a) “Tracing is … neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim…The successful completion of a tracing exercise may be preliminary to a personal claim or a proprietary one, to the enforcement of a legal right or an equitable one.” Discuss. (Lord Millett in Foskett v McKeown [2000] 3 All ER 97).
According to Smith (1997), tracing pertains to the process that allows the transmission of a claim upon the original asset to a new asset. The core idea of tracing is the necessity of one asset standing in place for another asset for legal purposes. As a result, the claims that should have been made relative to the specified original asset are permitted to be transmitted to a new asset.
The plaintiff exercises tracing by locating the asset to pursue pre-existing rights towards the thing. The plaintiff is allowed to make a claim over the new asset relative to subsequent possessors because the latter has interfered with the original rights of the plaintiff. In attempting to trace an asset, the plaintiff is in effect asserting that a new asset was obtained using the original asset. The plaintiff seeks to establish the relationship of the original asset over which a claim was previously made and the new asset to which the claim is aimed to be transmitted. (Smith, 1997)
The situation is exemplified by a defendant exchanging an asset, upon which a plaintiff has a claim for another asset. The plaintiff is able to assert a claim over the new asset through tracing. Tracing provides the crucial relationship between the plaintiff and the new asset by proving that the new asset was obtained with the original asset. Tracing substantiates the claims of the plaintiff over the new asset. This is because the exchange of assets implies that the defendant acquired the value attached to the new asset commensurate to the value of the old asset. What the plaintiff targets is the establishment of the fact that the value attached to the original asset is the same value of what is now attached to the new asset because the old asset was exchanged for the new asset changing the object representing the value but retaining the value per se. According to Smith (1997) what is being traced is value because it is the constant factor that exists before the exchange of assets and after the substitution of assets. Although, value is represented by a different object through the new asset it is still the same value attached to the old asset. This rationale justifies the claim over the new asset. Thus, tracing involves value and not property.
Prior to tracing, it is imperative that the plaintiff has a thing of value. The plaintiff must hold an asset exclusive to other people. The right is not necessarily proprietary in nature and it can refer to either a legal or an equitable right (Agip (Africa) Ltd v. Jackson, 1991; Lipkin Gorman v. Karpnale Ltd, 1991). This is an important prerequisite because it is the right that fuels the tracing of value.
Tracing was applied in Westdeutsche Landesbank Girozentrale v Islington London Borough Council (1996) where the court held that “when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity”. The case allows tracing to support claims of fraud in the acquisition of property. In Commerzbank AG v IMB Morgan plc (2004), the proceedings involved different claimants to the money in a single account with the petitioner bank. Tracing was made to determine which claims are supported by the process of tracing value since there are various claimants with conflicting claims.
Tracing is a distinct concept of claim because it is the process of tracing that justifies a claim. Claim is the assertion of a right as supported by the process of tracing. Thus, the process of claiming is also different from the process of tracing. Claiming is a process involving the determination of the issue on the right that the claimant is able to establish. It is only after the right has been established that the process of tracing becomes useful in enforcing the right.
Tracing is not also a remedy because the process does not constitute a legal or judicial manner through which a right is enforced or the violation of the right is prevented or redressed. Tracing is the process of supporting a claim and not establishing a right because the establishment of a right precedes tracing. Tracing makes way for the enforcement of a right.
b) Robert is a trustee of two separate family trust funds, the Childrens’ fund and the Grandchildrens’ fund. In September 2005, Robert’s personal account at his bank is £5,000 in credit. In October 2005, he withdrew £10,000 from the Childrens’ fund and paid it into his own account. In November 2005, he withdrew £15,000 from the Grandchildrens’ fund and paid it into his own account. In December 2005, he withdrew £25,000 from his own account and invested it in Premium Bonds, having seen the television advertisement. In February 2006, he won £50,000 on the Premium Bonds and paid it into his account. In March, he withdrew £50,000 and invested it in further Premium bonds. Robert has recently had judgment given against him in a libel action and as a result, he has now been adjudicated bankrupt. New trustees have been appointed to both funds. Advise the trustees of both funds as to their respective positions concerning the recovery of the misappropriated trust funds.
According to Commerzbank AG v IMB Morgan plc (2004), establishing a claim in order to share in a trust fund requires proof of proprietary right to the trust fund. The claimants have three possible bases for enforcing their rights. First basis is tracing by connecting the transfer of assets from the original source to another source, which in this case is tracing the withdrawal of money from the two trust funds and the subsequent deposit to the personal account of the trustee who is also the defendant. The rationale for doing so is to establish a claim over the new account because equity considers the money in the personal account as charged with repaying the money withdrawn from the trust funds (El Ajou v. Dollar Land Holdings plc (No. 1), 1993; Bristol and West Building Society v. Mothew, 1998; Bankers Trust Co. v. Shapira, 1980) regardless of the mixing of the money from the trust fund and the personal fund of the trustee.
Second basis is tracing to prove mistake in payment (Commerzbank AG v IMB Morgan plc, 2004). In cases where there is an identifiable trust fund, where the trustee could have deposited money in payment of the amount withdrawn after receiving the amount invested in premium bonds together with the money gained from the endeavour, the recipient does not have the right to retain the benefit of the money received especially since the trustee is presumed to have cognizance of the claims of the subjects of the trust funds (Papamichael v. National Westminster Bank plc, 2003). The claimants of the trust funds from which money was withdrawn establish their right to the reimbursement of the misappropriated trust fund by supporting their claims with tracing. The claimants may trace the flow of money from the trust funds to the personal account of the trustee to the purchase of premium bonds using the money and the receipt of the money and gains until the aggregate amount was reinvested again into premium bonds. Tracing is important to show that the value lost by claimants due to the withdrawal of the money is the same value attached to the premium bonds and the gains.
Third basis is tracing to support the payment of money for a particular purpose that was not fulfilled (Commerzbank AG v IMB Morgan plc, 2004) so that the trustee, who holds the money is deemed to do so in trust for the subjects of the trust funds (Barclays Bank Ltd v. Quistclose Investments Ltd,1970; Carreras Rothmans Ltd v. Freeman Matthews Treasure Ltd, 1985). This allows the action of the claimants to trace the transmission of value they rightly hold from the withdrawal of funds until the reinvestment of the money in premium bonds. The claimants need tracing in order to support their claims against the funds, held by the trustee, which is now being applied to the court order in favour of the petitioner in a libel suit to which the trustee is the defendant.
These bases are congruent to the possible defences of the defendant. In relation to the first basis, the defendant may claim that the money withdrawn from his personal account and invested in premium bonds constitutes his personal funds. The claimants may support their claim of fund misappropriation by showing that the tracing of value shows that the amount withdrawn by the trustee is the same amounts deposited in his personal account. The defendant may also claim that there was a mistake of payment when instead of depositing the money back to the account, the whole amount after the monetization of the bonds were deposited to his personal account. The claimants support their claim for misappropriation of funds by tracing value from the trust fund withdrawals to the investment and reinvestment of the money in bonds without reimbursing the trust funds. On the third basis, the trustee may claim that the withdrawals were made to invest the money in behalf of the subjects of the trust. The claimants may support their claim of misappropriation of funds as supported by tracing value from withdrawal to the purchase of bonds and corresponding investment of the funds. The claimants have the right to claim misappropriation of funds as supported by tracing. Overall, tracing will help the claimants establish their claims for breach of trust and the reimbursement of the misappropriated funds relative to the plaintiff in the libel case and other claimants to the assets of the trustee.
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