Many aspects of the law of tracing are debated, including fundamental matters like what tracing is, why it is permitted and, relevantly for present purposes, the nature of the interest required to be established to invoke it.
The Full Court of the Federal Court in RnD Funding Pty Ltd v Roncane Pty Ltd[1] (Roncane) has quelled any lingering controversy in respect of the important threshold question of what amounts to a sufficient proprietary foundation necessary to invoke the tracing process. Following the decision in Roncane, it is clear that a fiduciary relationship is not a necessary pre-condition to invoking the tracing process.
The “fiduciary relationship” requirement emanated from UK authorities, and arguably remains a necessary ingredient of a tracing claim in that jurisdiction. As the analysis in Roncane demonstrates, however, even the English position is controversial.
This article explores the development of the law of tracing in UK and Australia, and the important step in that development that Roncane represents. In his Honour’s reasons, Derrington J (with whom Beach and Halley JJ agreed) thoroughly examined the authorities in both jurisdictions and articulated a (with respect) compelling basis for the rejection of the “fiduciary relationship” requirement.
Background facts
RnD Funding Pty Ltd (RnD) lent money to Australian Tailings Group Pty Ltd (ATG). RnD’s loan was secured by a general security deed which created a revolving security in the nature of a floating charge. The terms of the security provided that on default, the charge crystallised.
After the charge crystallised, ATG received a large goods and services tax refund into its bank account. However, rather than dealing with it in accordance with the security, ATG transferred it to Roncane Pty Ltd, a company controlled by the same director as ATG. Roncane Pty Ltd used those funds to purchase shares in Goldus Pty Ltd.
Was RnD entitled to trace its interest in the funds credited to ATG’s bank account to Roncane Pty Ltd’s shares in Goldus? The primary judge determined it was not, on the ground that no Australian authority had departed from the requirement that a fiduciary relationship was a necessary prerequisite for the invocation of the tracing exercise, and no such relationship existed.
It was a controversial basis for rejecting RnD’s claim. The view that the existence of “fiduciary relationship” remained a precondition to a right to trace in Australian law was not universally accepted (even in UK) and had been rejected by leading commentators.[2] The appeal was, therefore, an ideal vehicle to consider the important question of the nature of the interest necessary to invoke a tracing claim.
Tracing fundamentals
Tracing is a process by which a person who held an interest in property demonstrates that different property held by a third party is clearly the derivative of the original property, such that the party’s rights in respect of the first property attached to the second. Demonstrating the transmission of those rights is not itself a remedy, but might form the basis for a personal or (subject to establishing the primacy of the attached rights vis-à-vis other claimants) proprietary claim.
Tracing in equity is distinguishable from tracing at common law in that the former permits tracing to occur through a mixed fund. There are powerful arguments, beyond the scope of this article, that it is not even possible to trace at common law,[3] and even if it is, maintaining a distinction between the two is inutile.[4]
Fiduciary relationship requirement
The genesis of proposition that it is necessary to show that the original proprietary interest sought to be traced was derived from a fiduciary relationship is the decision in Re Hallett’s Estate; Knatchbull v Hallett.[5] This decision was followed in In re Diplock v Wintle[6] (In re Diplock), in which it was held that the right to trace in that case required there to be some initial fiduciary relationship.
In his Honour’s analysis of these English authorities in Roncane, Derrington J identified the following two bases for the fiduciary relationship requirement:
… First, the circumstances where tracing is available has to be distinguished from those where legal ownership of the funds is simply placed in the hands of a third party, such as a debtor/creditor relationship or such other similar relationship. In those latter circumstances, tracing is not available as the party holding the property or funds would not be prevented from setting up their own title. Secondly, the claimant’s right needed to be equitable in order to trace the funds into or through a mixed bank account which was not available in common law tracing …[7]
As Derrington J identified, there were, however, comments made in In re Diplock[8] suggesting that while equitable tracing was available where the claimant could establish “the existence of a fiduciary or quasi-fiduciary relationship”, it was also available where “a continuing right of property recognised by equity”[9] subsisted.
Notwithstanding the scope of the tracing rights endorsed in In re Diplock, the opinion that it was “still a prerequisite of the right to trace in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being” still endured,[10] and has been affirmed in a number of English authorities since, though doubt has been cast on its efficacy. In Foskett v McKeown, Lord Millett observed (in relation to the questionable merits of maintaining any distinction between tracing at law or in equity) that:
… There is certainly no logical justification for allowing any distinction between them to produce capricious results in cases of mixed substitutions by insisting on the existence of a fiduciary relationship as a precondition for applying equity’s tracing rules …[11]
His Lordship’s observations were obiter, because a fiduciary relationship did exist in that case. The matter is likely to remain in doubt in England until, as was the case in Roncane, the absence of such a relationship was the basis for the rejection of the claimant’s right to trace.
Australian position
The English view as to the necessity of a pre-existing fiduciary relationship of some fashion has been featured in some Australian decisions. In CFHW Pty Ltd v Burness,[12] for example. Warren CJ held (citing In re Diplock) that the authorities mandated that a party seeking to trace in equity “must show a breach of fiduciary duty”.[13]
However, as Derrington J observed,[14] while the Full Court of the Federal Court in Grimaldi v Chameleon Mining NL (No 2)[15] (Grimaldi) referred to the requirement to establish a “proprietary base” as the source of the proprietary foundation of the right to trace, it did not establish that an interest arising from a trust or fiduciary relationship (as was the case in Grimaldi) was the only way that could occur.
Moreover, Derrington J identified support for the position that an equitable proprietary interest was an alternative basis to ground a tracing right from the observations of Spigelman CJ in the decision of the NSW Court of Appeal in Evans v European Bank Ltd.[16] In that case it was observed that “a duty or interest arising pursuant to the doctrines of equity”,[17] an observation Derrington J considered identical in effect to that made in In re Diplock.
The proprietary interest-based approach
Ultimately, Derrington J concluded that “it is the nature of the equitable interest as being one relating to property which is the genesis of the right to invoke tracing.”[18] This conclusion, his Honour observed, was the result of the “analytical consequence of the existing law”[19] and was consistent with the principles applicable to tracing at common law.
The facts in Roncane did not render it necessary to determine the precise nature of the equitable interest in property that gave rise to a right to trace. It was sufficient to conclude that an interest as equitable charge, or equitable mortgagee, is enough to invoke the right to trace. The status of lesser rights, such as equitable liens, mere equities and personal equities must necessarily await an appropriate opportunity to determine whether those rights are sufficient to invoke the equitable tracing process.
Conclusion
Viewed narrowly, Roncane stands for the proposition that the holder of an equitable charge has a sufficient proprietary interest in the charged property to enable it to, in equity, trace that interest into property held by a third party, and it is unnecessary to establish the existence of any fiduciary relationship. More significantly, however, by identifying the equitable proprietary interest as the foundation of tracing rights, the case represents a subtle but discernible step towards the harmonisation of the law of tracing at common law and in equity.
Apart from the absence of any obvious rationale for the distinction in theory or logic, Lord Millett’s lament that “one set of tracing rules is enough”[20] is reason enough to laud clarity in this complicated area of the law.
[1] RnD Funding Pty Ltd v Roncane Pty Ltd [2023] FCAFC 28; BC202301628.
[2] See for example, M J Hafeez-Baig and J English “The Law of Tracing” (2021) 81(3) The Cambridge Law Journal 141 at [5.66].
[3] Above, at Ch 3.
[4] Foskett v McKeown [2001] 1 AC 102 at 128–29 per Lord Millett.
[5] Re Hallett’s Estate; Knatchbull v Hallett (1879) 13 Ch D 696 at 710.
[6] In re Diplock v Wintle [1948] Ch 465 at 540.
[7] Above n 1, at [60].
[8] Above n 6, at 520.
[9] Above n 1, at [85].
[10] See Boscawen v Bajwa [1995] 4 All ER 769 at 777.
[11] Above n 4, [2000] 3 All ER 97 at 121.
[12] CFHW Pty Ltd v Burness [2014] VSC 451; BC201407648.
[13] Above, at [35].
[14] Above n 1, at [81].
[15] Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; 287 ALR 22; [2012] FCAFC 6; BC201200621.
[16] Evans v European Bank Ltd (2004) 61 NSWLR 75; [2004] NSWCA 82; BC200401304.
[17] Above, at [141].
[18] Above n 1, at [110].
[19] Above n 1, at [112].
[20] Above n 4, [2000] 3 All ER 97 at 121.