Tracing in equity is proprietary: what youre seeking as a remedy is recovery of the asset, only equity can give this

type of result. There are advantages in insolvency, the tracing process will give you the asset back and ahead of everyone else. Insolvency lawyers dont like this because the equitable process takes ahead (doesn't matter about other parties) So what happens when the process in Equity merges in common law? does it stay proprietary or move into a personam approach? Following and Tracing: Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Note: tracing is NOT a remedy! Its merely a process - the remedy will be decided by the Court if a successful claim is brought. Tracing may be concluded at law or in equity - different rules apply to each.

AGIP v Jackson he obtained property by theft, there were many claims of dishonest assistance, tracing at Common law etc. Millet J: the process in equity requires a fiduciary relationship, fundamentally with this established, youll be able to trace.

Possible defences: 1 2 Equitys darling i.e. the bonafide purchaser The defence of innocent change of position (this is for the restitutionary claim)

Should you have a personal type defence to the tracing process? Seeing as how the starting point is fiduciary, so it demonstrates the personam roots, note that all categories of fiduciaries count. AG Hong Kong v Reid R becomes director for public prosecution for govt of HK. R likes lots of money, accepts bribes, was found out R received over 12mn and the state sought to recover this money. R bought 3 properties in NZ for his retirement why did they bring these type of proceedings (tracing in equity) when he was personally liable? They could recover the 12mn but if they trace the properties (and R made a profit) the claimants can gain on the profitability of the asset PC: what R received was a bribe (Reid was a fiduciary) and so was accountable; if bribe is put into a property, the Cs can get the asset and its increase value, they relied on the maxim equity looks at what ought to be done as done.

Note the use of a constructive trust.

Daragdon Holdings Ltd the true price of any goods will be at least increased by the amount of the bribe. there are policy reasons for ensuring that a fiduciary doesnt gain the bribe, there are policy reasons for ensuring that a fiduciary doesnt gain from when theyve gained fraudulently (idea of restitution)

Re Diplock will go for such charitable institutions or other charitable or benevolent objects in England as the trustee should in their absolute discretion. benevolent was used during litigation, and it was found to be not exclusively non charitable trust; so went back on resulting trust for next of kin. However, the money had already been given to other charities (careless) so now kin wants recovery and pursued the tracing process; it could be brought since there was a fiduciary relationship (executor and beneficiaries). This was confirmed in Westdeutsche i.e. there has to be an identifiable asset. Note that tracing is not allowed on particular facts e.g. Re Goldcorp, this was because it was an insolvency case, and thats why it couldnt be traced.

El Ajou v Dollar Land Holdings You should be able to trace when your property has been stolen right? Well Millet says that you CANT. Tracing cant work because there is no fiduciary relationship, we need to find a better reason to trace - the thief is a stranger. However, with a resulting trust, which is automatic, the basis of the trust is principled (so youre getting restitution on what is yours, good and bad is irrelevant but its about restoring the Claimant.) However, the historical approach is a constructive trust:

Banque Belgue H got monies fraudulently, paid into his own account, then moved into his flatmates account (2nd account). Note that the monies were unmixed - so under common law money could be traced and 2nd def could be made personally liable

Could it be brought in equity? Yes, a constructive trust can be imposed because of the wrongful conduct, whereas a resulting trust its simply due to proprietary reasons i.e. X owes it so it should go back to X.

Westdeutsche confirms the constructive trust approach.

Chase Manhattan Bank Chase Manhattan

CM made a payment into a bank twice by accident, but made it a second time, bank should have returned it, bank went into insolvency, where CM entitled to recover the money? Browne Wilkinson LJ: CM wants to argue that it has rights under a constructive trust (if you have rights of a Beneficiary under the trust you become the secured creditor on insolvency and you can take your property rights no matter what. Did the receiving bank realise that the transfer had been made mistakenly? If they did and hence realised the unconscionable fact they would be held to hold the second payment on CT for Cm. But if they didn't realise, there could be no CT The Courts held that the mistake gave rise to a fiduciary relationship (anything to give rise to a particular necessary result)

If someone has your property you can rescind the agreement so that the owner recovers/ or is able to recover the equitable interest. Fundamentally, equity wants a process that gives a result, we could just rely on fiduciary relationship, but the others broaden it out. Boscaven v Bajwa: LJ Millet: tracing is neither a right or a remedy but simply a process, whereby C traces what has happened to his or her property, identifies the person who has handled or received it (the person who then currently holds it, you can trace into the property). Also, C justifies his or her position by asserting that the property that received by someone else can properly be regarded as his or her property. Basically the C was the owner and has retained (or can show) the equitable interest which C handles or receives. This demonstrates that the process is proprietary, important ramifications. If your money is used to apply or improve a particular property (i.e. it goes into the asset) it may be very difficult to recover because you would have to sell the property, but equity gives you a charge over the asset so that you can get your money back and you are protected in the

meantime - the charge is important because it is consistent with following the asset and demonstrating its proprietary nature. Common Law says that if the money is mixed there is no tracing, if its unmixed the common law is just as good as equity, but if mixed, equity will allow it, saying it wouldnt be equitable for C they would be left without a remedy. Equity is prepared to trace mixed bank accounts. If that becomes difficult, it will find a conceptual way to determine how much money is recoverable. Foskett v Mckeown case involved M who took out a life insurance policy, he was well insured, if he was to die, a million pounds was to be paid out under the policy. the first two premiums were paid by M using his own money. around 1989/90 he then decided to perpetrate a fraud, and in order to pay the premium he no longer used his own money but dipped his hands into a trust fund, and he took out money which was held on trust. It so happened as well as taking out the policy, M was in charge of a property development scheme to buy land abroad and loads of customers put money into this scheme (and thus being held on trust for the customers) but in 1989/90 the fourth and fifth premiums came directly from the trust for the customers - who was to benefit under the life insurance policies? his children were the beneficiaries. M then committed suicide in 91. thereby triggering the life insurance policy. The question was who was entitled to the million pounds. The children? Or the customers? Came before the HL, the CA reversing the HC held that these customers could not trace into the life assurance policy. Rationale: this whole thing was intended for the children, they were the intended Bs and this express trust couldnt change by having proceeds from a different source. LJ Morrit (dissent) - customers money could become part of the asset so that when there was a payout those customers were entitled to a share. This being an important test case went to the HL: Lord Hope said that the tracing process being pursued by the customers was a proprietary process, they were following their money from the scheme in Portugal to Ms life insurance policy. HL held (overturning CA and reinstating the HC - see the dissention) by majority 3-2, these customers were entitled to trace into the life insurance policy. How? they would be entitled to the share of 1mn proportionately to how much their premiums were to the premiums of the children. So since they paid the 4th and 5th premiums, they are then entitled to that part of the payout. Whats unusual is that the asset is a life insurance policy, but still the basic rules still applies. Millet and Hoffman- this is a proprietary process, what did it mean to trace in this regard? You trce into the insurance policy which was the bundle of rights the policy holder was entitled in return of the premiums (so on the death of M 1mn was to be paid out, so you trace into that) These rights were choses in action, and you can trace into them, a debt was an item in property like anything else. Regarding the children, it followed that the Bs could also trace into this policy

Browne Wilkinson: tracing into an insurance policy is wholly analogous to tracing into a bank account. Hoffman: the conclusion should be pro rata i.e. how much premium was the childrens and how much belonged to the 3rd party. Broadly, they looked at it by looking at it proportionally to the units of the insurance policy. Key case: fairness is irrelevant, but rather its about asking where has the money gone, once the money has gone into the asset, its when you can start the process. (this is due to the proprietary nature of the asset) Fundamental case Browne Wilkinson: confirms the idea of the process, you are allowed to trace, its proportionate to the amounts going in, if the asset increases in value, you are entitled to that increase. You would also have a charge over the asset. LJ Steiner: there is no difficulty in tracing, equity will impose a charge over that asset,

LJ Millett: this is a textbook example of tracing through mixed substitutions. There is a defence that is available, i.e. equitys darling. If you are a good faith buyer, you will then defeat the purpose of tracing. Tracing is neither a claim or a remedy, it is a process, you look to see what has happened to your property, you then follow and then make your claim. at p121, there is no sense in maintaining different rules in claiming in law and in equity, but you only get to make a claim in one so there will always be two separate streams (for now) the tracing at common law is personal, whilst at equity its proprietary, (which according to Nigel is reason enough for them to remain separate since they both serve different functions, how can you merge them when theyre different) Where the money is mixed you have a proportionate share, its a physical following not about doing an equity. The children were volunteers, they weren't buyers, or equity's darling, they had clean hands, so they were innocent volunteers, but this means that they could lose some of their assets due to the trustee. M had concealed his wrongdoings from all the parties, they should be treated both alike, i.e. pro rata. Clark v Cutland

re: a corporate fraud Mr Clarke and Cutland fell out, without Mr Clarkes knowledge, Cutland stole from the company large amounts of money, about half a mil, then Cutland also took over 400k which he regarded as remuneration re: pay and pension contributions, which was placed in his pension funds. Process was brought by Clarke (tracing), Ct held that tracing was possible, that the payments were made were void without legal effect (due to lack of authorization) also Cutland had acted in breach to his fiduciary duties (if you bring a claim in fiduciary

duties, thats a personal claim) but by bringing a claim using tracing it can allow you to regain control over the assets. So the Courts imposed a charge over Cutlands pension fund, this is a very effective remedy and consistent with the proprietary process. Re Hallets Estate (pre Foskett) concerned Mr Hallet, a solicitor, as well as this, there was a marriage settlement he was a trustee of this settlement, and he paid some money from the settlement money (held on trust) into his own personal bank account. As a solicitor he acted for Mrs C, and she trusted him, he also used her investment money into his own account. He used this account and made loads of transfers, then Mr H died. On his death, there was not sufficient money in his personal account for both the marriage settlement and to also repay Mrs C, so there was a shortfall. Ct decided that both the marriage settlement and Mrs C could bring the tracing process, and therefore it followed that in order to protect them, each were entitled to a charge over the bank account: this was to protect them and to confirm that they had the a share of the property, and also to prioritise them over the creditors If a trustee or fiduciary mixes trust money with his own, then firstly, the beneficiaries will be entitled to a charge over their moneys in order to protect their claim. Secondly, if the trustee or fiduciary withdraws money for his own purposes, he is deemed to have drawn out his own money, so that the beneficiary can claim the balance of the fund. Therefore, the various payments by H out of the account must be treated as payments of his own money, and not that of the trust or Mrs C - so they are protected ahead of H.

Re Tilleys Will Trust (pre Foskett)

testator died in 1932 left property to widow, she became the sole trustee. The terms of the trust therefore was that the property was on trust for the widow for life the remainder to C and M, (his children from a former marriage in equal shares) properties were then sold for 2237 pounds, this amount was paid into the widows bank account, and was mixed with her own moneys, (her bank account was usually overdrawn) from 1951 onwards her account was normally in credit, without taking into account any trust money 1959 - widow dies with an estate valued at 94k. M had predeceased the widow, and the administrators of M had sued widows estate, claiming a half share of the profits made by the widow. The Court held that the trust monies, were used by the widow to withdraw her overdraft. so that the trust monies were not the cause of the profit that she had made from investing the money she had. J Ungoed Thomas - it seems that on proper appraisal that the widows breach halted at the mixing of the funds in her bank account. The trust monies merely went in reducing

the widows overdraft. Fundamentally, you cannot trace into an overdrawn bank account, and thus the estate of Ms claim failed. Re Oateway O is a trustee, he paid the sum of 3k into his own private bank account. it contained his own monies, O later purchased shares in Oceana Ltd for 2137 pounds, after the spending, there was still more in the account than the amount of trust monies paid in. O paid further sums into the account, but his subsequent spending for his own purposes used up the entire amount standing to his credit. the shares were later sold for 2474 pounds O became insolvent and died insolvent. Beneficiaries claimed that the proceeds of sale in Oceana Ltd represented money that belonged to them (that could be traced) The Courts found in favour of the beneficiaries these are the following rules: the rules of tracing that govern the right of a b to trace the mixed money in an account are technical rules based on presumptions. They are deemed to have preserved the trust fund at the expense of his own money, regardless of the time at which his own funds were paid into the account. This is the result of Hallets Estate. Furthermore, the trustee is effectively stopped from asserting the money withdrawn from the account was trust money if the expenditure can be attributed to his own funds in the account. If however, the credit balance in the account falls below the amount in the trust monies, the presumption can no longer apply, and the lowest intermediate balance is taken s the maximum limit of the trust fund. Where part of a mixed fund is used as an investment in property, and the remaining credit balance is then dissipated, the trustee is not permitted to treat the money remaining in the account as dissipated. The beneficiary is entitled to assert a charge over the new asset acquired with money Conclusion: where the trustee maintains in the account an amount equal to the remaining trust fund, the bs right to trace is limited to that fund, it is not open to the b to assert a charge over the investment made using money out of the mixed account unless the sum expended is of such a size that it must have included trust money. Is there any role of equity in these cases? These next cases suggest so. R v Clowes (pre Foskett)

Clowes and Naylor were convicted of various offences of dishonesty Investors were not used in investing in gifts but in fact were stolen and used to buy nice things.

Brochures were issued which contained terms of the so called investments, making cheques payable to Clowes, and that it would be held on trust in an account, and that Clowes had authority to sell and buy gvt stock for investors Investors monies were transferred to jersey, and were never kept separate, all mixed up with the personal accounts of Clowes and Naylor Had CLowes dishonestly appropriates property belonging to another? Had he stolen trust money? It had to be established if it were held on trust. The application states that the money was to be put into an account, on behalf of the investors, and thus a trust was established. Clowes and Naylor had taken money from someone else, and thus were correctly convicted The issue which was later litigated was the extent to which the investors could recover their monies, the point was all the dissipation of the funds meant that there was not enough for the investors. There could be a tracing process since the money was held on trust (so in principle it was possible) but how would the shortfall be dealt with? The question was was what rule would the Court adopt? Would they adopt the Fi- Fo way i.e. the money that came in first would be treated as being dissipated first. This is pretty arbitrary however. Would they adopt a Li-Fo approach? The money that came in last would be treated as being dissipated first, again this is pretty arbitrary. in Clowes v Vaughn, they said they would do what is fair, a pro rata approach based on proportionality - you get back all your investment as proportionally followed through.

Overall, if you look at all the cases (Russell Cook and Cornestone AG) you can see that they follow the Clowes v Vaughn approach (i.e. pro rata) Although equity has a proprietary approach (which may lead to arbitrary results) it doesn't mean that there is no role for equity, the mentioned cases demonstrate that equity will sometimes pop in etc. How can they be reconciled? no one knows.