FOLLOWING AND TRACING

⇒ “Following” and “tracing” are both exercises in locating assets which are or may be taken to represent
an asset belonging to claimants and to which they assert ownership.

 Following and tracing are proprietary remedies

 Tracing is a process. Tracing itself is not a remedy (Boscawen v Bajwa 1996)

 Therefore, 2 thing must happen: first, trace into the appropriate property; and, secondly, identify the

best remedy to bring against that property

o The court may order compensation (Target Holdings), order property be restored by

transferring it to original owner (Foskett), order the property be held on resulting trust

(Dollar Land Holdings), or constructive trust (Islington), or be subject to a charge (Barlow

Clowes)
⇒ “Following” is a process of following the same asset as it moves from one person to another

 So if there is a trust asset and the trustee gives it to somebody in breach of trust, this does not stop it

from being trust property

 The property can be followed into the hands of the other person and the beneficiary can assert a

proprietary right

 Lord Millett has described the notion of following as “the process of following the same asset as it

moves from hand to hand” (Foskett v McKeown 2001)

⇒ “Tracing” is the process of identifying a new asset as substitute for the old — for example if money is
used to purchase a car, the money can potentially be “traced” into the car.

 Here the claimant is seeking to assert title to substitute property, which might take the form of sale

proceeds, or of some composite property in which the original property has been combined in some

way

 They may also be able to take advantage of increased value of any property

Common Law Tracing

INTRODUCTION
⇒ Common law tracing: you can trace to third parties but only through clean substitutions of property. In
other words, you cannot trace property at common law if the property has become mixed with any other
property
  The claimant must demonstrate the property is the very property which is to be restored or that the

property claimed has not been mixed with any other property e.g. Banque Belge v Hambrouck:

Provided money in bank accounts was held unmixed with other moneys, it was possible for common

law tracing to be effected

⇒ In Taylor v Plumer (1815), Lord Ellensborough was clear that there must be a clean substitute to trace
at common law, such that the substituted can be ascertained to represent the original property

 So if you convert the property into money and mix that with other money you lose the power to trace

at common law - this means that common law tracing is very rarely applied

 So an equitable claim of tracing is much more powerful than a common law claim of tracing

THE COMMON LAW CANNOT TRACE PROPERTY THROUGH

A MIXED FUND
⇒ For example, in Agip (Africa) v Jackson [1991], the Court of Appeal found that the money could not be
traced at common law, as it had passed through mixed funds

⇒ In FC Jones & Sons v Jones [1997], there was a significant development in the scope of common law
tracing - the Court of Appeal held that the Official Receiver could use common law tracing to receive
money loaned to someone PLUS the profits she made from that loan, on the basis that the money was
clearly identifiable in a separate bank account

Tracing in Equity

INTRODUCTION
⇒ If the claimant is able to establish property was transferred in breach of a fiduciary duty they will be
able to use equitable tracing → this allows the claimant to trace through mixed funds; and to take the
increase in value of any assets bought with the funds. However, this is also, it appears, available in
common law tracing (FC Jones & Sons v Jones [1997])

⇒ Equity can also trace money through electronic fund transfers, whereas common law cannot: see Agip
(Africa) v Jackson [1991]

REQUIREMENTS TO TRACE IN EQUITY

⇒ The claim must be based on a pre-existing fiduciary relationship

 It is a pre-requisite for an equitable tracing claim that the the claimant had some equitable interest in

the original property, or that the person who transferred the property away had some fiduciary

relationship to the claimant (such as being a trustee)

⇒ Property must be in a traceable form; (i.e. there must be some property to attach to) and
⇒ It must be equitable to trace.

⇒ Re Hallett's Estate 1879: this case clearly states the requirements needed to trace in equity

⇒ See the case of Sinclair v Brougham [1914] for an example of equitable tracing

⇒ In the case of In Re Diplock [1948], following the case of Sinclair v Brougham [1914], the Court of
Appeal held that equity operates not only on those that acquire property through their own breach of trust,
but also in hands of people who are volunteers: equity can follow property into hands of people who do
not know there has been a breach of trust (i.e. innocent volunteers) (Lord Green)

⇒ There are, therefore, two main circumstances we will look at: 1) where the property remains in the
hands of the defaulting trustee or fiduciary and used property for their own use; and 2) where the property
has passed into the hands of a third party.

1) Property remains with trustee

MIXED FUNDS – MIXED WITH TRUSTEE’S MONEY

⇒ In other words, where the fiduciary/trustee takes money from the trust fund and mixes that money with
their own money, how does equitable tracing operate in that circumstance?

⇒ The doctrine of the ‘honest trustee’ assumes that, where a trustee has mixed trust money with his own,
and that some of the money is spent on items of value, such as shares, and other money diddipated,
the trustee has invested the trust money and invested his own

 In other words, the court may choose if it is a trust investment or from trustee’s own pocket (if

investment is good it will be trust investment, if bad it will be from own pocket)
⇒ See the cases of In re Hallett's Estate (1879) and In re Oatway [1903]

MIXED FUNDS - LOWEST INTERMEDIATE BALANCE

⇒ Where a mixed bank account contains trust funds and other money, whether the other money belongs to
an innocent 3rd party or person in breach, then money which has been dissipated (and hence untraceable)
cannot be replaced by money put in account later

 So, let's say a trustee puts £1000 of trust money into his personal bank account and dissipates it, then

places another £1000 of his own money into that account, the claimant cannot trace into the money

deposited later → The maximum amount that can be reclaimed from that bank balance is the lowest

intermediate balance. The claimant will, however, still have a personal claim against the trustee
⇒ For example, in James Roscoe (Bolton) Ltd v Winder [1915], a trust fund was mixed with private
money in a bank account. The owner of the account spent most of it reducing the total credit in the bank to
about £25 at one point. Money was later paid in, resulting in a balance of £358 at his death. It was held that
the seller could not claim more than £25 from the deceased's bank account (as that was the lowest
intermediate balance)
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MIXED FUNDS – THE RULE IN CLAYTON’S CASE

⇒ In Clayton's case a ‘first-in, first out’ rule was adopted i.e. payments into and out of an account were set
off against each other in order in which they occurred

 If there is a mixed fund in a bank account representing the funds of two trusts this rule will apply →

so let's say £100 of one beneficiary is paid into a bank account, and later £100 of a 2nd beneficiary is

paid into that bank account. If the trustee then dissipates £100 for personal use the 1st beneficiary will
 have no equitable right to trace, but the 2nd beneficiary will be able to trace the remaining £100 (as

the first in was the first beneficiary's money, so his was the first out too)

 This rule is settled law and designed for convenience sake

⇒ In the Clayton's case there was a partnership that, in breach of its fiduciary duty, sold treasury bills
worth £1035 deposited by Clayton and kept the proceeds for its own use. However, Clayton continued to
deal with bank and drew out sums greater than the amount converted by the bankers. It was held that
Clayton could have no claim against estate in respect of the £1,035, as that debt was set against the later
drawings.

⇒ In Barlow Clowes [1992] the rule in Clayton’s case was reaffirmed as the prima facie rule, but it will
not be applied it impracticable or would result in injustice

THE ‘ROLLING CHARGE’

⇒ An alternative means of allocating the property is the ‘rolling charge’: each payment out the account is
allocated, pari passu, to the beneficial owners of property at the time of payment

 This is seen as fairer → money is paid out in proportion to their contributions, taking into account

length of time money was part of the fund

 Issue is that it is very complex, requiring a reconstruction of every transaction

⇒ Dillon LJ in Barlow Clowes [1992] accepted the rolling charge, in principle, is a better way of doing
things; but was too impractical to apply in the case

⇒ Although it’s been acknowledged as the theoretically most equitable way of determining each claimant's
beneficial interest in remaining property, it has never been applied by English courts

BENEFICIARIES’ RIGHT OF ELECTION

⇒ Where an asset has been bought by the trustee in breach of trust, then the beneficiaries may elect to
accept the asset as trust property or take a lien (i.e. a right to take possession of property until one is paid
what one is owed) over the property against the trustee.

 E.g. in In re Oatway [1903] the beneficiaries were able to elect to have the valuable shares subsumed

into the trust as opposed simply to taking rights over money

2) Property passes to Third Party

INTRODUCTION
⇒ In other words, if trust propery is misapplied such that it is mixed with property belonging to an
innocent 3rd party (rather than with the trustee's own money), how does equitable tracing work in that
cirucmstance?
  Therefore, rather than consider the issues which arose above concerning the obligations of the

wrongdoing trustee, it is now necessary to decide how property belonging to innocent parties should

be allocated between them

THIRD PARTY HAS KNOWLEDGE OR NOTICE

⇒ If 3rd party knows property has passed in breach of trust, they are subject to the same liability (i.e.
personal and proprietorial liability) as the original fiduciary, by the doctrine of knowing receipt

⇒ A party with notice of the trust cannot raise the defence of being equity’s darling (i.e. a bona fide
purchaser of trust property for value without notice), and may have to restore the property, even if they
have provided value

⇒ See, for example, Papadimitriou v Crédit Agricole Bank [2015] where it was held the art collector’s
family were able to trace the property into the hands of the bank as the bank had notice of the claimant's
proprietary interest (and therefore could not raise the defence of Equity's Darling)

INNOCENT VOLUNTEERS
⇒ An innocent volunteer is one who is not party to and does not have notice of the breach of trust; and
who has not provided value for the property received.

⇒ Foskett v McKeown [2001] demonstrates that prima facie an innocent volunteer who receives property
in breach of trust has to return it → but, if the innocent volunteer mixed it with their own property they can
claim proportionally their own money from the mixed fund pari passu; whereas, a trustee in breach or 3rd
party with knowledge/notice cannot do this

⇒ In In Re Diplock [1948], the trust failed as a purpose trust, so the property was held on resulting trust
for the residuary beneficiaries. Accordingly, they were entitled to trace the money from innocent parties,
including some charities. (Lord Greene)

MIXED FUNDS – WHERE MIXED WITH INNOCENT PARTY’S

MONEY
⇒ Lord Greene in In Re Diplock [1948] said the Innocent Volunteer and the beneficiary have equal pari
passu mixed claims to a mixed trust → they have proportionate claims to the fund

 So if the innocent volunteer has unmixed trust property the beneficiary can take it all back, but if it is

mixed they share the property pari passu

Untraceable Property

DISSIPATED MONEY
⇒ If the property has been dissipated then there is no property to trace. In the case of bank accounts, when
the account becomes overdrawn, there can be no further tracing.
⇒ See the case of Bishopsgate Investment Management v Homan [1995]

BACKWARDS TRACING
⇒ The Privy Council has accepted that ‘backward tracing’ should sometimes be allowed → this is tracing
into an asset acquired before the breach of trust e.g. if a trustee borrows money from the bank to buy a
house, then takes money from the trust fund to pay off a mortgage on a house, the court can trace into the
house, even though the loan account is never in credit

 Strictly speaking the beneficiary's interest has been dissipated, but backward tracing allows the

beneficiary to claim the asset acquired by the fraudster with the loan money
⇒ Federal Republic of Brazil v Durant International Corporation [2015] (Lord Toulson) → the court said
backward tracing is not standard: what you have to show is some sort of link between the acquisition and
the breach of trust

UNASCERTAINED GOODS
⇒ Tracing cannot follow property into unascertained goods: see Re London Wine and Re Goldcorp

USED TO IMPROVE REAL PROPERTY

⇒ Although money can be traced into mixed accounts and assets bought partly with trust money, where
money is used to improve real property, it is regarded as incapable of being disentangled from the D’s
property and no longer traceable. Re Diplock [1948]

EQUITY’S DARLING (I.E. BONA FIDE PURCHASER FOR

VALUE WITHOUT NOTICE)
⇒ As a rule, you cannot trace property bought by someone who is equity’s darling

 “Where the moneys are handed to a person who takes for value without notice, the claim of the owner

of the moneys is extinguished.” Re Diplock

⇒ The claimant will, however, have a claim against the proceeds of sale, if they are in traceable form.

DEFENCE OF CHANGE OF POSITION

⇒ This defence will be available to a defendant who has received property and, on the faith of that
property, suffered some change in her personal circumstances

⇒ In Lipkin Gorman v Karpnale [1991], Lord Goff held where an innocent volunteer’s position is so
changed he will suffer an injustice if called to return the property, then he should not have to return the
property to the claimant as “the injustice of requiring him so to pay outweighs the injustice of denying the
claimant's restitution”
 This case is not actually based on equitable tracing: it was a claim in restitution on the basis of unjust

enrichment under the common law → as such, it is not binding authority for the defence of change

in position as a defence to money received in breach of trust by an innocent volunteer