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Tracing in Equity

Tracing at common law does not extend to the case where the defendant has mixed the plaintiff’s money, or money obtained by conversion (the fund has itself been converted into other property), with money of his own. The remedy granted by equity against a mixed fund or property acquired thereby is a charge for the value of the plaintiff’s interest.

However, there are respects in which tracing in equity is less extensive than at common law. The right is lost if the property comes into the hands of a bona fide purchaser for value who has no notice of the plaintiff’ right, whereas the common law recognises no such limitation.

Tracing will not be available if the property has ceased to be identifiable, as where it has been dissipated: the personal action remains unaffected. In Re Diplock, it was held that the remedy of a charge upon the property will not be granted where the result would be inequitable, as where the volunteer has spent the money on alterations or improvements on his land and the imposition of a charge enforceable by sale would cause undue hardship – not to mention the practical difficulties arising where the land is, for example, a hospital.

Bank account

The beneficiary is entitled to a first charge over a mixed fund or property purchased with it. The burden rest on the trustee to prove that some portion of the fund is his own, and the beneficiary is entitled to all the rest. If the trustee has mixed funds belonging to two or more trusts, or transferred trust funds on an innocent volunteer who has mixed them with his own, then the trust in the former case, and the trust and the volunteer in the latter, will share in pari passu (in proportion to the amount each has contributed) in the mixed fund or any property purchased therewith.

It is likely that the mixing of funds will take place in a bank account. Where the claim is against a trustee, equity relies upon the presumption that the trustee, in making withdrawals from the account, draws out his own money first and does not draw on the money subject to the trust until all his own money has been exhausted, no matter what order the money was paid in. So what remains in the account is treated as trust money.

In Re Hallett’s Estate, Hallett, a solicitor, was a trustee of his own marriage settlement. He had paid some of the money from that trust into his own bank account, into which he also paid money which had been entrusted to him for investment by a client. He made various payments in and out of the account, which at his death contained sufficient funds to meet the claims of the trust and his client, but not those of his personal creditor as well. The court held that both the trust and the client were entitled to a charge in priority to the general creditors, and that the various payments out of the account must be treated as payments of Hallett’s own money.

The rule will not operate in derogation of the principle that the beneficiary is entitled to a first charge on a mixed fund. In Re Oatway, the trustee had withdrawn money from the mixed account and invested it in shares, leaving a balance which at that time was ample to meet the claims of the beneficiaries. Subsequently, he dissipated the balance further. The argument that he must be treated as withdrawing his own money first (so that his shares would be treated as his own property) was rejected. The beneficiaries’ claim must be satisfied out of any identifiable part of the fund before the trustee could set up his own claim. They were entitled to the shares in priority to the general creditors.