TRACING

When there are a large number of trustees, they must generally act unanimously
to avoid impasse. When a stalemate is observed between trustees in Luke, the
only reasonable solution is judicial intervention. As stated in Swale v. Swale, the
primary principle requiring harmony appears to be that a settlor, by appointing
multiple trustees to administer the trust, is presumed to have intended for the
trust to benefit from the "assistance and discretion" of all trustees. Brightman J
ruled in the case of Re Butlin's Settlement Trusts that it would be unjust to
"supersede the realistic resistance of the par of impeccable trustee to
accommodate the needs of the settlor who, or whose adviser, have ex ante
erred." According to the Dimes v. Scott case, trustees are not beyond reproach
with regard to trust property and are accountable for the account information of
trust property. Additionally, there are benefits to using proprietary remedies.
First, the satisfaction of the plaintiff's petition is not dependent on the credibility
of the defendant. Second, the plaintiff can seek compensation for the increase in
value of the property in question. It relates to assets that generate income, with
interest calculated from the date the property came under the defendant's
control.
This is a type of remedy that allows a claimant to treat specific property as his
own, and it applies to tracing under both Common Law and Equity. Paul S. Davies
argued in his article that Lord Browne-decision Wilkinson's in Target Holdings Ltd
v Redferns: where a trustee mismanages trust property, a beneficiary is limited to
seeking equitable compensation for damages caused by the trustee's breach of
duty. It may be considered a departure from traditional equitable doctrine, which
held that the beneficiary could invent the trustee's unauthorized expenditure and
sue for an 'equitable debt.' Tracing is not technically a remedy, but rather a
process that identifies any trust property that has been transferred to a recipient
who has breached the trust. Now, the beneficiary can submit a proprietary claim
to establish his ownership of the property. Personal claims have fewer advantages
than proprietary claims. It may be available, for instance, when there is no valid
personal claim, such as when the trustee is insolvent and the person in possession
of the property is a volunteer. Tracing has been governed differently by common
law and equity. The common law rules are characterized by their strictness. Both
judges and commentators are dissatisfied that the law has failed to establish a
unified set of rules for claimants in both law and equity. In Jones (FC) & Sons,
Millet LJ stated that "tracing is neither a right nor a remedy; it is merely the
process by which the plaintiff establishes what has happened to his property and
proves that the assets he claims are properly considered to represent his
property." The same concept can be found in Foskett v. McKeown. However, a
distinction existed in the case of (Shalson v Russo).
Tracing requires two prerequisites before it can be performed. The first
requirement is that the parties must have a fiduciary relationship. Traceability of
the property is required. Conventional wisdom holds that a claimant may only
invoke the equitable tracing rules if he can demonstrate the existence of fiduciary
obligations between the claimant and the wrongdoer [Agip (Africa) v. Jackson]
(1990). Other types of claims, such as a mistaken overpayment made by the
claimant bank to the recipient bank, present greater challenges. In Chase
Manhattan v. Israel-British Bank, the court's search for evidence of fiduciary
obligations led it to identify a fiduciary duty that arose upon the defendant bank's
receipt of the payment, when its conscience was suitably affected. In Foskett v.
Mckeown, Lord Millett acknowledged that there was no logical justification for
requiring a fiduciary relationship as a prerequisite to tracing in equity. According
to the second tracing requirement, the property must be traceable, and the
beneficiary may claim either the property or a charge on the property for the
purchase price (Sinclair V Brougham). However, problems arise when money is
combined with other funds in a mixed bank account.
The claimant may benefit from the application of the rules in Re Hallett's Estate
and Re Oatway in situations where the trustee mixes trust funds with his own
funds and uses the combined funds to make investments or purchases. According
to the rule in Re Hallett's Estate, a trustee is presumed to use his own funds first
and is not expected to commit a breach of trust. For example, a trustee has 1,000
pounds in his account, consisting of 500 pounds of his own money and 500
pounds of trust funds. Then, he invests £500 in a vacation. The five hundred
pounds he spent are his own funds. In Re Hallett's Estate, the overarching
principle is that the beneficiary has first charge on any property acquired from a
mixed fund. In Re Oatway, however, a trustee invested money from a diversified
fund. He subsequently withdrew the remaining funds, which he subsequently
spent. Creditors could not successfully argue that the trustee was obligated to
spend his own funds first in such circumstances. Beneficiaries were entitled to
both the investments and any profits they generated.
It is only possible to trace the account's lowest intermediate balance (James
Roscoe (Bolton) Ltd v. Winder). As demonstrated in the preceding illustration, 500
pounds remain in the trustee's personal account. If the trustee spends an
additional 400 pounds but then deposits 200 pounds from his own funds, the
account balance is 300 pounds. Only 100 pounds are accounted for. The
remainder has disappeared. Consequently, none of the 200 pounds deposited
into the account can be considered trust property. As a result, the lowest
intermediate balance on the account is 100 pounds.
Backward tracing involves tracing assets technically acquired prior to the
misappropriation of trust funds based on the assumption that the wrongdoer
intended to use the misappropriated funds to finance the acquisition of the asset.
A wrongdoer may, for instance, use his overdraft facility to withdraw £15,000 in
order to purchase a speedboat. Consequently, he stole £15,000 to restore the
account's balance. Backwards tracing has been rejected by the courts on the
grounds that tracing is a process that disregards the wrongdoer's intent
(Bishopsgate Investment Management V Homan). In Federal Republic of Brazil v.
Durant International Corp, however, the Privy Council recognized the possibility of
backward tracing. Lord Toulson stated that in order to backtrack and even trace
into an overdrawn account, it is necessary to retrace one's steps. "The claimant
must establish a coordination between the depletion of the trust fund and the
acquisition of the subject asset, taking into account the entire transaction, so that
the court can attribute the value of the acquired interest to trust fund misuse."
The swollen assets theory involves tracing the wrongdoer's general assets on the
basis that the misappropriation has "swollen" those assets in instances where the
claimant can no longer locate the trust property or its specific value. For instance,
misappropriated funds deposited into an overdrawn account may cause the
claimant to question why he cannot locate other accounts with positive balances
held by the perpetrator. Such arguments elicit little judicial enthusiasm (Serious
Fraud Office V Lexi Holdings PLC). To balance the competing claims of
beneficiaries and innocent volunteers, the rules for dealing with more complex
mixtures, such as two trust funds or a trust fund mixed with an innocent
volunteer's property, are different.
There are three options:
 Clayton's Case: First in, First out. It is assumed that withdrawals occur in the
same sequence as deposits.
 The proportionality theory (Foskett V Mckeown). The method involves a
distribution proportional to the amounts contributed to the funds.
 When there are a large number of contributors to a fund, the North
American rolling charge (Vaughan v. Barlow Clowes International) method
has been adopted in the United States and Canada as producing the most
equitable results.

In a number of instances, the right to trace is lost or it is evident that the claimant
will fail. If the claimant's property has been consumed or destroyed, the claim
may be denied. Sinclair Investments (UK) Limited Funds were deposited into an
overdrawn account and creased for identification purposes: Shalson, No
proprietary claim for value can be asserted against a bona fide purchaser without
notice of the equity: Sinclair Investment (UK) Ltd and tracing will not be permitted
because it would be unjust. Consequently, a "change of position" defense may be
accepted if the position of an innocent recipient has changed to the extent that
he will suffer an injustice if forced to repay or repay in full (Re Diplock's Estate).