Trustee of the Property of FC Jones & Sons v Jones

When a trustee in bankruptcy’s title relates back to an act of bankruptcy, the bankrupt has no legal or equitable title to property falling within the statutory vesting and cannot pass title to another person. The legal owner may trace that property at common law into an identifiable substitute or product.

Where money is deposited for trading under a contract entitling the account holder to the resulting balance, the owner’s claim may extend to the whole identifiable balance, including profits generated through use of the money. The absence of a fiduciary relationship prevents an equitable proprietary remedy, but does not defeat the owner’s proprietary claim at law.

After the partners in a potato-growing firm had committed an act of bankruptcy, one partner paid £11,700 from a joint bank account to his wife. She used it to trade profitably in potato futures and deposited the resulting balance with Raphaels. Following the trustee in bankruptcy’s claim, Raphaels interpleaded and the money was paid into court.

Mr Cherryman QC, sitting as a deputy judge of the Chancery Division, ordered payment to the trustee on the basis that the wife was a constructive trustee. She appealed, conceding the trustee’s claim to the original £11,700 and interest but disputing his entitlement to the trading profits. The central issue was whether the trustee could recover those profits through a proprietary claim at common law despite the absence of a fiduciary relationship.

1. Appeal dismissed unanimously. Millett LJ delivered the principal judgment. Beldam and Nourse LJJ agreed that the trustee was entitled to the entire sum in court, including the profit generated through the use of the original £11,700.

2. Under section 37 of the Bankruptcy Act 1914, the trustee’s title related back to the relevant act of bankruptcy. The statutory vesting automatically divested the bankrupt partners of title from that date. Accordingly, the cheques drawn afterwards could pass no legal or equitable title to the wife unless she came within the protection of section 45. She did not do so. In re Dennis [1995] 3 WLR 367 and In re Gunsbourg [1920] 2 KB 426 were followed.

3. The wife did not receive the money in a fiduciary capacity and was not a constructive trustee. The deputy judge’s reliance on Chase Manhattan Bank v Israel-British Bank [1981] 1 Ch 105 presupposed that the transferor possessed legal title capable of transfer. Here the bankrupts had already been divested of every title by statute. The equitable rules of tracing were therefore unavailable.

4. The absence of a constructive trust did not prevent a proprietary claim at common law. Tracing is a process for identifying what has happened to property, rather than a right or remedy. The legal owner may assert title to an identifiable substitute or product of the original property. Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 and Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321 established that common law recognises such claims.

5. The trustee’s money remained identifiable. The chose in action against the commodity brokers was not merely a right to repayment of the initial deposit. Under the trading arrangement it was a right to the resulting balance, whether greater or smaller. That chose in action, and later the debt owed by Raphaels, therefore belonged to the trustee. The profits could not be separated from the product of his money.

6. The trustee had an exclusively proprietary claim at law, although no proprietary remedy in equity. He could obtain payment of the debt from Raphaels, and the interpleader proceedings permitted the court to determine who could give a valid receipt. The order directing payment of the money in court to the trustee was correct. The appeal was dismissed with costs, and leave to appeal to the House of Lords was refused.

1. Court of Appeal: The appeal was dismissed unanimously. The order that the money in court be paid to the trustee was upheld, with costs. Leave to appeal to the House of Lords was refused.

2. High Court, Chancery Division: Mr Cherryman QC, sitting as a deputy judge, found for the trustee and ordered payment of the money in court to him. He treated the wife as a constructive trustee.

3. Interpleader proceedings: Raphaels interpleaded after receiving competing demands. The money was paid into court and the rival claims were directed to be tried with the trustee as plaintiff and the wife as defendant.