(v) A Move to a More Pragmatic Approach?

Despite the orthodox approach of equitable tracing, which requires clear representation of the value of the claimant’s property in the asset or fund that is in the defendant’s possession or under his or her control, dicta in some cases suggest that it is possible to trace into the defendant’s general assets even though no specific asset can be identified as representing the claimant’s money.^[1] This has been described as the ‘swollen assets theory’, since the defendant’s assets will have been swollen by the receipt of property to which the claimant had a proprietary claim. Tracing into the defendant’s general assets can be justified on the basis that, if the defendant has dissipated those assets in which the claimant had a proprietary interest, then, because the defendant could have dissipated other assets that he or she owned, it is right that the claimant should be able to make a claim against those other assets.^[2] But such a flexible approach to tracing is not consistent with the orthodox tracing rules, which require value to be identified in particular assets, and the swollen assets theory has been confined to the specific situation in which an insolvent bank trustee wrongly deposits trust money with itself in a mixed fund and uses this money in its general business.^[3] In such circumstances, a charge can be granted over the mixed fund. The reason for this exception involving an insolvent bank trustee can be justified by reference to general principles underpinning equitable tracing.^[4] If a bank is a trustee and trust money has been deposited with it, the bank will be required to keep that money in a separate bank account. If the bank wrongly uses that money in its general banking business, it can be assumed that the trust money forms part of a mixed fund with all money deposited with the bank. The beneficiaries will be able to trace into this fund, as long as the value of that fund does not fall below the value of the claimant’s contribution to it.

The courts have been right to reject the general incorporation of the swollen assets theory into the tracing rules, since such a theory confuses the fundamental distinction between proprietary claims in which the claimant seeks a personal remedy and those claims in which he or she seeks a proprietary remedy. Where the claimant seeks a personal remedy, it is sufficient for him or her to establish that the defendant received property in which the claimant had a proprietary interest; it is irrelevant that this property was dissipated subsequently. Where, however, the claimant seeks a proprietary remedy, he or she must establish that the defendant has particular assets that can be considered to represent the claimant’s property.^[5] It is only where particular assets can be identified that represent the claimant’s original property that it is appropriate that the claimant should gain priority over the defendant’s general creditors.

Nevertheless, recent cases do suggest a trend towards the development of a more pragmatic approach to the equitable tracing rules. For example, where the claimant’s money is paid into different bank accounts, the courts have been prepared to place an equitable charge on each account even though the claimant was unable to identify which sums had been credited to which accounts.^[6] In Shalson v Russo,^[7] however, the claimant’s money was deposited into the defendant’s overdrawn bank account and tracing was defeated, even though the defendant had other accounts in credit at other financial institutions. Rimer J refused to treat all of the bank accounts as forming a single fund because it was possible to show that the claimant’s money had been deposited in the bank account that was overdrawn.

Other examples of a greater willingness to use tracing rules to secure what is perceived to be a just result include recent suggestions that backward tracing should be recognized. Finally, the emphasis on attribution rather than causation in Foskett v McKeown^[8] is further evidence of pragmatism in the interpretation and application of the tracing rules.

• [1] 486 Ibid. For a defence of this theory see W Evans, ‘Rethinking Tracing and the Law of Restitution’ (1999)
• [2] 115 LQR 469.
• [3] Re Goldcorp Exchange Ltd [1995] 1 AC 74, 105 (Lord Mustill); Bishopsgate Investment Management Ltdv Homan [1995] Ch 211, 218 (Dillon LJ).
• [4] SeeLGullefer, ‘Recovery of Misappropriated Assets; Orthodoxy Re-Established?’ [1995] LMCLQ 446,447.
• [5] Re Diplock’s Estate [1948] Ch 465, 521.
• [6] El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717.
• [7] [2003] EWHC 1637 (Ch), [2005] Ch 281, [140] (Rimer J). 492 [2001] 1 AC 102.
• [8] 493 Confirmed by Rimer J in Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281, [104].