I – CHAPTER 9

1. TRACING

Reading

• Michael Christie, “Tracing’, dalam Parkinson (ed), The

Principle of Equity (LBC Information Series, 1996) Ch 23
• Petitt, Equity and the Law of Trust 11th Ed (Oxford University
Press, 2009) Ch 24
• Dal Pont & Chalmers, Equity and Trusts in Australia and
New Zealand (LBC Information Services, 2000) Ch 37
• Hayton DJ, Hayton & Marshall, Commentary and Cases on
the Law of Trusts and Equitable Remedies 12th Ed (Sweet
& Maxwell, 2005) Ch 12

9.1 Introduction

Where a trustee breaches his or her fiduciary duty by dealing with

trust property as if it were his or her own, he or she will be
personally liable to the trust for any gain or loss there from. A
personal claim is only enforceable against a defendant personally so that a
judgment against him personally is no use if he is insolvent.

So if the trustee is insolvent, the beneficiaries may opt to pursue a

claim against the property that has been misused rather than a
personal action against a trustee. This is called tracing

Equity has developed identification rules to protect the plaintiff’s

proprietary interest so that the value of the original property can be
traced nto new assets to ascertain the value surviving in the
defendant’s hands no matter how many substitutions of one asset
for another has occurred. The right to trace allows a claimant to
identify and follow property into the hands of a third party even
where the property has been mixed or the form of the property
has changed.

See Foskett v McKeown [2000] 3 All ER 97 Per Lord Millet

Facts: The beneficiaries were M’s business clients. They tried to

trace into the death benefit on a life insurance policy which M’s
children had received on M’s death. M had made five premium
payments on the policy: three of his own money and two of trust
money.

The Court of Appeal: The beneficiaries could only claim the amount
 of the premiums plus interest.

House of Lord overturned the decision and held: That the

beneficiaries could claim a share proportionate to the amount that
the trust money contributed to the purchase price.

Lord Millet:
“Where a trustee wrongfully uses trust money to provide part of the
cost of acquiring an asset, the beneficiary is entitled at his option
either to claim a proportionate share of the assets or to enforce a
lien upon it to secure his personal claim against the trustee for the
ammunt of the mis applied money. “

9.1.1 Tracing at common law

At common law, tracing of property is allowed in a number of

situations:

(a) A pre-existing common law cause of action

(b) Clear succession to the property
(c) That property remained identifiable

Case: Re Diplock [1948] Ch 465

Diplock left some money on trust in his will for charity. His executor
was given absolute discretion to decide on the distribution of the
gift, which he distributed to a number of welfare homes. When the
will was found to be invalid, the heirs of Diplock’s estate brought an
action for the return of the gifts by the welfare institutions.

Issue: Can they follow the money into the hands of the recipients
of the gift?

Held: Lord Greene MR held that common law takes a materialistic

approach to mixed funds and looks at the physical identity
of the property.
 See also:

Puma Australia Pty Ltd v Sportsman’s Australia [1994] 2 Qd R 159

Per MacPherson ACJ at 162-163.

What is clear is that the right to trace at law ceases when the thing, or
more often the proceeds of its sale in the form of money, is intermixed
with other things or money so as to lose its identity … Once that
point is reached, the common law, acknowledging that ‘money has
no earmark’ , abandons the pursuit of equity.

9.1.2 Tracing of property in equity requires

(a) That there be a fiduciary relationship (and a breach of that

relationship)

Cases:

• Sinclair v Brougham (1914) AC 398 HC

• Re Diplock [1948] 1 Ch 465
• Agip (Africa) Ltd v Jackson [1990] Ch 265 -
• Chase Manhattan NA v Israel-British Bank (London)
Ltd [1981] 1 Ch 105
• El Ajou v Dollar Holdings plc [1993] 3 All ER 717

(b) There must be continued existence of the property but the

real advantage of equitable tracing is that it is not defeated by
the property having been mixed with other property.

Case: Re Diplock (supra)

(c) Property must be identifiable (but this is given a liberal

interpretation) – property that is mixed might still be followed
into the hands of another).

See - Mixing trust money and trustees money

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Cases

• Re Hallett’s Estate (1880) 13 Ch D 696

•
Facts: A solicitor mixed trust funds with his own money in a
bank account. He then made various payments out of and
into the funds. At his death the balance exceeded the
amount of the trust but not sufficient to meet his other debts
as well. It was held that the beneficiaries were entitled to a
charge for the full amount of trust moneys ahead of the
other creditors . He was ssumed to have spent his own
money first.

• Re Diplock (above) - Lord Green MR at 520

Equity adopted a more metaphysical

approach. It found no difficulty in regarding a
composite 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 … 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.

(d) Where defendant mixes the monies belonging to two or

more parties who are innocent and dissipates the money
or invests in shares or buys property with the money-
Beneficiaries are entitled to trace into the shares.

Case: Re Oatway [1903] 2 Ch 356

Foskett v Mc Keown – claimant can assert ownership in
proportion to the contribution.

(e) Where the defendant transfers property of monies to a third

party

Case: UMBC v Aluminex (M) Sdn Bhd [1993] 3 MLJ 587

Although the legal ownership to the glass has been

transferred to A, the glass is still subject to an equitable
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 charge for the benefit of UMBC.

9.2 How the Courts Give Relief through Tracing

(a) An order to restore the monies that have not been mixed
(where the defendant holds the original property)

(b) Order or declaration of a charge over the mixed funds or

property.

Cases:

• Re Hallet’s Estate (1880) 13 Ch D 696

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 • El Ajou v Dollar Land Holdings No 2 [1995] 2 All ER
221, 223
• Re Hallett’s Estate, Sir George Jessel MR:

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 generally

express it, he is entitled at his election either to take
the property, or have a charge on the property for the
amount of the trust money.

9.3 The Tracing Steps

9.3.1 Mixing of trust moneys with personal money of a trustee –

Equity presumes that the trustee uses his personal funds first,
so that any amount remaining is trust monies

Case: Re Hallett’s Estate (1880) 13 Ch D 696

The trustee, a solicitor, mixed moneys held on trust for a client with
his own money. The trustee subsequently died insolvent. The client
was allowed to trace her money into the bank account and claim the
balance remaining as trust moneys thereby removing those moneys
from the pool to be distributed among the trustees general body of
creditors.

9.3.2 Equity limits the beneficiary’s claim to the lowest balance in the
account between the date of the wrongful deposit and the date the
claim was made unless there is evidence of the trustee’s
intention to restore the funds in the depleted account.

Cases

• Re Oatway [1903] 2 Ch 235

• Roscoe (Bolton) v Winder [1915] 1 Ch 62 (No equitable
right to subsequent deposit by the fiduciary unless there is
intention to restore the moneys that was wrongly used)
• Re Goldcorp Exchange Ltd [1995] 1 AC 74
• Kensington v Liggett [1994] 2 NZLR 385

9.3.3 The principle is not restricted to money – may apply to other

property

Case: Re Hallet’s Estate (supra) at 338-339

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 Equities are not defeated if a trustee mixes trust
moneys with his own moneys and with the mixture
purchases a grey horse and a black horse, or a grey
horse alone. In such a case equity imposes a charge
on the two horses or the one horse. But where it is
possible to give effect to the rights of a cestui que
trust by simply taking out so much money or so many
bonds or so many shares, the cestui que trust may
elect whether he will take property in specie out of the
mass or have a charge on the mass..[t]hat distinction
is well illustrated by the contrast between the case,
instanced above, where a trustee has mixed trust
moneys with his own and bought a horse, and the case
where he has mixed trust bonds with bonds of his own.
Yet a horse is an ‘indistinguishable mass’ in almost
the opposite sense. The horse is an ‘indistinguishable
mass’ in the sense that it is no tracticable to attribute
one part of him to the trust fund and another part of
him to the trustee’s own funds. The bonds are an
‘undistinguishable mass’ in the sense that there is
no practical reason for differentiating one bond from
another and it is quite possible to take out so many
bonds as will suffice to make a good trust fund. The
real distinction which equity draws is between the case
where it is, and the case where it is not; practicable
to give effect to the rights of the cestui que trust by
approaching to him a specific severable part of the
available properly.

9.3.4 Property must be in existence to permit tracing

Whether the property to be traced is money, shares or other property,

the property must be in existence.

The right to trace ends when the property is dissipated.

For instance, equitable tracing cannot be pursued through an

overdrawn (and therefore, non-existent) bank account.

Cases

• Re Diplock [1948] Ch 465

• Bishopsgate Investment Management Ltd v Homan [1994]
3 WLR 1270

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9.3.5 Increases in value of property traced

Trustees must account to the beneficiaries for any profit made from
the trust fund whether by breach of trust or in the ordinary course of
management of the trust.

Cases

• Re Tilley’s Will Trust [1967] 1 Ch 1179

• Re Oatway [1903] 2 Ch 356

Per Joyce J:

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
belonging to the trust.

Case: Foskett v Mc Keown [2000] 3 ALLER 97

9.4 Mixing of property from more than one trust – the allocation
step

(a) First issue is - the identification of the property.

(b) Second issue - involves the distribution of the property
among the trusts involved

9.4.1 General rule of distribution is - pari passu

Case: Sinclair v Brougham [1914] AC 398

9.4.2 Mixing of funds in one bank account

The general rule for mixed funds in a bank account is “ First in, first
out“.

See: Devaynes v Noble (Clayton’s Case) (1816) 1 Mer 572; 35

E 718

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  Exceptions:

(a) Where there is a specific contrary agreement

between client and banker
• Barclays Bank Ltd v Quistclose Investments
Ltd [1970] AC 567

(b) Where specific withdrawals are indicated as

belonging to a particular trust
• Re Diplock [1948] Ch 465, 551-552

(c) Does not apply to transactions entered on the same

day but rather to the balance at the end of the day
• The Mecca [1897] AC 286, 291 per Lord
Halsbury LC

(d) Will not apply where there are distinct and separate
debts
• The Mecca [1897] AC 286

 Note

The application of Clayton’s rule has been questioned in a number of

cases including Barlow Clowes International Ltd ( in liq) v Vangham [1992]
4 All ER 22; also in New Zealand in Re Registered Securities [1991] 1
NZLR 545.

Should the the rule in Clayton’s case be done away with?

9.5 Limits to the right to trace

9.5.1 Bona fide purchaser for value without notice

Case: Re Diplock

9.5.2 Impossibilty of identification of property

Case: Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch

25 46

The manufacturer has mixed the resin with other materials

to produce carpets. It will be imposible to restore or to take
back the resin in the unaltered form.

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 However, the impossibility of precise identification, arising from the mixing by the
wrongdoer, of funds belonging to the wrongdoer and the claimant will not
preclude tracing.

Case: Sumitomo Bank v Kartika Ratna Tahir [1993] 1 SLR 735

9.5.3 Where tracing will cause hardship and result in injustice Case: Re

Diplock
Takako Sakao v Ng Pek Yuen (no.3) [2010] I CLJ 429

What about an innocent volunteer? The right to trace will not be available
against moneys that an innocent volunteer has used to extinguish or to settle a
debt.

9.5.4 Backward tracing

Case: Bishopsgate Investment Ltd v Homan (supra)

There can be no equitable remedy against an asset acquired

before misappropriation of money takes places, since ex-
hypothesis it cannot be followed into something which existed and
so had been acquired before the money was received and therefore
without its aid.

9.5.5 Proprietary Estoppel (See Part I : Ch 5)

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