HCS (North East) Limited v Mehmet Tahir & Ors

Where misappropriated money is used to improve property, tracing depends on identifying a substitute asset and establishing the value added by the expenditure. If the property remains vested in the wrongdoer, an equitable lien may secure the enhanced value attributable to the misappropriated funds. Re Diplock does not impose an absolute bar on tracing into improved property held by a volunteer. It identifies circumstances in which tracing may fail, including evidential uncertainty or unfairness. An equitable lien creates security but does not confer possession. The appropriate relief is a declaration of charge and, where repayment is otherwise unlikely, an order for sale.

The claimant had obtained judgment after establishing that Mehmet Tahir, acting in breach of fiduciary duty, misappropriated its money and used part of it to improve Ray Mill, an unregistered property. The tracing claim was adjourned because the estate of James Chapman and the beneficiaries under his will had not initially been joined.

At the resumed hearing, the court considered whether the claimant could trace its money into the increased value of Ray Mill, whether an equitable lien should be declared, and whether the claimant was entitled to possession and sale. The court also considered the proper division of the property for valuation purposes and consequential costs and sale directions.

1. Tracing and enhanced value. The court found that the claimant’s money had been used to fund improvements to Ray Mill and that those improvements had increased the property’s value by £450,000. The increased value represented the claimant’s misappropriated money for tracing purposes.
2. Equitable lien. Tracing is a process of identifying what has happened to property and whether a substitute asset represents it. Where money is used to improve land, equity may impose a lien securing the amount by which the land’s value has been enhanced. Ray Mill was vested in Mr Tahir as an executor, making the relevant asset available against the wrongdoer. The claimant was therefore entitled to a lien over 45/85ths of the property’s value, securing Mr Tahir’s personal liability.
3. Effect of Re Diplock. The Court of Appeal decision did not establish that tracing into improved property held by an innocent volunteer was always unavailable. It identified cases where no substitute asset could be identified or where tracing would be unfair. Those concerns did not arise here: the wrongdoer held the property, the enhanced value was evidenced, and no unfairness to the beneficiaries was shown. The decision was distinguished.
4. Possession and sale. An equitable lien is security for a debt. It does not give the lien-holder possession. The claimant was entitled instead to a declaration of equitable charge and an order for sale. The Trusts of Land and Appointment of Trustees Act 1996 and its section 15 considerations were irrelevant because the claimant had no interest in the land as a beneficiary or trustee.
5. Consequential orders. Ray Mill was to be marketed after three months, with the claimant conducting the sale. The defendants were required to co-operate, permit viewings and give up possession on completion. The property was to be treated as one parcel, and 45/85ths of the net proceeds were payable to the claimant up to £758,009.17. Costs were summarily assessed at £30,989.17 against the estate.

The tracing claim followed an earlier judgment in the same proceedings, reported at [2021] EWHC 3499 (KB), in which the fiduciary breach and misappropriation were established. The tracing issues were adjourned until the estate and beneficiaries were joined. Permission to appeal the tracing judgment was refused, with renewal available to the Court of Appeal.