A property developer using monies which he held on trust to carry out a development instead had mixed those monies with his own in his bank account, and subsequently used those mixed monies to pay premiums on a life assurance policy on his own life, vested in trustees for his children. After his death, the life assurance company paid out on the policy. The beneficiaries of the development monies trust made a proprietary claim to a share in the monies paid out by the life assurance company.
Two groups of innocent parties disputed the rights to a death benefit of about 1m pounds paid by insurers pursuant to a whole life policy. A trustee had misappropriated trust funds and used them in part to pay premiums on life insurance policies for the benefit of his own children.
Held: The misappropriated funds could be traced through the insurance policies into the hands of the beneficiaries of the policies. Where part of the premiums had been paid properly, a mixed fund, akin to a bank account, was created, and the interest was according to the proportions. The interest was a property interest in the fund, and the court had no discretion as to its distribution. There is no rule in English law that in the case of a mixed substitution the beneficiary is confined to a lien. ‘Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.’
Lord Millett said: ‘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. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner . . Tracing is thus 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 claimants’ property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim.’
Lord Millett set out the distinction between a claim to enforce property right and a case of unjust enrichment: ‘A plaintiff who brings an action in unjust enrichment must show that the defendant has been enriched at the plaintiff’s expense, for he cannot have been unjustly enriched if he has not been enriched at all. But the plaintiff is not concerned to show that the defendant is in receipt of property belonging beneficially to the plaintiff or its traceable proceeds. The fact that the beneficial ownership of the property has passed to the defendant provides no defence; indeed, it is usually the very fact which founds the claim. Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff’s interest.’
Lord Steyn said: ‘In truth tracing is a process of identifying assets: it belongs to the realm of evidence. It tells us nothing about legal or equitable rights to the assets traced.’
Lord Browne-Wilkinson, Lord Steyn, Lord Hoffmann, Lord Hope of Craighead, Lord Millett
Times 24-May-2000, Gazette 08-Jun-2000, [2000] UKHL 29, [2000] 3 All ER 97, [2000] Lloyd’s Rep IR 627, [2001] 1 AC 102, [2000] WTLR 667, (1999-2000) 2 ITELR 711, [2000] 2 WLR 1299
House of Lords, Bailii
England and Wales
Citing:
Cited – In re Diplock’s estate CA 1948
After considering a situation in which trust money had been applied in making alterations to the property of an innocent third party but had not added to the value of the property,
Held: The origin of the equitable rules of tracing were . .
Appeal from – Foskett v McKeown and Others CA 27-Jun-1997
Various people had paid money with the promise of acquiring an interest in land in Portugal. The scheme was fraudulent. The funds had been used to purchase a life/investment policy. The policy was held in trust for the fraudster’s mother but he had . .
Cited – In re Leslie; Leslie v French ChD 1883
The court gave guidance as to the circumstances in which an individual who had paid a premium on a policy belonging to someone else could claim an interest in the policy: ‘In my opinion a lien may be created upon the moneys secured by a policy by . .
Cited – In re Tilley’s Will Trusts ChD 1967
The court considered the rights of a beneficiary to participate in any profit which resulted where a trustee mixed trust money with his own money and then used it to purchase other property. . .
Cited – Scottish Co-operative Wholesale Society Ltd v Meyer HL 1959
Valuation of Shares on Order for Purchase
The Co-operative Society had formed a 51 per cent-owned subsidiary to manufacture rayon at a time of strict post-war controls. The other shares were owned by two outside directors with skill and experience in the trade. When these directors declined . .
Cited – Falcke v Scottish Imperial Insurance Co CA 1886
The owner of a policy of life assurance mortgaged the policy to secure repayment of a loan. Subsequently the owner, now the owner of an equity of redemption in the policy, paid two annual premiums which became due under the policy. The policy was . .
Cited – D’Avigdor-Goldsmid v Inland Revenue Commisioners HL 1953
A contingency which makes money payable under a chose cannot affect the proprietary interests in the chose in action and therefore in its proceeds. No fresh beneficial interest in a policy of life assurance accrues or arises on the death of the life . .
Cited – Sandeman and Sons v Tyzack and Branfoot Steamship Co Ltd HL 1913
The House described the doctrines of English law which are applicable to cases where goods belonging to different owners have become mixed so as to be incapable of either being distinguished or separated: ‘If the mixing has arisen from the fault of . .
Cited – Edinburgh Corporation v Lord Advocate HL 1879
Competing claims to a mixed fund were resolved by the application of equitable principles. Funds had been contributed by a benefactor of a hospital for particular trust purposes and had for more than 170 years been held, administered and applied as . .
Cited – Trustee of the Property of F C Jones and Sons (A Firm) v Jones CA 13-May-1996
A bankruptcy order was made in 1984. Under the 1914 Act the trustee in bankruptcy got title to all the assets of the bankrupt as of the date of the act of bankruptcy. So, the trustee owned the partnership assets. The wife drew andpound;11,700 out of . .
Cited – El Ajou v Dollar Land Holdings Plc ChD 1995
The tracing of assets into the hands of a third party depends upon a notional charge. There are no inflexible rules. The essential elements of ‘knowing receipt’ are: ‘For this purpose the plaintiff must show, first, a disposal of his assets in . .
Cited – Magistrates of Edinburgh v McLaren HL 1881
. .
Disapproved – In re Hallett’s Estate; Knatchbull v Hallett CA 1880
Where a trustee of a policy used money received from others to make payment of premiums on an insurance policy, they would be entitled to a lien on the policy. Where an asset was acquired exclusively with trust money, the beneficiary could either . .
Cited – Lupton v White 19-Dec-1808
Whatever alteration of form any property may undergo, the true owner is entitled to seize it in its new shape if he can prove the identity of the original material. . .
Cited – Jones v De Marchant 1916
A husband wrongfully used 18 beaver skins belonging to his wife together with four skins of his own, to have a fur coat made up which he then gave to his mistress. The wife was held entitled to recover the coat. The mistress knew nothing of the true . .
Cited – Frith v Cartland 1865
‘. . . If a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own.’ . .
Cited by:
Appealed to – Foskett v McKeown and Others CA 27-Jun-1997
Various people had paid money with the promise of acquiring an interest in land in Portugal. The scheme was fraudulent. The funds had been used to purchase a life/investment policy. The policy was held in trust for the fraudster’s mother but he had . .
Cited – Ultraframe (UK) Ltd v Fielding and others ChD 27-Jul-2005
The parties had engaged in a bitter 95 day trial in which allegations of forgery, theft, false accounting, blackmail and arson. A company owning patents and other rights had become insolvent, and the real concern was the destination and ownership of . .
Cited – Clark v Cutland CA 18-Jun-2003
One director discovered that his co-director had withdrawn substantial sums from the company. . .
Cited – Bank of Cyprus UK Ltd v Menelaou SC 4-Nov-2015
The bank customers, now appellants, redeemed a mortgage over their property, and the property was transferred to family members, who in turn borrowed from the same lender. A bank employee simply changed the name on the mortgage. This was ineffective . .
Cited – Scott v Bridge and Others ChD 25-Nov-2020
Claim to recover money and property said to have been transferred by the claimant to the defendants or one or more of them. The money concerned came from a bank account belonging to the claimant. The property concerned consisted of two . .
Lists of cited by and citing cases may be incomplete.
Insurance, Equity, Trusts
Leading Case
Updated: 10 November 2021; Ref: scu.80646