Bishopsgate Investment Management Ltd v Homan & Others

Equitable tracing requires the misappropriated money to retain a continuing existence as a separate fund, a mixed fund, or property acquired with it. Money paid into an overdrawn bank account ceases to exist as a traceable fund, so it cannot ordinarily be traced through that account or into assets acquired through it. A general equitable charge over an insolvent recipient’s assets is therefore unavailable merely because the money was trust money. A sufficiently clear factual connection between a particular misappropriation and a particular asset may nevertheless make a specific charge arguable. The lowest-balance principle applies where trust money is mixed in a bank account, absent clear evidence that later payments were intended to restore it.

Bishopsgate Investment Management Ltd, trustee of pension schemes, alleged that pension money had been misappropriated and paid into accounts of Maxwell Communication Corporation plc, an insolvent company. The administrators applied under the Insolvency Act 1986 for directions concerning an interim distribution. Vinelott J held that equitable claims depended on recognised tracing principles and rejected a general charge over assets acquired before the misappropriated money reached the company, while reserving possible cases involving a sufficient factual connection or backward tracing.

Bishopsgate appealed. The administrators cross-appealed against the reservations. The central issue was whether Space Investments supported a charge over all the company’s assets, including assets connected with an overdrawn account.

Appeal and cross-appeal dismissed. The order was made with costs, and leave to appeal was refused.

1. Equitable proprietary remedies presuppose the continued existence of the money, either as a separate fund, as part of a mixed fund, or as latent in property acquired with it. If continued existence is not established, equity cannot provide a tracing remedy. The court treated Re Diplock as binding and endorsed its formulation.
2. The observations in Space Investments concerning a charge over all the assets of an insolvent bank trustee were strictly obiter. Read in context, and as explained by the Privy Council in Re Goldcorp Exchange Ltd, they concerned a mixed fund, not a non-existent fund. The broad interpretation adopted in the New Zealand Court of Appeal was rejected. Trust money paid into an overdrawn account ceased to exist for tracing purposes, and its trust character did not permit tracing into later-acquired assets merely because it had entered the account.
3. The claim to a lien over the credit balance in the National Westminster account failed. In the absence of clear evidence that the balance was intended to make good the misappropriation, it could not be treated as subject to a trust. The lowest-balance rule in James Roscoe (Bolton) Ltd v Winder applied.
4. The court declined to remove Vinelott J’s reservations concerning a particular asset. If a sufficiently clear connection between a particular misappropriation and the acquisition of that asset were proved, an equitable charge remained at least arguable. Leggatt LJ added that there could ordinarily be no tracing into an asset acquired before the money was received, although subrogation might arise where an asset securing an overdraft was discharged with the misappropriated money.

• Court of Appeal (Civil Division) dismissed the appeal and cross-appeal, with costs, and refused leave to appeal.
• High Court (Chancery Division), Vinelott J, directed that claims could be disregarded where no proprietary claim was legally maintainable and held that equitable tracing could not ordinarily proceed through an overdrawn account. The order was dated 21 December 1993.