The Federal Republic of Brazil and another v Durant International Corporation and another

Equitable tracing depends on the substance and overall effect of a transaction, rather than the strict chronological order of associated events. The value of misapplied trust property may therefore be traced into an asset acquired before the trust fund was depleted, including through an overdrawn account.

The claimant must prove a close causal and transactional link between the depletion and the acquisition. The evidence must justify attributing the value of the acquired interest to the misuse of the trust fund. The broader proposition that payment of a debt permits tracing into anything acquired in return for that debt is rejected. Conventional lowest-intermediate-balance reasoning remains applicable where no coordinated transaction connects the movements of value.

The Municipality of São Paulo alleged that companies controlled by a former mayor and his son had received the proceeds of bribes connected with a public road-building contract. Thirteen bribe payments, totalling US$10,500,055.35, were paid into a New York bank account. Payments were then made through accounts held by Durant International Corporation and Kildare in Jersey.

The Royal Court of Jersey held the companies liable as constructive trustees for the full amount. The Court of Appeal of Jersey upheld that decision. The companies appealed, contending that only US$7,708,699.10 could be traced because three bribe payments post-dated the final transfer to Durant and because the balance in the mixed account had fallen below the amount claimed.

The central issue was whether equity permits backward tracing and, if so, what connection must exist between the depletion of a trust fund and an earlier acquisition.

1. The appeal was dismissed. The Royal Court and the Court of Appeal were entitled to find that the entire US$10,500,055.35 was traceable to the appellants. The pleaded admission linking the payments received by the appellants with the Chanani account provided particularly strong evidence of the necessary connection.

2. Lord Toulson, delivering the Board’s judgment, held that equity does not impose an absolute prohibition on backward tracing. Nor is tracing necessarily barred because the relevant value passed through an overdrawn account. An account may operate as a conduit whether it is in credit or used within an overdraft facility.

3. The court must examine the transaction as a whole. Where apparently separate credits, debits and acquisitions form part of a coordinated scheme, their substance and overall effect prevail over the order in which entries appear. This approach is particularly important where sophisticated money laundering uses intermediaries and deliberately choreographed transactions to disguise the movement of value.

4. A claimant must establish coordination between the depletion of the trust fund and the acquisition of the asset claimed. The connection must justify attributing the value of the acquired interest to the misuse of the trust fund. The necessary finding will commonly be inferred from proved facts, since evidence from the defaulting trustee may be unavailable or unreliable.

5. The Board rejected the broader proposition that trust money used to discharge a debt may always be traced into whatever was acquired in return for that debt. Such an extension could prejudice innocent unsecured creditors. The courts should therefore exercise caution before enlarging equitable proprietary remedies.

6. James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 and In re Goldcorp Exchange Ltd [1995] 1 AC 74 remained correct. They involved no evidence of an overall transaction coordinating the outward and inward movements of assets. Their lowest-intermediate-balance reasoning did not govern a case where the required coordination was proved.

1. Privy Council: Dismissed the companies’ appeal and upheld their liability as constructive trustees for US$10,500,055.35.
2. Court of Appeal of Jersey: Upheld the Royal Court’s reasoning and conclusions.
3. Royal Court of Jersey: Held Durant and Kildare liable as constructive trustees for US$10,500,055.35 and rejected their backward-tracing and lowest-intermediate-balance arguments.