trustee can successfully trace his money into her account at Raphaels, for his concession in
respect of the £11,700 acknowledges this. In my judgment the concession that the trustee can trace the money at common law is rightly made. There are nofactual difficulties of the kind which proved fatal in this court to the common law claim in Agip (Afri.a) Lid v. Jackson [1991] Ch.547. It is not necessary to trace the passage of the money through the clearing system or the London potato futures market. The money which the defendant paid into her account with the commodity brokers represented the proceeds of cheques which she received from her husband. Those cheques represented money in the bankrupts’ joint account at the Midland Bank which belonged to the trustee.In Lip/tin Gorman v. Karpnale Ltd [1991] 2 AC 548, 573 Lord Goff of Chieveley held that the plaintiffs could trace or follow their ‘property into its product’ for this ‘involves a decision by the owner of the original property to assert title to the product in place of his original prop erty’. In that case the original property was the plaintiffs’ chose in action, a debt owed by the bank to the plaintiffs. Lord Goff held, at 574, that the plaintiffs could:’… trace their property at common law in that chose in action, or in any part of it, into its product, i.e. cash drawn by Cass from their client account at the bank.’
Accordingly, the trustee can follow the money in the joint account at Midland Bank, which had been vested by statute in him, into the proceeds of the three cheques which the defendant received from her husband. The trustee does not need to follow the 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 the cheques into their proceeds.
In Agip (Africa) Ltd v.Jackson [1990] Ch. 265,285 I said that the ability of the common law to trace an asset into a changed form in the same hands was established in Taylor v. Plumer (1815) 3M. & S. 562. Lord Ellenborough CJ in that case had said, at 575:
‘The product of or substitute for the original thing still follows the nature of the thing itself as long as it can be ascertained to be such and the right only ceases when the means of ascertainment fails, whictl. is the case when the subject is turned into money and con fined within the general mass of the same description.’
In this it appears that I fell into a common error, for it has since been convincingly demon strated that, although Taylor v. Plumer was decided by a common law court, the court was in fact applying the rules of equity: see Lionel Smith: ‘Tracing in Taylor v. Plumer. Equity in the King’s Bench’ (1995) LMCLQ240.
But this is no reason for concluding that the common law does not recognize claims to sub stitute assets or their products. Such claims were upheld by this court in Banque Beige Pour l’Etranger v. Hambrouck [1921] I KB 321 and by the House of Lords in Lipltin Gorman v. Karpnale Ltd [1991] 2 AC 548. It has been suggested by commentators that these cases are undermined by their misunderstanding of Taylor v. Plumer, 3M. & S. 562, but that is not how the English doctrine of stare decisis operates. It would be more consistent with that doctrine to say that, in recognizing claims to substituted assets, equity must be taken to have followed the law, even though the law was not declared until later. Lord Ellenborough CJ gave no indica tion that, in following assets into their exchange products, equity had adopted a rule which was peculiar to itself or which went further than the common law.
There is no merit in having distinct and differing tracing rules at law and in equity, given that tracing is neither a right nor a remedy but merely the process by which the plaintiff estab lishes what has happened to his property and makes good his claim that the assets which he claims can properly be regarded as representing his property. The fact that there are different tracing rules at lawand in equity is unfortunate though probably inevitable, but unnecessary differences should not be created where they are not required by the different nature of legal and equitable doctrines and remedies. There is, in my view, even less merit in the present rule which precludes the invocation of the equitable tracing rules to support a common law claim; until that rule is swept away unnecessary obstacles to the development of a rational and coher ent law of restitution will remain.
Given tliat the trustee can tr!!Ce his money at Midland Bank into the money in the defen dant’s account with the commodity brokers, can he successfully assert a claim to that part of the money which represents the profit made by the use of his money? I have no doubt that, in the particular circumstances of this case, he can. There is no need to trace through the dealings on the London potato futures market. If the defendant, as the nominal account holder, had any entitlement to.demand payment from the brokers, this was because of the terms of the contract which she made with them. Under the terms of that contract it is reasonable to infer that the brokers were authorized to deal in potato futures on her account, to debit her account with losses and to credit it with profits, and to pay her only the balance standing to her account. It is, in my opinion, impossible to separate the chose in action constituted by the deposit of the trustee’s money on those terms from the terms upon which it was deposited. The chose in action, which was vested in the defendant’s name but which in reality belonged to the trustee, was nota right to payment from the brokers of the original amount deposited buta right to claim the balance, whether greater or less than the amount deposited; and it is to that chose in action that the trustee now Jays claim. Given, then, that the trustee has established his legal claim to the £11,700 and the profits
earned by the use of his money, and has located the money, first, in the defendant’s account with the commodity brokers and, later, in the defendant’s account at Raphaels,I am satisfied that the common law has adequate remedies to enable him to recover his property. He did not need to sue the defendant; and he did not do so. He was entitled to bring an action for debt against Raphaels and obtain an order for payment. When he threatened to do so, Raphaels inter pleaded, and the issue between the trustee and the defendant was which of them could givea good receipt to Raphaels. That depended upon which of them had the legal title to the chose in action. The money now being in court, the court can grant an appropriate declaration and make an order for payment.
In my judgment the trustee was entitled at law to the money in the joint account of the bankrupts at Midland Bank, which had vested in him by statute. He was similarly entitled to the bal ance of the money in the defendant’s account with the commodity brokers, and the fact that it included profits made by the use of that money is immaterial. He was similarly entitled to the money in the defendant’s account at Raphaels and able to give them a good receipt for the money. The defendant never had any interest, legal or equitable, in any of those moneys. The trustee is plainly entitled to the money in court and the judge was right to order that it be paid out to him. I would dismiss the appeal
Sinclair v. Brougham
[1914] AC 398, House of Lords
The Birkbeck Permanent Building Society was acting ultra vires by carrying on a banking business. In an application by the liquidator, on the winding up of the society, one of the two major questions that arose was whether the depositors could trace in equity into the funds of the society. The House of Lords held that the depositors and shareholders of the society, as innocent parties, were entitled to trace their payments into the mixed fund and to claim a proportionate share of that mixed fund.
Viscount Haldane LC (with whom Lord Atkinson concurred): [After rejecting the depositors’ action for money had and received (see above, S) his Lordship continued:] [T]he depositors in the pres ent case will not succeed unless they are able to trace their money into the hands of the society or its agents as actually existing assets. The question is whether they are able to establish enough to succeed upon this footing. Their claim cannot be in personam and must be in rem, a claim to fol low and recover property with which, in equity at all events, they had never really paned.
[After considering common law tracing and regarding it as unavailable where, as here, a relation ship of debtor and creditor had arisen, Viscount Haldane went on to examine the approach in epity:] The Court of Chancery could and would declare that there was what it called a charge on
the banker’s debt to the person whose money had been paid into the latter’s bank account in favour of the person whose money it really was. And, as Jessel MR pointed out in Hallet’s Case,1 this equity was not confined to cases of trust in the strict sense, but applied at all events to every case where there was a fiduciary relationship. It was, as I think, merely an additional right, which could be enforced by the Court of Chancery in the exercise of its auxiliary jurisdiction, wherever money was held to belong in equity to the plaintiff. If so … I see no reason why the remedy explained by Jessel MR in Halle11’s Case, of declaring a charge on the investment in a debt due from bankers on balance, or on any mass of money or securities with which the plaintiff’s money had been mixed, should not apply in the case of a transaction that is ultra vires. The property was never converted into a debt, in equity at all events, and there has been throughout a resulting trust, not of an active character, but sufficient, in my opinion, to bring the transaction within the general principle.
In the present case the investment was not made in breach of a fiduciary duty on the part of the society, and it was actually made with the authority of the depositors. What was a material point in Hallett’s Case, therefore, does not occur here. No doubt it was ultra vires of the soci ety to undertake to repay the money. But it was none the less intended that in consideration of giving such an undertaking the society should be entitled to deal with it freely as its own. The consideration failed and the depositors had the right to follow the money so far as invalidly bor rowed into the assets in which it had been invested, whether these assets were mere debts due to the society or ordinary securities, but that was their only right.
As to the part of the assets which was acquired with money paid by the shareholders, the case appears to me to be free from difficulty. The mo ey paid to the society by the shareholders was paid as the consideration for the shares which.were issued to them. That money, therefore, beyond question, became the money of the society. A large part of it has probably been applied ultra vires in the acquisition of the assets of the ‘banking business. These assets can accordingly be claimed only by the society itself as belonging to it, and the shareholders have no direct title to them.
The total mass of assets which the liquidato has to distribute thus represents in part money
which the depositors are entitled to follow and in part money which the society is entitled to follow. If the present value of these assets was equivalent to the total amount of such money, there would be no difficulty; the assets would be apportioned according to the sources from which they came. Does it make a difference that the value has shrunk so that the two sets of claimants cannot be pai in full? I do not think so. The position of the society is different from that of the agent in Hallett’s Case. The depositors have no alternative right in this case to dis affirm the transaction to the extent of claiming on the footing that their money has been applied in breach of trust. All they can do is to adopt the dealings with the money that they handed over, under circumstances in which it never really ceased to be theirs, and claim the part of the mass of assets which represents it as belonging to them in equity.
There has been no breach of fiduciary duty on the part of the society, and it appears to me that this circumstance is material in distinguishing the consequences here from those which fol lowed in Hallett’s Case on the footing that there the agent could not gain, at the expense of the principal, an advantage for himself or his general creditors by in effect setting up a breach of duty. The depositors can, in my opinion, only claim the depreciated assets which represent
their money, and nothing more. It follows that the principle to be adopted in the distribution must be apportionment on the footing that depreciation and loss are to be borne pro rata. I am, of course, assuming in saying this that specific tracing is not now possible. What is there must be apportioned accordingly among those whose money it represents, and the question of how the apportionment should be made is one of fact. In the present case the working out of a proper apportionment based on the principle of tracing not only would involve immense labour but would be unlikely to end in any reliable result. The records necessary for tracing the dealings with the funds do not exist. We have therefore, treating the question as one of presumption of fact, to give such a direction to the liquidator as is calculated to bring about a result consistent with the principles already laid down.
I think that this direction should be that, without disturbing anything that has up to now been settled or agreed, he should apportion the entirety of the remaining assets (including mortgages and loans) between the depositors and the shareholders in proportion to the amounts paid by the depositors and the shareholders respectively. In this way I am of opinion that the near est approach praticable to substantial justice will be done. I think that this is the utmost extent to which, consistently with well-established principles, a Court of justice can go in compelling the society to restore that of which it has bemme possessed through its ultra vires transactions.
Imove that the judgments of the Courts below be varied so as to give effect to a declaration
that, subject to matters which have already been settled by the consent of the parties and subject to any application which may be made by any individual depositor or shareholder witha view of tracing his own money into any particular asset, and subject to the payment of all proper costs, charges, and expenses, the liquidator ought to proceed in distributing the remaining assets of the society between the depositors and the unadvanced shareholders on the principle of distributing them pari passu in proportion to the amounts properly credited to them respec tively in the books of the society in respect of their advances at the date of the commencement of the winding-up, and that the case be remitted to the Court of first instance to apply this principle….
Lord Dunedin: ,Neither party is here in any fiduciary position to the other. It is a mere question of evidence. What has happened is truly this. The directors of the society have taken the moneys of the shareholders which they had a right to receive, and the moneys of the,depos itors which they had not, and mixed them so that they cannot be discriminated from each other, and have put them, so to speak, in the society’s strong-box, where the mixed mass is found by the liquidator There being no direct evidence, the only equitable means is to let each party bear the shrinkage proportionately to the amount originally contributed, and this is the judg ment ofmy noble and learned friend on the woolsack, in which I concur….
Lord Parker of Waddington: … The case presents itself in this way. Here is a mass of assets arising in the course of an ultra vires business carried on by the directors and agents of the society. There are, on the other hand, liabilities, how or for what purpose incurred is not in evidence. No one claims any interest in the assets except the ultra vircs lenders, the members of the society and the creditors, in respect of the liabilities to which I have referred. The ultra vires lenders and the members are willing that these liabilities and the msts of the liquidation, which are in effect costs of administering the fund, shall be first paid. If this is done, what is left may be taken to represent in part the moneys of the ultra vires lenders and in part the mon eys of the society wrongfully employed in the business. The equities of the ultra vires lenders and of the society are equal, and it follows that the remainder of the assets ought to be divided between the ultra vires lenders and the society rateably, according to the capital amount mn tributed by such lenders and the society respectively ..
Lord Sumner: My Lords, I agree, without recapitulating reasons, that the principle on which Hallett’s Case is founded justifies an order allowing the appellants to follow the assets, not merely to the verge of actual identification, but even somewhat further in a case like the present, where after a process of exclusion only two classes or groups of persons, having equal claims, are left in and all superior claims have been eliminated. Tracing in a sense it is not, for we know that the money coming from A went into one security and that coming from B into another, and that the two securities did not probably depreciate exactly in the same percentage, and we know further that no one will ever know any more. Still I think this well within the ‘trac ing’ equity, and that among persons making up these two groups the principle of rateable division of the assets is sound.
Re Diplock
[1948]Ch. 465, Court of Appeal
Lord Greene MR It will be seen that the only claims which in our view can be supported on the basis of the so-called equitable doctrine of tracing are of a strictly limited character.
We shall endeavour to explain our views as to the basis on which the doctrine must now be taken to rest. In this ronnexion we regard the case of Sinclair v. Brougham as of fundamental importance. That decision, in our view, did not so much extend as explain the doctrine of Hallett’s case, which now must be regarded not, so to speak, as a genus but as a species in a genus where equity works on the same basic principles but selects what on the particular case is the equitable method of applying them in practice. It will be found that our views as to the meaning and effect of the speeches in Sinclair v. Brougham differ from those expressed by Wynn-Parry J. We should, however, be lacking in candour rather than showing respect if we refrained from saying that we find the opinions in Sinclair v. Brougham in many respects not only difficult to follow but difficult to reconcile with one another.
Before passing to a consideration of the case of Sinclair v. Brougham we may usefully make some observations of our own as to the distinction between the attitude of the rommon law and that of equity to these questions.
The common law approached them in a strictly materialistic way. It could only appreciate what might almost be called the ‘physical’ identity of one thing with another. It could treat a person’s money as identifiable so long as it had not become mixed with other money. lt could treat as identifiable with the money other kinds of property acquired by means of it, provided that there was no admixture of other money. It is noticeable that in this latter case the common law did not.base itself on any known theory of tracing such as that adopted in equity. It pro ceeded on the basis that the unauthorized act of purchasing was one capable of ratification by the owner of the money (see per Lord Parker in Sinclair v. Brougham.)
Equity adopted a more metaphysical approach. It found no difficulty in regarding a com posite fund as an amalgam constituted by the mixture of two or more funds each of which could be regarded as having, for certain purposes, a continued separate existence. Putting it in another way, equity regarded the amalgam as capable, in proper circumstances, of being resolved into its component parts.
Adapting, for the sake of amtrast, the phraseology which we have used in relation to the common law, it was the 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. Equity, so to speak, is able to draw up a balance sheet on the right-hand side: of which appears the composite fund and on its left-hand side the two or more funds of which it is to be
deemed to be made up.
Regarded as a pure piece of machinery for the purpose of tracing money into a mixed fund or into property acquired by means of a mixed fund, a declaration of charge might be thought to be a suitable means of dealing with any case where one person has, without lepl title, acquired some benefit by the use of the money of another-in other words, any cases of what is often called ‘unjust enrichment.’ The opinion of Lord Dunedin in Sinc/ai,v. Brougham appears to us to come very nearly to this, for he appears to treat the equitable remedy as applicable in any case where ,i superfluity, expressed or capable of being expressed in terms of money, is found to exist. Such a view would dispense with the necessity of establishing as a starting point the existence of a fiduciary or quasi-fiduciary relationship or of a continuing right of property recognized in equity. We may say at once that, apart from the possible case of Lord Dunedin’s speech, we cannot find that any principle so wide in its operation is to be found enunciated in English law Theequitable remedies pre-suppose 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, on the facts of any individual case, such continued existence is not estab lished, equity is as helpless as the common law itself. If the fund, mixed or,unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, cif course, award damages but specific relief would be out of the question. It is, therefore, a nec essary matter of consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief.
The first question which appears to us to fall for decision on this part of the present appeals may, we think, be thus formulated: Did the power of equity to treat Diplock ‘money’ as recover able from the charity, which undoubtedly existed.down to the moment when the cheque was paid by the bank on which it was drawn, cease the moment that the ‘money’ by the process of ‘mix ture’ came to be represented by an accretion to or an enlargement of the chose in action consist ing of a debt already owing to the charity by its own bankers? Wynn-Parry J, in effect, decided that it did. His reason for taking this view, shortly stated, was as follows: The principle applica ble was to be extracted from the decision in Hal/m’s case and that principle was in no way extended by the decision in Sinclair v. Brougham. The principle can operate only in cases where the mixing takes place in breach of a trust, actual or constructive, or in breach of some other fidu ciary relationship and in proceedings against the trustee or fiduciary agent: here the mixing was not of this charac;ter, since it was effected by an innocent volunteer: there is no ground on which, according to principle, the conscience of such a volunteer can be held in equity to be precluded frorn setting up a title adverse to the claim: in every case, therefore, where a ‘mixture’ has been carried out by the charity, the claim, whether it be against a mixed monetary fund or against investments made by means of such a mixed fund, must fail in limine.
Now we may say at once that this view of the inability of equity to deal with the case of the volunteer appears to us, with all respect to Wynn-Parry J to be in conflict with the principles expounded, particularly by Lord Parker, in Sinclair v. Brougham [W]e may conveniently
summarize what we consider to be the effect of [Lord Parker’s observations] as follows: Where an innocent volunteer (as distinct from a purchaser for value without notice) mixes ‘money’ of his own with ‘money’ which in equity belongs to another person, or is found in possession of such a mixture, although that other person cannot claim a charge on the mass superior to the claim of the volunteer he is entitled, nevertheless, to a charge ranking pari passu with the claim of the volunteer. And Lord Parker’s reasons for taking this view appear to have been on the fol lowing lines: Equity regards the rights of the equitable owner as being ‘in effect rights of prop erty’ though not recognized as such by the common law. Just as a volunteer is not allowed by equity in the case, e.g., of a conveyance of the legal estate in land, to set up his legal title adversely to the claim of a person having an equitable interest in the land, so in the case of a mixed fund of money the volunteer must gi\’e such recognition as equity considers him in con science (as a volunteer) bound to give to the interest of the equitable owner of the money which has been mixed with the volunteer’s own. But this burden on the conscience of the volunteer is not such as to compel him to treat the claim of the equitable owner as paramount. That would be to treat the volunteer as strictly as if he himself stood in a fiduciary relationship to the equi table owner which ex hypothesi he does not. The volunteer is under no greater duty of conscience to recognize the interest of the equitable owner than that which lies upon a pcnon hav ing an equitable interest in one of two trust funds of ‘money’ which have become mixed towards the equitable owner of the other. Such a person is not in conscience bound to give precedence to the equitable owner of the other of the two funds.
We may enlarge upon the implications which appear to us to be contained in Lord Parker’s rC)ISOning. First of all, it appears to us to be wrong to treat the principle which underlies Hallett’s case as coming into operation only where the person who does the mixing is not only in a fiduciary position but is also a party to the tracing action. If he is a party to the action he is,
of course, precluded from setting up a case inconsistent with the obligations of his fiduciary position. But supposing that he is not a party? The result cannot surely depend on what equity would or would not have allowed him to say ifhe had been a party. Suppose that the sole trustee of (say) five separate trusts draws 100/. out of each of the trust banking accounts, pays the resulting 500/. into an account which he opens in his own name, draws a cheque for 500/. on that account and gives it as a present to his son. A claim by the five sets of beneficiaries to fol-· low the money of their respective trusts would be a claim against the son. He would stand in no fiduciary relationship to any of them. We recoil from the conclusion that all five beneficia ries would be dismissed empty handed by a court of equity and the son left to enjoy what in equity was originally their money. Yet that is the conclusion to which the reasoning of the learned judge would lead us. Lord Parker’s reasoning, on the other hand, seems to us to lead to the conclusion that each set of beneficiaries could set up its equitable interest which would pre vail against the bare legal title of the son as a volunteer and that they would be entitled to share pari passu in so much of the fund or its proceeds as remained identifiable.
An even more striking example was admitted by [Counsel for the charities] to be the result of his argument, and he vigorously maintained that it followed inevitably from the principles of equity involved. If a fiduciary agent takes cash belonging to his principal and gives it to his son, who takes it innocently, then so long as the son keeps it unmixed with other cash in one trouser pocket, the principal can follow it and claim it back. Once, however, the son, being under no fiduciary duty to the principal, transfers it to his other trouser pocket in which there are repos ing a coin or two of his own of the same denomination, the son, by a sort of process of accre tion, acquires an indefeasible title to what the moment before the transfer he could not have claimed as his own. This result appears to us to stultify the beneficent powers of equity to pro tect and enforce what it recognizes as equitable rights of property which subsist until they are destroyed by the operation of a purchase for value without notice.
The error into which, we respectfully susgest, the learned judge has fallen is in thinking that what, in Hullett ‘s case, was only the method (there appropriate) of bringing a much wider-based principle of equity into operation-viz., the methcxl by which a fiduciary agent, who has him self wrongfully mixed the funds, is prohibited from asserting a breach of his duty-is an ele ment which must necessarily be present before equity can afford protection to the equitable rights which it has brought into existence. We are not prepared to see the arm of equity thus shortened.
It is now time to examine in some detail the case of Sinclair v. Brougham … like Lord Parker, Lord Haldane bases the remedy available in equity upon a right of prop erty recognized by equity as vested in the plaintiff throughout, not lost by payment into a bank ing account, nor by the mixture of moneys nor by merger in a mass of assets. In all these cases the equitable remedy by way of declaration of charge is available.
It is to be observed that neither Lord Parker nor Lord Haldane suggests that the equitable remedy extends to cover all cases where A becomes possessed of money belonging to B, a view which Lord Dunedin seemed inclined to accept if he did not actually do so. Lord Parker and Lord Haldane both predicate the existence of a right of property recognized by equity which depends upon there having existed at some stage a fiduciary relationship of some kind (though not necessarily a positive duty of trusteeship) sufficient to give rise to the equitable right of property. Exactly what relationships arc sufficient to bring such an equitable right into exist ence for the purposes of the rule which we are considering is a matter which has,not been pre cisely laid down. Certain relationships are clearly included, e.g., trustee (actual or constructive) and ccstui que trust; and ‘fiduciary’ relationships such as that of principal and agent. Sinclair v. Brougham itself affords another example. There, a sufficient fiduciary relationship was found to exist between the depositors and the directors by reason of the fact that the purposes for which the depositors had handed their money to the directors were by law incapable of fulfilment.
We have now to consider how the principles which we have outlined are to be applied to the facts of the individual cases which are before us. We deal first of all with what appear to be the most important claims from the point of view of amount. They are cases in which the money received from the Diplock executors was used in the execution of works upon land or buildings already belonging, to the charities. The appellants claim in each case declarations of charge on land of the charity in respect of these amounts. …..Where the contribution of a volunteer to a mixed fund or the acquisition of what we may call a ‘mixed asset’ is in the form of money, it is, as we hope to have shown, inequitable for him to claim the whole fund or the whole asset. The equitable charge given to the other claimant in respect of the money contributed by him results merely in the division of the mixed fund between the two of them or the reduction of the asset by sale to its original components, i.e., money which is then divisible in the same manner. The volunteer gets back what he put in, i.e., money. On this basis, if a charity had used a mi ed fund, consisting in part of its own money and in part of Diplock money, in the acquisition of property, whether (for example) land or stock, the application of the equitable remedy would have presented no particular difficulty. The Diplock money and the charity money could each have been traced. A charge enforced by sale and distribution would have been effective as well as fair to both parties. The charity would not, as the result of the mixture, have been deprived of anything that it had before.
In the present cases, however, the charities have used the Diplock money, not in combina tion with money of their own to acquire new assets, but in the alteration and improvement of assets which they already owned. The altered and improved asset owes its existence, therefore, to a combination of land belonging to the charity and money belonging to the Diplock estate. The question whether tracing is possible and if so to what extent, and also the question whether an effective remedy by way of declaration of charge can be granted consistently with an equi table treatment of the charity as an innocent volunteer, present quite different problems from those arising in the simple case above stated. In the case of the purchase of an asset out of a mixed fund, both categories of money are, as we have said, necessarily present throughout the existence of the asset in an identifiable form. In the case of adaptation of property of the vol unteer by means of trust money, it by no means necessarily follows that the money can be said to be present in the adapted property. The beneficial owner of the trust money seeks to follow and recover that money and claims to use the machinery of a charge on the adapted property in order to enable him to do so. But in the first place the money may not be capable of being followed. In every true sense, the money may have disappeared. A simple example suggests itself. The owner of a house who, as an innocent volunteer, has trust money in his hands given to him by a trustee uses that money in making an alteration to his house so as to fit it better to his own personal needs. The result may add not one penny to the value of the house. Indeed,only that part of it which was altered or reconstructed or on which a building has been erected by means ofDiplock money? If the latter, the result may well be that the property, both in its original state and as altered or improved, will, when taken in isolation, have little or no value. What would be the value of a building in the middle of Guy’s hospital without any means of access through other parts of the hospital property? If, on the other hand, the charge is to be on the whole of the charity land, it might well be thought an extravagant result if the Diplock estate, because Diplock money had been used to reconstruct a corner of it, were to be entitled to a charge on the entirety.
But it is n t merely a question oflocating and identifying the Diplock money. The result of a declaration of charge is to disentangle trust money and enable it to be withdrawn in the shape of money from the complex in which it has become involved. This can only be done by sale under the charge. But the equitable owner of the trust money must in this process submit to equality of treatment with the innocent volunteer. The latter too, is entitled to disentangle his money and to withdraw it from the complex. Where the complex originates in money on both sides there is no difficulty and no inequity. Each is entitled to a charge. But if what the volun teer has contributed is not money but other property of his own such as land, what then? You cannot have a charge for land. You can, it is true, have a charge for the value of land, an entirely different thing. Is it equitable to compel the innocent volunteer to take a charge merely for the value of the land when what he has contributed is the land itself? In other words, can equity, by the machinery of a charge, give to the innocent volunteer that which he has contributed so as to place him in a position comparable with that of the owner of the trust fund? In our opin ion it cannot.
In the absence of authority to the contrary our conclusion is that as regards the Diplock money used in these cases it cannot be traced in any true sense; and, further, that even if this were not so, the only remedy available to’equity, viz., that of a declaration of charge would not produce an equitable result and is inapplicable accordingly.
In the case of Dr Barnardo’s Homes … , the case presented to us as we understood it was limited to a claim to trace the sum of 3,000/. granted by the executors and paid into the char ity’s general current account on December 14, 1936, into a sum of 40,0001. 2¾ per cent. Funding Loan purchased for 39,341/. 13s. 9d. on December 23, 1936, and paid for by a cheque drawn on the same account and cleared on December 24. The precise manner in which the entries in the bank pass book ought to be interpreted is not, we think, entirely clear, but for the purpose of explaining the principle which we consider would be applicable we start with the position at the close of business on December 14, 1936. The position then was that the credit balance of 49,771/. 4s. lid. represented, as to 3,000/., Diplock money, and as to the remainder, namely, 46,711/. 4s. l ld. charity money.
If the whole of this charity money is treated (as for the purpose of our explanation we are treating it) as having been paid in before the Diplock 3,000/. was paid in, it would follow, if the principle of Clayton’s case were applicable as between the claimants and the charity, that the first 46,771/. 4s. l ld. drawn out would be charity money. Now, as we have said, the cheque for 39,341/. 13s. 9d. was cleared and debited to the account on December 24. Meanwhile a number of withdrawals had taken place, namely:
the alteration may well lower its value; for the alteration, though convenient to the owner, may be highly inconvenient in the eyes of a purchaser. ….777
The above result would only follow if Clayton’s case applies. It might be suggested that the corollary of treating two claimants on a mixed fund as interested rateably should be that with drawals out of the fund ought to be attributed rateably to the interests of both claimants. But in the’ case of an active banking account this would lead to the greatest difficulty and complica tion in practice and might in many cases raise que tions incapable of solution. What then is to be done? In our opinion, the same rule as that applied in Clayton’s case should be applied. This is really a rule of convenience based upon so-called presumed intention….
ThReoyal Sailors Orphan Girls’ School and Home … received a grant of 2,000/. sent to them on March 20, 1937, and paid it into their current account. By a contract dated March 24, 1937, they contracted to purchase a sum of 1,943/. 18s. Sd. 3½ per cent War Stock. This stock costing (with expenses) the sum of 2,000/. was paid for by cheque on the account on April 6, 1937. It is admitted in para. 5 of the defence that,this 2,000/. was the 2,000/. received from the Diplock executors.
… [W]c think that, for the purposes of the equitable doctrine, this 2,000/. and any investment, shown to represent it must be regarded as belonging to the Diplock estate. But there is a fur ther complication, since it is argued that there is no investment which can in any true sense be said to represent the 2,000/. of Diplock money. At the date of the purchase of the War Stock the charity already owned 9,747/. ]Os. 2d. like stock. Both sums of stock were uncertified inscribed stock, and according to the method of accounting adopted by the Bank of England, the 1,943/. 18s. Sd. was added to the existing holding. This, by itself, would not, in our opin ion, affect the power of equity to trace the Diplock money and secure its return to the estate in the shape of a proportionate part of the total holding. Unlike the case already discussed, where the Diplock money was expended in works on charity land, no injustice would be done to the charity as volunteers by carrying out the necessary process of dissection. ‘
But there are further complications. Subsequently to the addition of the 1,943/. 18s. 5d. to the existing holding, two further sums of stock amounting respectively to 50/. 6s. 6d. and 47/. IOs. 9d. were purchased by the charity and these sums it would be entitled to have taken into account on a division of the holding. So far, still, there is no difficulty. But in addition to pur chases, certain sales took place amounting to 3,509/. I ls. 4d., t e purchase price being expended for the general purposes of the charity. Of these sales, the last for 4341. lls. 2d. was effected on December 23, 1939, i.e., after the receipt of the warning letter and must, we think, be treated as referable solely to the charity’s own interest. The other sales covered a period between November 10, 1938, and August 10, 1939. To what interest ought these sales to be attributed? Entirely to the charity’s own interest, say the claimants, leaving the Diplock interest intact in the stock remaining unsold. They suggest that a principle analogous to that of Clayton’s case ought to be applied, with the result that the stock first brought into the mass which was the charity’s own stock ought to be treated as having been first drawn out.
We do not accept the view that the case ought to be treated as though it were subject to the rule in Clayton’s case. We sec no justification for extending that rule beyond the case of a bank to be traced into any existing asset, that amount of Diplock money must be regarded as having disappeared. But in respect of so much of the Diplock interest as is not thus accounted for, we are of opinion that the claim to a rateable proportion of the stock still held is established….
Barlow Clowes International Ltd v. Vaughan
[1992] 4 All ER 22, Court of Appeal
Dillon LJ: … Thaergument put by Mr Walker QC for the appellant is that instead of trac ing or any application of Clayton’s Case the available assets and moneys should be distributed pari passu among all unpaid investors rateably in.proportion to the amounts due to them. This is the basis of distribution whic ubject to any application which might be made by any indi vidual depositor or shareholder with a view to tracing his own money into any particular asset was directed by the House of Lords in Sinc/airov. Brougham [1914] AC 398, as between the shareholders in a building society which was being wound up and depositors who had made deposits in an ultra vires banking business which the building society had developed and car,.. ried on for many years. It is not in doubt that that basis of distribution ought to be adopted if distribution by tracing in accordance with Clayton’s Case is not to be preferred.
We were indeed referred in the course of the argument to a third possible basis of distribu tion, which was called the ‘rolling charge’ or ‘North American’ method. This has been pre ferred by the Canadian and United States courts to tracing in accordance with Clayton’s Case, as more equitable: see for instance the decision of the Ontario Court of Appeal in Re Ontario Securities Commission and Greymac Credit Corp. (1986) 55 OR (2d) 673. This method goes on the basis that where funds of several depositors, or sources, have been blended in one account, each debit to the account, uni= unequivocally attributable to the moneys of one depositor or source (eg as if an investment was purchased for one), should be attributed to all the depositors so as to reduce all their deposits pro rata, instead of being attributed, as under Clayton’s Case, to the earliest deposits in point of time. The reasoning is that if there is an account which has been fed only with trust moneys deposited by a number of individuals, and the account holder misapplies a sum from the account for his own purposes, and that sum is lost, it is fair that the loss should be borne by all the depositors pro rata, rather than that the whole loss should fall first on the depositor who made the earliest deposit in point of time. The complexities of this method would, however, in a case where there arc as many depositors as in the present case and even with the benefits of modem computer technology be so great, and the cost would be so high, that no one has sought to urge the court to adopt it, and I would reject it as impractica ble in the present case.
…..
One case in which it was held that the nature and circumstances of a fund showed that the partiel could not have intended Clayton’s Case to be applied when the surplus in the fund fell to be returned to the subscribers is Re Bn”tish Red Cross Balkan Fund, British Red Cross Sorllly v.Johnson [1914] 2 Ch. 419, a decision of Astbury J. There a fund had been collected by public subsaiption in 1912 for assisting the sick and wounded in the Balkan war of that time. By 1913 there remained a balance in the fund which was no longer required for the purposes of the fund and it was assumed that the surplus fell to be returned to the subscribers. Astbury J held that Clayton’s Case, which would involve the attribution of the first payments out of the fund to the earlier contributions to it was not to be applied; he said ((1914] 2 Ch. 419 at 421: ‘ the rule is obviously inapplicable.’ The actual decision is suspect, since the objects of the fund would seem to have been chari table, and if they were charitable then, as the surplus did not come about through a failure of the charitable objects ab initio, the surplus should have been applied cy-pres for other charita ble purposes. If however for some reason the fund was not devoted to charity, the decision was plainly right. It was followed, in the case of a winding up of a non-charitable fund, by Cohen J
in Re Hobourn Aero Components Ltd’s Air-Raid Distress Fund, Ryan v. Forrest (1946] Ch. 86 at 97; Cohen J’s decision was affirmed by this court, but the only issue on the appeal was whether or not the fund was charitable (see [1946] Ch. 194).
There are many other cases in the books in which the court has been concerned with the distribution of the surplus on the winding up of a non-charitable benevolent fund and no one has suggested that Clayton’s Case should be applied.
Mr Walker has accordingly submitted for the appellant in the present case, by what he called his narrower submission, that all investors who contributed to the two portfolios in question in the present case were contributing to common funds in which all investors were to participate and that, by analogy with Re British Red Cross Balkan Fund and Re Ho,ourn Aero Components Ltd’s Air-Raid Distress Fund, Clayton’s Case should not be applied.
I accept Mr Walker’s narrower submission and would hold that Clayton’s Case is not to be applied in the distribution of the available assets and moneys. Mr Walker’s wider submission is to the effect that, while the rule in Clayton’s Case is valid and useful, subject to the observations in The Mecca [1897] AC 286, where what is in question is the appropriation of payments as between the parties to a running account, it is illogical and unfair to the earlier contributors to apply the rule as between innocent beneficiaries whose pay ments to a third party, BCI, have been paid by that third party into a bank account in which, at the end of the day, there are-for whatever reason-not enough moneys left to meet all claims.
The decisions of this court, in my judgment, establish and recognise a general rule of prac tice that Clayton’s Case is to be applied when several beneficiaries’ moneys have been blended in one bank account and there is a deficiency. It is not, in my judgment, for this court to reject that long-established general practice. A fortiori it is not appropriate to reject it in the praent case, when the more logical method, the North American method, which is the basis for criti cising the application of Clayton’s Case is accepted to be impracticable. Therefore I would not accept Mr Walker’s wider submission.
However as I would accept his narrower submission I would allow this appeal, and set aide the order of the judge and I would declare that the rule in Clayton’s Case is not to be applied on the distribution of the moneys in the bank accounts specified in schedules A and D to the judge’s order or of the proceeds of sale of the additional assets. Instead these were held on trust for all unpaid investors pari passu rateably in proportion to the amounts due to them.
WoolfLJ: … Mr Walker QC submitted that there are three possible solutions for resolving the competing claims of the investors to the assets which have been recovered. The first solu tion, which is the one which was adopted by the judge, depends on the rule in Clayton’s Case, Devaynes v. Nohle (1816) 1 Mer. 572….
In addition to relying upon the arbitrary results which follow from the ‘mechanistic’ appli cation of the rule Mr Walker relies upon the expense and time which will be involved in hav ing to apply the rule. With the advent of computer technology it cannot be said the task is impossible but it is clearly complex. The costs involved will result in a depletion of the assets available to the investors. In determining the appropriateness of the machinery used for resolv ing the claims of the investors among themselves, surely this should be a relevant considera tion.
The second solution for resolving the claims of the investors among themselves is the rolling charge or North American solution (‘North American’ because it is the solution adopted or favoured in preference to the rule in Clayton’s Case in certain decisions of the courts in the United States and Canada because it is regarded as being manifestly fairer). This solution involves treating credits to a bank account made at different times and from different sources as a blend or cocktail with the result that when a withdrawal is made from the account it is
treated as a withdrawal in the same proportions :fs the different interests in the account (here
of the investors) bear to each other at the moment before the withdrawal is made. This solution should produce the most just result, but in this case, as counsel accept, it is not a live contender, since while it might just be possible to perform the exercise the costs involved would be out of all proportion even to the sizeable sums which are here involved.
The third solution (and the only other solution canvassed in argument) is the pari passu ex post facto solution. This involves establishing the total quantum of the assets available and shar ing them on a proportionate basis among all the investors who could be said to have contributed; to the acquisition of those assets, ignoring the dates on which they made their investment. Mr Walker submits this is the solution which is appropriate in this case. It has the virtue of rela tive simplicity and therefore relative economy and also the virtue of being in this case more just than the first solution. It would have the effect of sharing the pool of assets available propor tionately among the thousands of investors in a way which reflected the fact that they were all the victims of a ‘common misfortune’. [He considered the authorities and’continued:]
The decision in Re Diplock ‘s Estate must be considered together with the other judgements to which I have referred. When this is done, short of the House of Lords, it is settled law that the rule in Clayton’s Case can be applied to determine the extent to which, as between each other, equally innocent claimants are entitled in equity to moneys which have been paid into a bank account and then subject to the movements within that account. However, it does not, having regard to the passages from the judgments in the other authorities cited, follow that the rule has always to be applied for this purpose. In a number of different circumstances the rule has not been applied. The rule need only be applied when it is convenient to do so and when its application can be said to do broad justice having regard to the nature of the competing claims. Re Hallett ‘s Estate shows that the rule is displaced where its application would unjustly assist the trustee to the disadvantage of the beneficiaries. In Re Diplock ‘s Estate the rule would have been displaced by the trustee subsequently earmarking the beneficiary’s funds. It is not applied if this is the intention or presumed intention of the beneficiaries. The rule is sensibly not applied when the cost of applying it is likely to exhaust the fund available for the benefi ciaries.
The approach, in summary, which I would adopt to resolving the issues raised by this appeal are as follows.
(1) While the rule in Clayton’s Case is prima facie available to determine the interests of investors in a fund into which their investments have been paid, the use of the rule is a matter of convenience and if its application in particular circumstances would be impracticable or result in injustice between the investors it will not be applied if there is a preferable alternative.
(2) Here the rule will not be applied because this would be contrary to either the express or inferred or presumed intention of the investors. If the investments were required by the terms of the investment contract to be paid into a common pool this indicates that the investors did not intend to apply the rule. If the investments were intended to be separately invested, asa result of the investments being collectively misapplied by DCI a common pool of the invest ments was created. Because of their shared misfortune, the investors will be presumed to have intended the rule not to apply.
(3) As the rule is inapplicable the approach which should be adopted by the court depends on which of the possible alternative solutions is the most satisfactory in the circumstances. If the North American solution is practical this would probably have advantages over the pari passu solution. However, the complications of applying the North American solution in this case make the third solution the most satisfactory.
(4) It must however be remembered that any solution depends on the ability to trace and if the fund had been exhausted (ie the account became overdrawn) the investors whose moneys were in the fund prior to the fund being exhausted will not be able to claim against moneys which were subsequently paid into the fund.
Their claims will be limited to following, if this is possible, any of the moneys paid out of the fund into other assets before it was exhausted.
Leggatt LJ: .. Logic seems to dictate that as between banker and customer the rule in Clayton’s Case will apply. As between trustee and beneficiary the trustee will be presumed to draw his own money out of a mixed account before trust money. As between beneficiaries to whom money in an account belongs, they should share loss in proportion to their interest in the account immediately before each withdrawal. The fairness of that course is obvious. It is exem plified by the judgment of the court in Re Ontario Securities Commission and Greymac Credit Corp. (1986) 55 OR (2d) 673. But if, as here, that calculation is too difficult or expensive, the beneficiaries should in my judgment share rateably. It seems to me that the rule in Clayton’s Case has nothing to do with tracing and therefore provides no help in the present action….
As soon as the money of two or more investors was mixed together it became part of a com mon fund that was diminished only when it was used other than for the purchase of gilts. Such investors cannot be presumed to have intended that losses incurred would be borne other than rateably. All the money was paid into a fund, which already was, or which became, depleted. When paid into the fund it ceased to be earmarked or identifiable as the money of individual investors. They did not expect to incur any loss, but when they found that they had done so they would have had no reason to expect that they would be repaid other than pari passu with
other investors whose money was held in the same way.
In my judgment the so-called ‘rule of convenience’ would be exceedingly inconvenient in its application here. A glance at the judge’s order shows how com plex it would be to apply. It would also be, in the words of the editors of Goff and Jones, La1P of Restitution (3rd edn., 1986) 75, ‘capricious and arbitrary’. The use of this fiction, as Judge Learned Hand termed it, for the amelioration of a common misfortune would not be justifiable. It is another case on the facts of which the rule is inapposite and therefore inapplicable. All the moneys, which were provided by the investors, were treated by Barlow Oowes as a common pool to which they could have resort for their own purposes. Since all the investors have equi table charges, and their equities are equal, and they presumably intended their money to be dealt with collectively, they should share rateably what is left in the pool, as did the claimant•
in Sinclair v. Brougham [1914) AC 398, and in other cases in which for a variety of reasons, the rule has not been applied.
Re Hallett’s Estate
(1880) 13 Ch. D 696,
Jessel MR: Hallett was bailee of the bonds, and an agent to receive the dividends on the bonds. There is no doubt, therefore, that Mr Hallett stood in a fiduciary position towards Mrs Cotteri/1. Mr Hallett, before his death, I regret to say, improperly sold the bonds and put the money to his general account at his bankers. It is not disputed that the money remained at his bankers mixed with his own money at the time of his death; that is, he had not drawn out the money from his bankers. In that position of matters Mrs Cotteri/1 claimed to be entitled to receive the proceeds, or the amount of the proceeds, of the bonds out of the money in the hands of Mr Hal/m’s bankers at the time of his death, and that claim was allowed by the learned Judge of the Court below, and I think was properly so allowed Thmeodern doctrine of Equity as regards property disposed of by persons in a fiduciary position is a very clear and wcll-estab lished doctrine. You can, if the sale was rightful, take the proceeds of the sale, if you can iden tify them. If the sale was wrongful, you can still take the proceeds of the sale, in a sense adopting the sale for the purpose of taking the proceeds, if you can identify them. There is no distinc tion, therefore, between a rightful and a wrongful disposition of the property, so far as regards the right of the beneficial owner to follow the proceeds. But it very often happens that you can not identify the proceeds. The proceelis may have been invested together with money belong ing to the person in a fiduciary position, in a purchase. He may have bought land with it, for instance, or he may have bought chattels with it. Now, what is the position of the beneficial owner as regards such purchases? I will, first of all, take his position when the purchase is clearly made with what I will call, for shortness, the trust money, although it is not confined, as I will
shew presently, to express trusts. In that case, according to the now well-established doctrine of Equity, the beneficial owner has a right to elect either to take the property purchased, or to hold it as a security for the amount of the trust money laid out in the purchase; or, as we gen erally express it, he is entitled at his election either to take the property, or to have a charge on the property for the amount of the trust money. But in the second case, where a trustee has mixed the money with his own, there is this distinction, that the cestui que lrusl, or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust-money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee. The moment you get a substantial portion of it furnished by the trustee, using the word ‘trustee’ in the sense I have mentioned, as including all persons in a fiduciary relation, the right to the charge follows. That is the modern doctrine of Equity. Has it ever been suggested, until very recently, that there is any distinction between an express trustee, or an agent, or a bailee, or a collector of rents, or anybody else in a fiduciary position? I have never heard, until quite recently, such a distinction suggested It can have no foundation in principle, because the beneficial ownership is the same, wherever the legal ownership may be. If you have goods bargained and sold to a man upon trust to sell and hand over the net proceeds to another, that other is the benefi cial owner; but if instead of being bargained and sold, so as to vest the legal ownership in the trustee, they are deposited with him to sell as agent, so that the legal ownership remains in the beneficial owner, can it be supposed, in a Court of Equity, that the rights of the beneficial owner are different, he being entire beneficial owner in both cases? I say on principle it is impossible to imagine there can be any difference….
Baggallay and Thesiger LJJ delivered judgments also dismissing the appeal The Second Appeal Jessel MR: The question we have to consider depends on very few facts. I will first state all those which I think material, and on which it appears to me my judgment ought to be based.
A Mr Hallett, a solicitor, was a trustee of some bonds. Without authority and improperly he sold them, and on the 14th of November, 1877, by his direction the proceeds of these bonds were paid to his credit at Messrs. Winings’ Bank, and there mixed with moneys belonging to himself, to the credit of the same banking account, and he also drew out by ordinary cheque moneys from the banking account, which he used for his own purposes. He died in February,
1878, and at his death the account stood in this way: that there was more money to the credit of the account than the sum of trust money paid into it; but if you applied every payment made after November, 1877, to the first items on the credit side in order of date, a large portion of the trust money would have been paid out. The question really is, whether or not, under these circumstances, the beneficiaries-that is, the persons entitled to the trust moneys, who are the
present Appellants–are or are not entitled to say that the moneys subsequently drawn out that is, drawn out by Mr Hallett subsequently to November, 1877–and applied for his own use, are to be treated as appropriated to the repayment of his own moneys, or whether the Respondents, the executors, are right in their contention that they are to be treated as appro priated in the way I have mentioned, so as to diminish the amount now applicable to the repay ment of the trust funds.
Now, first upon principle, nothing can be better settled, either in our own law, or, I suppose, the law of all civilised countries, than this, that where a man does an act which may be rightfully performed, he cannot say that that act was intentionally and in fact done wrongly…. When we come to apply that principle to the case of a trustee who has blended trust moneys with his own, 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. The simplest case put is the mingling of trust moneys in a bag with money of the trustee’s own. Suppose he has a hundred sovereigns in a bag, and he adds to them another hundred sovereigns of his own, so that they are commingled in such a way that they cannot be /listinguished, and the next day he draws out for his own purposes £100, is it tolerable for anybody to allege that what he drew out was the first £100, the trust money, and that he misappropriated it, and left his own £1()0 in the bag? It is obvious he must have taken away that whic he had a right to take awa)”, his own £100. What difference does it make if, instead of being in a bag, he deposits it with his banker, and then pays in other money of his own, and draws out some money for his own purposes? Could he say that he had actually drawn out anything but his own money? His money was there, and he had a right to draw it out, and why should the natural act of simply drawing out the moneybe attributed to anything except to his ownership of money which was at his bankers.
It is said, no doubt, that according to the modern theory of banking, the deposit banker is a debtor for the money. So he is, and not a trustee in the strict sense of the word. At the same time one must recollect that the position of a deposit banker is different from that of an ordin ary debtor. Still he is for some purposes a debtor, and it is said if a debt of this kind is paid by a banker, although the total balance is the amount owing by the banker, yet considering the repayments and the sums paid in by the depositor, you attribute the first sum drawn out to the first sum paid in. That was a rule first established by Sir William Grant in Clayton’s Case; a very convenient rule, and I have nothing to say against it unless there is evidence either of agreement to the contrary or of circumstances from which a contrary intention must be presumed, and then of course that which is a mere presumption oflaw gives way to those other considerations. Therefore, it does appear to me there is nothing in the world laid down by Sir William Grant in Clayton’s Case, or in the numerous cases which follow it, which in the slightest degree affects the principle, which I consider to be clearly established….
Baggallay LJ delivered a judgment agreeing with Jessel MR. Thesiger LJ dissented on the ground that the court was bound by Pennell v. Deffell (1853) 4 De GM & G 372 to apply the ‘first in, first out’ rule.
Re Oatway
[1903] 2 Ch. 356
Joyce J: … It is a principle settled as far back as the time of the Year Books that, whatever alteration of form any property may undergo, the true owner is entitled to seize it in its new shape if he can prove the identity of the original material: see Blackstone, vol. ii, p. 405, and Lupton v. White.1 But this rule is carried no farther than necessity requires, and is applied only to cases where the compound is such as to render it impossible to apportion the respective shares of the parties. Thus, if the quality of the articles that are mixed be uniform, and the ori ginal quantities known, as in the case of so many pounds of trust money mixed with so many pounds of the trustee’s own money, the person by whose act the confusion took place is still entitled to claim his proper quantity, but subject to the quantity of the other proprietor being first made good out of the whole mass: 2 Stephen’s Commentaries (13th ed.), 20. Trust money may be followed into land or any other property in which it has been invested; and when a trustee has, in making any purchase or investment, applied trust money together with his own, the cestuis que trust are entitled to a charge on the property purchased for the amount of the trust money laid out in the purchase or investment. Similarly, if money held by any person in a fiduciary capacity be paid into his own banking account, it may be followed by the equitable owner, who, as against the trustee, will have a charge for what belongs to him upon the balance to the credit of the account. If then, the trustee pays in further sums, and from time to time draws out money by cheques, but leaves a balance to the credit of the account, it is settled that he is not entitled to have the rule in Clayton’s Case applied so as to maintain that the sums which have been drawn out and paid away so as to be incapable of being recovered represented pro tanto the trust money, and that the balance remaining is not trust money, but represents onlyhis own moneys paid into the account. Brown v. Adams2 to the contrary ought not to be fol lowed since the decision in In re Hallett’s Estate. It is, in my opinion, equally clear that when any of the money drawn out has been invested, and the investment remains in the name or under the control of the trustee, the rest of the balance having been afterwards dissipated by him, he cannot maintain that the investment which remains represents his own money alone, and that what has been spent and can no longer be traced and recovered was the money belong ing to the trust. In other words, when the private money of the trustee and that which he held in a fiduciary capacity have been mixed in the same banking account, from which various pay ments have from time to time been made, then, in order to determine to whom any remaining balance or any investment that may have been paid for out of the account ought to be deemed to belong, the trustee must be debited with all the sums that have been withdrawn and applied to his own use so as to be no longer recoverable, and the trust money in like manner be debited with any sums taken out and duly invested in the names of the proper trustees. The order of priority in which the various withdrawals and investments may have been respectively made is wholly immaterial. I have been referring, of course, to cases where there is only one fiduciary owner or set of cestuis que trust claiming whatever may be left as against the trustee. In the present case there is no balance left. The only investment or property remaining which repre sents any part of the mixed moneys paid into the banking account is the Oceana shares pur chased for 21371. Upon these, therefore, the trust had a charge for the 30001. trust money paid into the account. That is to say, those shares and the proceeds thereof belong to the tru1t.
It was objected that the investment in the Oceana shares was made at a time when O.tw1y’1 own share of the balance to the credit of the account would have exceeded 21371., the price of the shares; that he was therefore entitled to with
draw’ that sum, and might rightly apply it for his own purposes; and that conaequently the shares should be held to belong to his estate. To this I answer that he never was entitled to withdraw the 2137l. from the account, or, at all events, that he could not be entitled to take that sum from the account and hold it or the investment made therewith, freed from the charge in favour of the trust, unless or until the trust money paid into the account had been first restored, and the trust fund reinstated by due investment of the money in the joint names of the proper trustees, which never was done.
The investment by Oatway, in his own name, of the 2137/. in Oceana shares no more got rid of the claim or charge of the trust upon the money so invested, than would have been the case if he had drawn a cheque for 2137/. and simply placed and retained the amount in a drawer without further disposing of the money in any way. The proceeds of the Oceana shares must be held to belong to the trust funds under the will of which Oatway and Maxwell Skipper were the trustees.
Re Tilley’s Will Trusts
Ungoed-Thomas J: …
In Snell’s Principles of Equity, 26th edn. (1966), the law is thus stated at page 315:
‘Where the trustee mixes trust money with his own, the equities are clearly unequal. Accordingly, the beneficiaries are entitled to a first charge on the mixed fund, or on any land, securities or other assets purchased with it. Thus if the trustee purchases shares with part of the mixed fund, leaving enough of it to repay the trust moneys, and then dissipates the balance, the beneficiaries’ charge binds the shares; for although under the rule in In re Hallett’s Estate the trustee is presumed to have bought the shares out of his own money, the charge attached to the entire fund, and could be discharged only by restoring the trust moneys. Where the property purchased has increased in value, the charge will be not merely for the amount of the trust moneys but for a proportionate part of the increased value. Thus if the trustee purchases land with £500 of his own money and £1,000 of trust moneys, and the land doubles in value, he would be profiting from his breach of trust if he were entitled to all except £1,000; the beneficiaries are accordingly entitled to a charge on the land for £2,000.’
For the defendants it has been rightly admitted that if a trustee wrongly uses trust money to pay the whole of the purchase price in respect of the purchase of an asset a beneficiary can elect either to treat the purchased asset as trust property or to treat the purchased asset as security for the recouping of the trust money. It was further conceded that this right of election by a beneficiary also applies where the asset is purchased by a trustee in part out of his own money and in part out of the trust moneys, so that he may, if he wishes, require the asset to be treated as trust property with regard to that proportion of it which the trust moneys contributed to its purchase.
The principle in Lupton v. White1 is not applicable to this bank account as the amount of trust moneys paid into the mixed bank account is distinguishable as £2,237 and can be readily sep arated from Mrs Tilley’s personal moneys. In the circumstances of this case there would be a charge on the properties purchased by Mrs Tilley out of the bank account as security for repay ment of the £2,237 trust moneys paid into her bank account in accordance with the principle
in In re Oatley, but that would be immaterial as the £2,237 is readily available out of Mrs Tilley’s estate.
But can the beneficiary claim the proportion of the proceeds of sale of 11, Church Street which £179 approximately bears to its purchase price of £1,000, and the proportion of the pro ceeds of sale of 17-17A, High Street for which £82 l Os. bears to the purchase price of approx imately £2,050, plus costs? These trust moneys bore a small proportion to the purchase price of the properties. Mrs Tilley had ample overdraft facilities to pay the price without relying on these trust sums at the time of the High Street purchase, for she had an overdraft of over £22,000 apparently within her own overdraft facilities, and presumably properly secured, and this would make any contribution of £82 !Os. negligible. She had throughout mixed her per sonal finances and those of her husband’s estate, whether paying that estate’s debts when it was without ready money or paying its proceeds of sale into her account. The £179 and the £82 10s. were clearly not trust moneys deliberately taken by Mrs Tilley out of the trust fund for the purpose of investing in property in her name. They merely avoided, to the extent of their amount, the use of Mrs Tilley’s ample overdraft facilities, and in the case of the £179 that advantage was lost after two months by her bank account showing a credit, although it went into debit again 17 months later. And no interest in these trust sums was lost to any other bene ficiary as Mrs Tilley was herself the life-tenant.
All these considerations appear to me to indicate overwhelmingly that Mrs Tilley was not deliberately using trust moneys to invest in or contribute towards or otherwise buy properties in her own name and the whole course of de_aling with the trust funds and the bank accounts and the properties purchased and their history, which I have mentioned, indicate that what happened was that Mrs Tilley mixed the trust moneys and her own in the bank account but did not rely on the trust moneys for any of the purchases. If, as it was suggested for the defendant,, the correct test whether a beneficiary is entitled to adopt a purchase by a trustee to which his t.rust moneys have contributed and thus claim a due proportion of its profits, is a subjective test, depending on the trustee’s intention to use the trust moneys to contribute to the purchase then in my view there was no such intention and the beneficiary is not so entitled. But my conclu sions about the trustee’s intention is based not on any direct evidence but on the circumstan tial evidence which I have mentioned. If, of course, a trustee deliberately uses trust money to contribute with his own money to buy property in hi own name, then l would see no difficulty in enabling a beneficiary to adopt the purchase and claim a share of any resulting profits. But the subjective test does not appear to me to be exclusive, or indeed adequate, if it is the only test.
It seems to me that if, having regard to all the circumstances of the case objectively consid ered, it appears that the trustee has in fact, whatever his intention, laid out trust moneys in or towards a purchase, then the beneficiaries are entitled to the property purchased and any prof its which it produces to the extent to which it has been paid for out of the trust moneys. But, even by this objective test, it appears to me that the trust moneys were not in this case so laid out. It seems to me, on a proper appraisal of all the facts of this particular case, that Mrs Tilley’s breach halted at the mixing of the funds in her bank account. Although properties bought out of those funds would, like the bank account itself, at any rate if the moneys in the bank account were inadequate, be charged with repayment of the trust moneys which then would stand in the same position as the bank account, yet the trust moneys were not invested in properties at all but merely went in reduction of Mrs Tilley’s overdraft which was in reality the source of the purchase-moneys.
The plaintiff’s claim therefore fails and he is entitled to no more than repayment of the half of the £2,237, interest not being in issue. £2,237 is readily available, which makes the existence of any charge for its security immaterial.
James Roscoe (Bolton) Ltd v. Winder
[1915] I Ch. 62, Chancery Division
SargantJ: …
What is now claimed in the present action (because one or two other points have been given up) is a charge upon the 358/. 5s. Sd. remaining to the credit of the debtor’s account at the time of his death, for the sum of 4551. 18s. l ld. received by him in respect of these book debts and paid into his banking account. That is the strict legal way of putting the claim, but, of course, practically it amounts to claiming the full sum of 358. 5s. Sd., since that sum is less than the amount of the charge claimed.
The first point that was taken against the claim was that no trust was created by the agree ment as to the book debts to he collected under it. In my opinion, that objection cannot be sustained…
That being so, we have a case where, as in In re Ha//ett’s Estate, the banking account of the debtor comprised not only moneys belonging to himself for his own purposes, but also moneys belonging to him upon trust for some one else, and that being so, and apart from the circum stances I am going to mention, it seems to me clear that the plaintiffs would be entitled to the charge they claim, and to receive the whole balance of 3581. 5s. 5d. standing to the debtor’s credit at the time of his death, and that although there had been payments out of the account which, under the rule in Clayton’s Case, would have been attributable to the earlier payments in re Hallett’s Estate, which would but for the circumstance I am going to mention entirely conclude this case, decided two clear points: First, that when a trustee mixes trust moneys with private moneys in one account the cestuis que trust liave a charge on the aggregate amount for their trust fund; and, secondly, that when payments are made by the trustee out of the general account the payments are not to be appropriated against payments in to that account as in Clayton’s Case, because the trustee is presumed to b honest rather than dishonest and to make payments out of his own private moneys and not out of the trust fund that was mingled with his private moneys.
But there is a further circumstance in the present case which seems to me to be conclusive in favour of the defendant as regards the greater part of the balance of 3581. 5s. 5d. It appears
that after the payment in by the debtor of a portion of the book debts which he had received l1
the balance at the hank on May 19, 1913, was reduced by his drawings to a sum of 251. 18s. only on May 21. So that, although the ultimate balance at the debtor’s death was about 358/., there had been an intermediate balance of only 25/. 18s. The result of that seems to me to be that the trust moneys cannot possibly he traced into this common, fund, which was standing to the debtor’s credit at his death, to an extent of more than 25/. 18s., because, although prima facie under the second rule in in re Hallett’s Estate any drawings out by the debtor ought to be attrib uted to the private moneys which he had at the bank and not to the trust moneys, yet, when the drawings out had reached such an amount that the whole of his private money part had been exhausted, it necessarily followed that the rest of the drawings must have been against trust moneys. There being on May 21, 1913, only 251. 18s., in all, standing to the credit of the debtor’s account, it is quite clear that on that day he must have denuded his account of all the trust moneys there–the whole 4551. 18s. lld.—i!xcept to the extent of 25/. 18s.
Practically, what counsel for the plaintiffs have been asking me to do … is to say that the debtor, by paying further moneys after May 21 into this common account, was impressing upon those further moneys so paid in the like trust or obligation, or charge of the nature of a trust, which had formerly been impressed upon the previous balances to the credit of that account. No doubt, counsel for the plaintiffs did say ‘No. I am only asking you to treat the account as a whole, and to consider the balance from time to time standing to the credit of that account as subject to one continual charge or trust.’ But I think that really is using words which are not appropriate to the facts. You must, for the purpose of tracing, which was the process adopted in ln re Hallett’s estate, put your finger on some definite fund which either remains in its ori ginal state or can be found in another shape. That is tracing, and tracing, by the very facts of this case, seems to be absolutely excluded except as to the 25/. 18s.
Then, apart from tracing, it seems to me possible to establish this claim against the ultimate balance of 3581. 5s. 5d. only by saying that something was done, with regard to the additional moneys which are needed to make up that balance, by the person to whom those moneys belonged, the debtor, to substitute those moneys for the purpose of, or to impose upon those moneys a trust equivalent to, the trust which rested on the previous balance. Of course, if there was anything like a separate trust account, the payment of the further moneys into that account would, in itself, have been quite a sufficient indication of the intention of the debtor to substi tute those additional moneys for the original trust moneys, and accordingly to impose, by way of substitution, the old trusts upon those additional moneys. But, in a case where the account into which the moneys are paid is the general trading account of the debtor on which he has been accustomed to draw both in the ordinary course and in breach of trust when there were trust funds standing to the credit of that account which were convenient for that purpose, I think it is impossible to attribute to him that by the mere payment into the account of further moneys, which to a large extent he subsequently used for purposes of his own, he intended to clothe those moneys with a trust in favour of the plaintiffs.
Certainly, after having heard in re Hallett’s Estate stated over and over again, I should have thought that the general view of that decision was that it only applied to such an amount of the balance ultimately standing to the credit of the trustee as did not exceed the lowest balance of the account during the intervening period. That view has practically been taken, as far as I can make out, in the cases which have dealt with In re Hallett’s Estate. in re Oatway, a decision of Joyce}, was cited to me in support of the plaintiffs’ case, but I do not find anything in it to help them. All that Joyce J did in that case was to say that, if part of the mixed moneys can be traced into a definite security, that security will not become freed from the charge in favour of the trust,.but will, together with any residue of the mixed moneys, remain subject to that charge. I am sure that nothing which he said was intended to mean that the trust was imposed upon any property into which the original fund could not be traced And certainly in the recent case of Sinclair v. Brougham I can see nothing in any way to impeach the doctrine as to tracing laid down in in re Hal/ett’s Estate.
In my opinion, therefore, the only part of the balance of 358/. 5s. 5d. which can be made avail able by the plaintiffs is the sum of 25/. 18s., being the smallest amount to which the balance, to the credit of the account had fallen between May 19, 1913, and the death of the debtor.
Re Goldcorp Exchange Ltd
[1995] 1 AC 74, Privy Council
Lord Mustill
Proprietary interests derived from the purchase price
Their Lordships now tum to the proposition, which first emerged during argument in the Court of Appeal, and which was not raised in In re London Wine Co. (Shippers) Ltd[l986] PCC 121, that a proprietary interest either sprang into existence on the sales to customers, or should now be imposed retrospectively through restitutionary remedies, in relation not to bullion but to the moneys originally paid by the customers under the contracts of sale. Here at least it is possible to pin down the subject matter to whjch the proprietary rights are said to relate. Nevertheless, their Lordships are constrained to reject all the various ways in which the sub mission has been presented, once again for a single comparatively simple reason.
The first argument posits that the purchase oneys were from the outset impressed with a trust in favour of the payers. That a sum of money paid by the purchaser under a contract for the sale of goods is capable in principle of being the subject of a trust in the hands of the ven dor is clear. For this purpose it is necessary to show either a mutual intention that the moneys should not fall within the general fund of the company’s assets but should be applied for a spe cial designated purpose, or that having originally been paid over without restriction the recip ient has later constituted himself a trustee of the money: see istclose Investments Ltd v. Rolls Razor Ltd [1970] AC 567, 581-2. This requirement was satisfied in In re Kayford Ltd (In Liquidation) [1975] I WLR 279 where a company in financial difficulties paid into a separate deposit account money received from customers for goods not yet delivered, with the intention of making withdrawals from the account only as and when delivery was effected, and of refund ing the payment to customers if an insolvency made delivery impossible. The facts of the pres ent case are, however, inconsistent with any such trust. This is not a situation where the customer engaged the company as agent to purchase bullion on his or her behalf, with imme diate payment to put the agent in funds, delivery being postponed to suit the customer’s convenience. The agreement was for a sale by the company to, and not the purchase by the company for, the customer. The latter paid the purchase price for one purpose alone, namely to perform his side of the bargain under which he would in due course be entitled to obtain delivery. True, another part of the consideration for the payment was the collateral promise to maintain separate cover, but this does not mean that the money was paid for the purpose of pur chasing gold, either to create the separate stock or for any other reason. There was nothing in the express agreement to require, and nothing in their Lordships’ view can be implied, which constrained in any way the company’s freedom to spend the purchase money as it chose, or to establish the stock from any source and with any funds as it thought fit. This being so, their Lordships cannot concur in the decision of Cooke P. r1993] 1 NZLR 257, 272, 273, that the purchase price was impressed with a continuing beneficial interest in favour of the customer, which could form the starting point for a tracing of the purchase moneys into other assets.
The same insuperable obstacle stands in the way of the alternative submission that the com pany was a fiduciary. If one asks the inevitable first question-What was the content of the fidu ciary’s duty?-the claimants are forc.,:d to assert that the duty was to expend the moneys in the purchase and maintenance of the reserved stock. Yet this is precisely the obligation which, as just stated, cannot be extracted from anything express or implied in the contract of sale and the
collateral promises. In truth, the argument that the company was a fiduciary (as regards the money rather than the bullion) is no more than another label for the argument in favour of an express trust and must fail for the same reason.
Thus far, all the arguments discussed have assumed that each contract of sale and collateral promises together created a valid and effective transaction coupling the ordinary mutual obligations of an agreement for the sale of goods with special obligations stemming from a trust or fiduciary relationship. These arguments posit that the obligations remain in force, albeit unper formed, the claimants’ object being to enforce them. The next group of arguments starts with the contrary proposition that the transactions were rendered ineffectual by the presence of one or more of three vitiating factors: namely, misrepresentation, mistake and total failure of con sideration. To these their Lordships now tum.
It is important at the outset to distinguish between three different ways in which the
existence of a misrepresentation, a mistake or a total failure of consideration might lead to the existence of a proprietary interest in the purchase money or its fruits superior to that of the bank.
I. The existence of one or more of these vitiating factors distinguished the relationship from that of an ordinary vendor and purchaser, so as to leave behind with the customer a beneficial interest in the purchase moneys which would otherwise have passed to the company when the money was paid. This interest remained with the customer throughout everything that fol lowed, and can now be enforced against the general assets of the company, including the bullion, in priority to the interest of the bank.
2. Even if the full legal and beneficial interest in the purchase moneys passed when they were paid over, the vitiating factors affected the contract in such a way as to revest the moneys in the purchaser, and, what is more, to do so in a way which attached to the moneys an interest super ior to that of the bank.
3. In contrast to the routes just mentioned, where the judgment of the court would do no more than recognise the existence of proprietary rights already in existence, the court should by its judgment create a new proprietary interest, superior to that of the bank, to reflect the justice of the case.
With these different mechanisms in view, their Lordships tum to the vitiating factors relied upon. As to the misrepresentations these were presumably that (in fact) the company intended to carry out the collateral promise to establish a separate stock and also that (in law) if this promise was performed the customer would obtain a title to bullion. Whether the proprietary interests said to derive from this misrepresentation were retained by the customers from the moment when they paid over the purchase moneys, or whether they arose at a later date, was not made clear in argument. If the former, their Lordships can only say that they are unable to grasp the reasoning for if correct the argument would entail that e,·en in respect of those con tracts which the company ultimately fulfilled by delivery the moneys were pro tcmpore subject to a trust which would have prevented the company from lawfully treating them as its own. This cannot be right. As an alternative it may be contended that a trust arose upon the collapse of the company and the consequent non-fulfilment of the contracts. This contention must also be rejected, for two reasons. First, any such proprietary right must have as its starting point a personal claim by the purchaser to the return of the price. No such claim could exist for so long as the sale contract remained in existence and was being enforced by the customer. That is the position here. The customers have never rescinded the contracts of sale, but have throughout the proceedings asserted various forms of proprietary interest in the bullion, all of them derived in one way or another from the contracts of sale. This stance is wholly inconsistent with the notion that the contracts were and arc so ineffectual that the customers are entitled to get their money back. As a last resort the non-allcx..ited claimants invited the Board to treat the contracts
as rescinded if their claims for a proprietary interest in bullion were rejected. There is however no mechanism which would pennit the claimants to pause, as it were, half way through the delivery of the present judgment and elect at last to rescind; and even if such a course were open, the remedies arising on rescission would come too late to affect the secured rights of the bank under its previously crystallised floating charge.
Furthermore, even if this fatal objection could be overcome, the argument would, in their Lordpshis’ opinion, be bound to fail. Whilst it is convenient to speak of the customers ‘getting their money back’ this expression is misleading. upon payment by the customers the purchase moneys became, and rescission or no rescission remained, the unencumbered property of the company. What the customers would recover on rescission would not be ‘their’ money, but an equivalent sum. Leaving aside for the moment the creation by the court of a new remedial pro prietary right, to which totally different considerations would apply, the claimants would have to contend that in every case where a purchaser is misled into buying goods he is automatically entitled upon rescinding the contract to a proprietary right superior to those of all the vendor’s other creditors, exercisable against the whole of the vendor’s assets. It is not surprising that no authority could be cited for such an extreme proposition. The only possible exception is In rt Eastgate; Ex parte Ward [1905] I KB 465. Their Lordships doubt whether, correctly under stood, the case so decides, but if it does they decline to follow it.
Similar objections apply to the second variant, which was only lightly touched upon in argu ment: namely, that the purchase moneys were paid under a mistake. Assuming the mistake to be that the collateral promises would be perform/:d and would yield a proprietary right, what effect would they have on the contracts? Obviously not to make them void ab initio, for ofher wise it would mean that the customers had no right to insist on delivery. Perhaps the mistake would have entitled the customers to have the agreements set aside at common law or under statute, and upon this happening they would no doubt have been entitled to a personal restitu tionary remedy in respect of the price. This does not, however, advance their case. The mon eys were paid by the customers to the company because they believed that they were bound to pay them; and in this belief they were entirely ‘right. The situation is entirely different from Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd [1981] Ch. 105, to which much attention was given in the Court of appeal and in argument before the Board. It may be-their Lordships express no opinion upon it-that the Chase Manhattan case correctly decided that where one party mistakenly makes the same payment twice it retains a proprietary interest in the second payment which (if tracing is practicable) can.be enforced against the payees’ assets in a liquidation ahead of unsecured creditors. But in the present case, the customers intended to make payment, and they did so because they rightly conceived that that was what the con tracts required. As in the case of the argument based on misrepresentation, this version con ceals the true nature of the customers’ complaint: not that they paid the money, but that the goods which they ordered and paid for have not been delivered. As in the case of the misrep resentation, the alleged mistake might well have been a ground for setting aside the contract if the claimants had ever sought to do so; and in such a case they would have had a personal right to recover the sum equivalent to the amount paid. But even if they had chosen to exercise this right, it would not by operation of law have carried with it a proprietary interest.
Their Lordships are of the same opinion as regards the third variant, which is that a propri etary interest arose because the consideration for the purchase price has totally failed. It is, of course, obvious that in the end the consideration did fail, when delivery was demanded and not made. But until that time the claimants had the benefit of what they had bargained for, a: con tract for the sale of unascenained goods. Qµite plainly a customer could not on the day after a
sale have claimed to recover the price for a total failure of consideration, and this at once puts paid to any question of a residuary proprietary interest and distinguishes the from those such as Sinclair v. Brougham [1914] AC 398, where the transactions under which the moneys were paid were from the start ineffectual; and Neste Oy v. Lloyds Bank Pfc [1983] 2Lloyd’sRep. 658, where to the knowledge of the payee no performance at all could take place under the con tract for which the payment formed the consideration.
There remains the question whether the court should create after the event a remedial resti tutionary right superior to the security created by the charge. The nature and foundation of this remedy were not clearly explained in argument. This is understandable, given that the doctrine is still in an early stage and no single juristic account of it has yet been generally agreed. In the context of the present case there appear to be only two possibilities. The first is to strike directly at the heart of the problem and to conclude that there was such an imbalance between the posi tions of the parties that if orthodox methods fail a new equity should intervene to put the mat ter right, without recourse to further rationalisation. Their Lordships must firmly reject any such approach. The bank relied on the floating charge to protect its assets; the customers relied on the company to deliver the bullion and to put in place the separate stock. The fact that the claimants are private citizens whereas their opponent is a commercial bank could not justify the court in simply disapplying the bank’s valid security. No case cited has gone anywhere near to this, and the Board would do no service to the nascent doctrine by stretching it past breaking point.
Accordingly, if the argument is to prevail some means must be found, not forcibly to subtract the moneys or their fruits from the assets to which the charge really attached, but retro spectively to create a situation in which the moneys never were part of those assets. In other words the claimants must be deemed to have a retained equitable title: see Goff and Jones, The Law of Restitution, 4th edn., 94. Whatever the mechanism for such deeming may be in other circumstances their Lordships can see no scope for it here. So far as concerns an equitable inter est deemed to have come into existence from the moment when the transaction was entered into, it is hard to see how this could coexist with a contract which, so far as anyone knew, might be performed by actual delivery of the goods. And if there was no initial interest, at what time before the attachment of the security, and by virtue of what event, could the court deem a pro prietary right to have arisen? None that their Lordships are able to see. Although remedial resti tutionary rights may prove in the future to be a valuable instrument of justice they cannot in their Lordships’ opinion be brought to bear on the present case.
For these nasons the Board must reject all the ways in which the non-allocated claimants assert a proprietary interest over the purchase price and its fruits. This makes it unnecessary to consider whether, if such an interest had existed, it would have been possible to trace from the subject matter of the interest into the company’s present assets. Indeed it would be unprofitable to do so without a clear understanding of when and how the equitable interest arose, and of its nature. Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd v. Canadian Imperial Bani, of Commerce Trust Co. (Bahamas) Ltd [1986] I WLR 1072, on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: sec, for example, In rt Diplock [1948] Ch. 465. The observations of the Board in the Space Investmenls case were concerned with a mixed, not a non-existent, fund.
The Walker & Hall claims
These claims are on a different footing. It appears that until about 1983 the bullion purchased by customers of the predecessor of Walker & Hall Commodities Ltd was stored and recorded separately. Thereafter, the bullion representing purchases by customers was stored en masse, but it was still kept separate from the vendor’s own stock. Furthermore, the quantity of each kind of bullion kept in this pooled mass was precisely equal to the amount of Walker & Hall’s exposure to the relevant categories of bullion and of its open contracts with customers. The documentation was also different from that received by the customers who later became the non-allocated claimants. The documents handed to the customer need not be quoted at length, but their general effect was that the vendor did not claim title in the bullion desaibed in the document and that the title to that bullion, and the risk in respect of it, was with the customer. The document also stated that the vendor held the bullion as custodian for the customer in safe storage. These arrangements ceased when the shares of Walker & Hall were purchased by the company, and the contractual rights of the customers were transferred.
The features just mentioned persuaded Thorp J at first instance to hold, in contrast to his conclusion in relation to the non-allocated claimants …, that there had been a sufficient ascertainment and appropriation of goods to the individual contracts to transfer title to each cus tomer; and that thereafter the customers as a whole had a shared interest in the pooled bullion, which the vendors held on their behalf. The Dublin City Distillery case [1914] AC 823 was cited in support of this conclusion. It followed that when the company absorbed the hitherto sepa rated bullion into its own trading stock upon the acquisition of Walker & Hall’s business, and thereafter drew upon the mixed stock, it wrongfully dealt with goods wh.ich were not its own. Thus far, the decision of Thorp J was favourable to the Walker & Hall claimants. There remained, however, the question of relief. Here, the judge applied conventional principles of tracing and concluded that the proprietary recoveries of the Walker & Hall claimants and those in a simila.r position could not exceed the lowest balance of metal held by the company between the accrual of their rights and the commencement of the receivership: see James Roscoe (Bolton) Ltd v. Winder [1915] 1 Ch. 62 and the passages from Ford and Lee’s Principles of the LaJ1J of Trusts, 2nd edn. (1990), 738-68, paras. 1716–1730, and Goff and Jones, The LaJIJ of Restitution, 3rd edn. (1986), 74 cited by the judge. : ”
Although the Walker & Hall claimants had succeeded on liability the bank was not unduly concerned, since the limitation of the claim to th,:: lowest intermediate balance meant that it was of comparatively small financial significance. The bank therefore did not appeal against this part of ThorpJ’s judgment when the unsuccessful claimants appealed to the Court of Appeal against other aspects of that judgment. A rather confusing situation then arose. Because the bank had not appealed in relation to the Walker & Hall claimants the Court of Appeal had no occasion to consider whether these claimants really were, as,the judge had held, in a different position from the non-allocated claimants …,although some brief observations by Gault J in his judgment [1993] I NZLR 257, 277, appeared to indicate some doubt on this score. When, however, the court had turned to the question of quantum, and ordered that the non-allocated claimants ..
. were entitled to charges on the remaining bullion assets of the company in priority to the charge of the bank, it concluded its declaration with the words ‘and the successful claimants in the High Coun are in the same position as the present appellants to the extent they cannot recover under the judgment of Thorp J.’ This enhancement of the remedy available to the Walker & Hall claimants made Thorp J’s adverse judgment much more serious for the bank,
and accordingly the bank desired to appeal to this Board not only on the ground that the Court of Appeal had wrongly enlarged the remedy but also (in case it should be held that in principle the decision of the court on the availability of a remedy should be upheld) on the ground that Thorp J had been in error when holding that the Walker & Hall claimants had any proprietary rights at all. To this the Walker & Hall claimants objected, on the ground that since the bank had never appealed to the Court of Appeal on the issue of liability it could not appeal to the Board. The bank responded that it was not they but the claimants who had set the appellate procedure in motion and if the judgment of Thorp J was to be reopened at all, it ought to be reconsidered in full.
In the event, a lengthy investigation by the Board of what had happened in the Court of Appeal was avoided by a sensible arrangement between the parties, whereby the bank accepted its willingness to abide by the decision of Thorp J on liability (although without making any concession upon it) in the event that the Board restored the judge’s decision on the measure of recovery. To this issue, therefore, their Lordships will immediately turn.
On the facts found by the judge the company as bailee held bullion belonging to the indi vidual Walker & Hall claimants, intermingled the bullion of all such claimants, mixed that bul lion with bullion belonging to the company, withdrew bullion from the mixed fund and then purchased more bullion which was added to the mixed fund without the intention of replacing the bullion of the Walker & Hall claimants. In these circumstances the bullion belonging to the
Walker & Hall claimants which became held by the company’s receivers consisted of bullion equal to the lowest balance of metal held by the company at any time: see James Roscoe (Bolton) Ltd v. Winder [1915] 1 Ch. 62.
The Walker & Hall claimants now seek to go further and ask the court to impose an equi table lien on all the property of the company at the date of the receivership to recover the value of their bullion unlawfully misappropriated by the company. Such a lien was considered by the Board in Space Investments Ltd v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd (1986] 1 WLR 1072. In that case the Board held that beneficiaries could not claim trust moneys lawfully deposited by a bank trustee with itself as banker in priority to other depositors and unsecured creditors. But Lord Templeman considered the position which would arise if a bank trustee unlawfully borrowed tnlst moneys. He said, at 1074:
‘A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general pur poses of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee
. appointed in place of an insolvent bank trustee to protect the interests of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank.’ These observations were criticised by Professor Goode in his Mary Oliver Memorial Address (1987) 103 LQR 433, 445-7, as being inconsistent with the observations of the Court of Appeal in In re Diplock [1948] Ch. 465,521, where it was said:
‘The equitable remedies presuppose the continued ecistence 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, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself. If the fund, mixed or unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, of course, award damages but specific relief would be out of the question. It is, therefore, a necessary matter for consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief.’
In the case of a bank which employs all borrowed moneys as a mixed fund for the purpose of lending out money or making investments, any trust money unlawfully borrowed by a bank trustee may be said to be latent in the property acquired by the bank and the court may impose an equitable lien on that property for the recovery of the trust money.
The imposition of such an equitable lien for the purpose of recovering trust money was more favourably regarded by Professor Peter Birks in An lntrodu.tion to the L1Jw of Restitution (1989), 377 IT., and by Goff and Jones, The LaJIJ of Restitution, 4th edn., especially at 73-5. The law relating to the creation and tracing of equitable proprietary interests is still in a state of development. In Auorney-Gern:ral for Hong Kong v. Reid (1994] AC 324 the Board decided that money received by an agent as a bribe was held in trust for the principal who is entitled to trace and recover property representing the bribe. In Lord Napier and Ettrick v. Hunter [1993]
AC 713, 738, 739, the House of Lords held that payment of damages in respect of an insured loss created an equitable charge in favour of the subrogated insurers so long only as the d1D1- ages were traceable as an identifiable fund. When the scope and ambit of these deci&io111 and the observations of the Board in the Space Investments case fall to be considered, it will be nec essary for the history and foundations in principle of the creation and tracing of equltablt prietary interests to be the subject of close examination and full argument and for attention be paid to the works of Paciocco (1989) 68 Cas Bar Rev. 315, Maddaugh andMcCamus, The Law ofRmiti,twn (1990), Emily L. Sherwin’s article ‘Constructive Trusts in Bankruptcy’ (1989) U Ill. L Rev. 297, 335, and other commentators dealing with equitable interests in tracing and referring to concepts such as the position of ‘involuntary creditors’ and tracing to ‘swollen assets.’
In the present case it is not necessary or appropriate to consider the scope and ambit of the observations in the Space Investments case [I986) I WLR 1072 or their application to trustees other than bank trustees because all members of this Board are agreed that it would be inequitable to impose a lien in favour of the Walker & Hall claimants. Those claimants received the same certificates and trusted the company in a manner no different from other bullion cus tomers. There is no evidence that the debenture holders and the unsecured creditors at the date of the receivership benefited directly or indirectly from the breaches of trust committed by the company or that Walker & Hall bullion continued to exist as a fund latent in property vested in the receivers. In these circumstances the Walker & Hall claimants must be restored to the remedies granted to them by the trial judge.
Their Lordships will accordingly humbly advise Her Majesty that the appeal ought to be allowed, the judgment of the Court of Appeal of New Zealand of 30 April 1992 set aside and the judgment of Thorp J of 17 October 1990 ristored. Their Lordships were informed that the parties had been able to agree the matter of costs in any event and therefore make no order in that regard.
Bishopsgate Investment Management Ltd v. Homan
[1995] Ch 211, Court of Appeal
Dillon LJ: In essence VinelottJ held-that B.l.M. could only claim an equitable charge on any assets ofM.C.C. in accordance with the recognised principles of equitable tracing and these principles do not permit tracing through an overdrawn bank account-whether an account which was already overdrawn at the time the relevant moneys were paid into it or an account which was then in credit, but subsequently became overdrawn by subsequent drawings.
The judge reserved, however, the position if it were shown that there was a connection between a particular misappropriation of B.l.M.’s moneys and the acquisition by M.C.C. of a particular asset. The judge gave as an instance of such a case what he called ‘backward trac ing’-where an asset was acquired by M.C.C. with moneys borrowed from an overdrawn or loan account and there was an inference that when the borrowing was incurred it was the inten tion that it should be repaid by misappropriations ofB.l.M.’s moneys. Another possibility was that moneys misappropriated from B.l.M. were paid into an overdrawn account of M.C.C. in order to reduce the overdraft and so make finance available within the overdraft limits for M.C.C. to purchase some particular asset.
By a respondent’s notice by way of cross-appeal, the administrators ask us to overrule these reservations of the judge, and hold that even if the possible facts which the judge envisages were clearly proved that could not in law give B.I.M. any equitable charge on the particular asset acquired. For my part I would not interfere at all with this aspect of the judge’s exercise of his discretion. In my judgment, if the connection he postulates between the particular misappro priation of B.I.M.’s money and the acquisition by M.C.C. of a particular asset is sufficiently clearly proved, it is at least arguable, depending on the facts, that there ought to be an equitable charge in favour of B.I.M. on the asset in question of M.C.C. But the main claims of B.I.M. are put much more widely as claims to an equitable charge on all the assets of M.C.C. These claims arc not founded on proving any particular intention of Robert Maxwell or others in charge of M.C.C. but on general principles which it is said that the court ought to apply. They are founded primarily on certain observations of Lord Templeman in giving the judgment of the Privy Council in Space In-vestments Ltd v. C, Imperial Bank of Commerce T,ust Co. (Bahamas) Ltd [1986) I WLR 1072. In particular, In dlll case Lord Templeman said, at 1074:
‘In these circumstances it is impossible for the beneficiaries interested in trust money appropriated from their crust to trace their money to any particular asset belonging to trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee … to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank that equitable charge secures for the beneficiaries and the trust priority over the claims of the customers … and all other unsecured creditors.’
What Lord Templeman there said was strictly obiter, in that on the facts the Privy Council held that the bank trustee was authorised by the trust instruments to deposit trust money with itself as banker and so there had been no misappropriation. The beneficiaries or their new trustee therefore could merely prove with the other general creditors of the insolvent bank trustee for a dividend in respect of the moneys so deposited.
VinelottJ rejected the submissions ofB.I.M. founded on the Space Investments case. He con sidered that Lord Templeman could not have intended to effect such a fundamental change to the well-understood limitations to equitable tracing; Lord Templeman was only considering the position of an insolvent bank which had been taking deposits and lending money.
As I read the judgment of the Privy Council in In re Goldcorp Exchange Ltd delivered by Lord Mustill, it makes it clear that Lord Templeman’s observations in the Space Investments case (1986] I WLR 1072 were not concerned; at all with the situation we have in the present case where trust rooneys have been paid into an overdrawn bank account, or an account which has become overdrawn. Lord Mustill said in the clearest terms, (1995] 1 AC 74, 104-5:
‘Their Lordships should, however, say .that they find it difficult to understand how the judgment of the Board in Space Investments Ltd v. Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd [1986] I WLR 1072, on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: see, for example, In re Diploclt (1948] Ch. 465. The observations of the Board in the Space Investments case were concerned with a mixed, not a non-existent, fund.’
Thus the wide interpretation of those observations put forward by Cooke P [in the Court of Appeal in New Zealand in Re Goldcorp], which is the basis of the first ground of appeal in the present case, is rejected. Instead the decision of the Court of Appeal in In re Diplock; Diplock v. Wintle (1948] Ch. 465 is endorsed. There it was said, at 521:
‘The equitable remedies presuppose the continued existence of the money either as a sep arate fund or as part of a mixed fund or as latent in property acquired by means of such a , fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself.’
Also endorsed, in my judgment, in the decision of the Board delivered by Lord Mustill is the long-5tanding first instance decision in James Roscoe (Bo/Jon) Ltd v. Winder (1915] l Ch. 62, which Mr Heslop for B.I.M., in his submissions in March, invited us to overrule. That was a decision that, in tracing trust moneys into the bank account of a trustee in accordance with I11 re Hal/ett’s Estate; Knatchbu/1v. Hallett (1880) 13 Ch. D 696, tracing was only possible to such an amount of the balance ultimately standing to the credit of the trustee as did not exceed the lowest balance of the account during the intervening period. Thus as is said in the headnote to the report (1915] 1 Ch. 62:
‘Payments into a general account cannot, without proof of express intention, be appro priated to the replacement of trust money which has been improperly mixed with that account and drawn out.’
That reflects the statement by Sargant J in the James Roscoe case, at 69: ‘it is impossible to attribute to him’-i.e. the account holder-‘that by the mere payment into the account of further moneys, which to a large extent he subsequently used for purposes of his own, he intended to clothe those moneys with a trust in favour of the plain tiffs.’
… B.I.M. claims (as it has been explained to us) to be entitled to an equitable charge as security for its claims against M.C.C. (i) over any moneys standing to the credit at the time of the appointment of the administrators ofM.C.C. of any banking account maintained by M.C.C. into which any moneys ofB.I.M. or the proceeds of any assets ofB.I.M. misappropriated from it were paid and (ii) over any assets acquired out of any such bank account, whether or not in credit as at the date such assets were acquired.
So far as (i) is concerned, the point is that the National Westminster Bank account into which the misappropriated B.I.M. trust moneys were paid happened to be in credit when the admin istrators were appointed. B.I.M. therefore claims a lien on that credit balance in the National Westminster Bank account for the amount of the misappropriated trust moneys. It is difficult to suppose, however, in the circumstances of Robert Maxwell’s last days-and I know no evi dence-that Robert Maxwell intended to make good the misappropriation of the B.I.M. pen sion moneys by the cryptic expedient of arranging to put M.C.C.’s account with l’\ational Westminster Bank into credit-but without repaying the credit balance this created to B.I.M. But in the absence of clear evidence of intention to make good the depradations on B.I.M. it is not possible to assume that the credit balance has been clothed with a trust in favour ofB.I.M. and its beneficiaries: see James Roscoe (Bolton) Ltd v. Winder [1915] I Ch. 62.
As to (ii), this seems to be going back to the original wide interpretation of what Lord Templeman said in the Space Investments case [1986] I WLR 1072 and applying it to an over drawn account because the misappropriated moneys that went into the account were trust mon eys and thus different from other moneys that may have gone into that account. But the moneys in the Space Investments case were also trust moneys, and so, if argument (ii) is valid in the pres ent case, it would also have been valid, as a matter oflaw, in the Space Investments case. But that was rejected in In re Goldcorp Exchange Ltd [1995] I AC 74 because equitable tracing, though devised for the protection of trust moneys misapplied, cannot be pursued through an over drawn and therefore non-existent fund. Acceptance of argument (ii) would, in my judgment, require the rejection of In re Diplock [1948] Ch. 465, which is binding on us, and of Lord Mustill’s explanation of Lord Templeman’s statement in the Space Investments case in In re Goldcorp Exchange Ltd (1995] I AC 74, 104.
It is not open to us to say that because the moneys were trust moneys the fact that they were paid into a overdrawn account or have otherwise been dissipated presents no difficulty to rais ing an equitable charge on assets of M.C.C. for their amount in favour of B.1.M. The difficulty Lord Mustill referred to is not displaced.
Leggatt LJ: As this court asserted in Jn re Dip/ode [1948] I Ch. 465, it is only possible to trace in equity money which has continued existence, actual or notional. That was why in James Roscoe (Bolton) Ltd v. Winder [1915] I Ch. 62, where trust funds had been mixed with private moneys in a bank account and the credit balance reduced at one point to £25 18s. Od. before being replenished, Sargant J held that the beneficiary’s charge extended only to that sum. As Buckley LJ said in Borden (U.K.J Ltd v. Scottish Timber Products Ltd [1981) Ch. 25, 46: ‘it is a fundamental feature of the doctrine of tracing that the property to be traced can be identi fied at every stage of its journey through life.’
For the same reason there can be no equitable remedy against an asset acquired before mis appropriation 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.
… Lord Mustill, delivering the judgment of the Board in In re Goldcorp Exchange Ltd [1995] 1 AC 1 74, 104, stated that their Lordships found it difficult to understand how it would enable the claimants in that case to ‘overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist.’ Lord Mustill emphasised that the observations of the Board were concerned with a mixed, not a non-existent, fund. He also cited with approval James Roscoe (Bolton) Ltdv. Winder [1915] 1 Ch. 62 as conventionally exemplifying the principles of tracing.
I therefore consider that the judge came to the right conclusion, though I do not accept that it is possible to trace through an overdrawn bank account or to trace misappropriated money into an asset bought before the money was received by the purchaser.