Tracing into an Overdrawn Bank Account — When does Money Cease to Exist?

Publication Date01 March 1995
Date01 March 1995
AuthorJohn Breslin
SubjectAccounting & finance
Journal of Financial Crime Vol. 3 No. 2 Civil Recovery
Tracing into an Overdrawn Bank Account When
does Money Cease to Exist?
John Breslin
The law relating to tracing1 is complicated, littered
with inconsistencies and possibly now verging on a
state of disarray. The complications are ever
increasing as the topic becomes inevitably inter-
twined with the law relating to constructive trusts2
and restitution.3 This article concentrates on a
specific aspect of the law of tracing, namely, the
extent to which one can trace money paid into an
overdrawn bank account.
This question has been the subject of a recent
decision of the Court of Appeal in
Investment Management
Ltd (in liq) v Hotnan.4 Bish-
opsgate Investment Management Ltd (BIM) was
trustee of the assets of various occupational pen-
sion schemes of companies associated with the late
Robert Maxwell. Pension fund moneys of BIM
were at various stages paid into the bank accounts
of Maxwell Communication Corp. plc (MCC),
the holding company of certain of the Maxwell
companies. At the time of payment the accounts
were, or subsequently became, overdrawn. Also,
MCC was insolvent. BIM sought to trace those
moneys into the overdrawn accounts. BIM's claim
was rejected. The reasons are analysed below.
Before analysing the decision in that case it is
worthwhile to state briefly the basic principles of
Tracing is the right of the owner of property,
including money, whose interests in the property
have been jeopardised by another either to claim
that property back, or alternatively to claim rights
over other property which has been acquired with
his property. In most cases the person against
whom the claim is made has acted in breach of
some trust or fiduciary duties to the owner of the
property. The right to trace may also be exercised
against subsequent recipients of the property.
However, the exercise of a tracing claim in such
circumstances is subject to equitable doctrines that
protect a bona fide purchaser for value of the prop-
erty. Furthermore, the claim may not be allowed
against an innocent volunteer5 where it would be
unfair in the circumstances to allow the claim.6
This is one of the points at which the law of
tracing merges with the law of restitution; the
third-party recipient may plead the defence of
change of position in relation to his use of the
property in question.7
In this paper the owner of the property is referred
to as 'the owner'. The person who acts in breach
of trust or fiduciary duty so as to jeopardise the
interests of the owner in the property is referred to
as 'the trustee'. Where the property has not been
mixed with other property but has been used to
acquire other property, that other property is
referred to as 'pure derivative property'. Where the
property has been mixed with other property and
the mixed property has been used to acquire other
property, that other property is referred to as
'mixed derivative property'.
Even today there are fundamental complications in
the law of tracing which emanate from the days
before fusion of the courts of Common Law and
Equity.8 One of these complications is relevant
where the property has been mixed with other
property which does not belong to the owner.
Tracing is only available at Common Law if the
property which is the subject of the tracing claim
has not become so mixed. The reason for this is
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