Category A Creditors
49 It is convenient to consider first the position of the Category A creditors. Mr Stomo did not suggest that the Category B creditors could be in any better position than the Category A creditors. Thus if it cannot be said, for the purposes of this application, that the Category A creditors enjoy priority over the unsecured creditors, the Category B creditors cannot be entitled to any such priority.
50 As I have pointed out, the present application seeks only directions from the Court and not the final determination of the rights of creditors against the Trustee and among themselves. It is not surprising, given the deficient record-keeping of the Bankrupt, that the evidence is incomplete. Even so, the limitations of the evidence are significant. Among other gaps, the evidence does not clarify when the various creditors purchased Bullion from the Bankrupt; whether the Bankrupt placed orders with the Mint precisely matching purchases made by customers and, if so, whether this practice continued at all material times; whether the Bankrupt stored Bullion purchased by customers separately from his own stocks and, if so, for how long that practice continued; and whether and when intermingling of Bullion stocks occurred. Moreover, it must be remembered that the classification adopted by the Trustee has been made simply for the purposes of identifying groups of creditors whose interests might diverge. The circumstances of each individual creditor have not been the subject of evidence.
51 Despite the gaps in the evidence, two conclusions can be reached readily enough from the available material. The first is that, as the Trustee and all represented creditors agreed, the Category A creditors, insofar as they might be able to establish that the Trustee held Bullion and/or funds received from the sale of Bullion in trust for them, cannot trace either the Bullion or the funds into the assets held by the Bankrupt at the date the sequestration order was made. By that date, the Bankrupt had disposed of the entirety of his stock of Bullion. Further, the represented creditors accepted that it was impossible to trace any funds received from the sale of Bullion into the First and Second Accounts. It follows that Category A creditors cannot avail themselves of tracing remedies in support of any constructive trust imposed on the Bankrupt in relation to the Bullion or the proceeds of sale. This, in my opinion, is a matter of considerable significance.
52 Secondly, I do not think that the Category A creditors can make out their claim that the Bankrupt owed them fiduciary duties, such as to give rise to a constructive trust in their favour over the proceeds derived from the sale of the Bullion. The position is somewhat complicated by the absence of clear information concerning the quantities of Bullion held by the Bankrupt and the relationship at any given time between the quantities in storage and the orders placed by Category A creditors. Nonetheless, the Category A creditors' claim that the Bankrupt owed them fiduciary duties rested on little more than mere assertion. It is difficult to see how a fiduciary relationship could have arisen between the Bankrupt and the Category A creditors.
53 In Re Goldcorp Exchange Ltd [1995] 1 AC 74 (PC), a case with some similarities to the present, the Privy Council rejected an argument that a company holding itself out as willing to vest bullion in a customer, and to hold it in safe custody on the customer's behalf, was a fiduciary. In the present case, there is no doubt that the Bankrupt was under a contractual duty to store Bullion ordered and paid for by Category A creditors and that, subject to evidence concerning the individual circumstances of particular creditors, the sale of the Bullion by the Bankrupt breached that duty. However, as their Lordships pointed out in Goldcorp (at 98) the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself. In this case, as in Goldcorp, the creditors did not suggest that the Bankrupt owed any duties as a fiduciary beyond his contractual obligations or, perhaps, beyond duties flowing from the creditors' proprietary rights in the Bullion stored on their behalf. As their Lordships said (at 98), "high expectations do not necessarily lead to equitable remedies". In my opinion, therefore, the argument of the Category A creditors, insofar as it is based on fiduciary duties owed to them by the Bankrupt, can be put to one side.
54 The absence of a fiduciary relationship does not dispose of the claims by Category A creditors that the Bankrupt held Bullion or the proceeds of sale of Bullion in trust for them (although it is significant for an argument I address later). As I have explained, the Category A creditors relied on other grounds to support the contention that equity would have imposed a constructive trust in respect of the Bullion or the proceeds of its sale. In my view, however, there are considerable difficulties in the path of resolving this question in the present proceedings. In particular, the agreed statement of facts leaves a number of crucial factual questions unresolved.
55 The point can be illustrated by one of the arguments put by Mr Condon. He relied on Re Stapylton for the proposition that, where a trader segregates quantities of stock corresponding to the quantities sold to customers, property in the stock passes to the customers even without allocation of the stock to particular customers. In Re Stapylton, a company stored wine for customers and maintained a card index showing the names of customers and the number of cases allocated to each. The customers' wine was segregated from the company's trading stock. Later, the stored wine was broken up, many index cards lost and some of the cases disposed of. Judge Baker QC held that each customer whose wine was stored had become a tenant in common of the segregated stock held from time to time, on a proportionate basis.
56 According to Mr Condon, it followed from Re Stapylton that each Category A creditor was a tenant in common of the Bullion stored in the Bankrupt's safes, notwithstanding that no means of identification was impressed on the Bullion and notwithstanding that the quantity of Bullion at any given time may have been less than the aggregate entitlement of the customers. As has been seen, this proposition formed a pillar of Mr Condon's argument that equity would impose a constructive trust over the proceeds of sale of the Bullion in favour of the Category A creditors.
57 The gaps in the agreed facts make it very difficult to decide whether the analysis in Re Stapylton can be applied to the circumstances of the present case. The statement does not make it clear whether the Bankrupt segregated Bullion ordered by Category A creditors from his own trading stock. On the assumption that he did, the statement does not address whether and, if so, when he ceased to segregate the Bullion held on behalf of the Category creditors. Nor does the statement say whether the Bankrupt's holding of Bullion ever precisely matched, in aggregate, orders placed and paid for by Category A creditors. (In Re Stapylton, the segregated holdings of wine did match purchases by customers: see [1994] 1 WLR 1181, at 1185). It seems to me less than satisfactory to attempt to draw inferences from an agreed statement of facts that simply does not address these issues. In essence I am being asked to engage in guesswork, but without the guidance provided by the rules governing the burden of proof in adversary litigation.
58 These evidentiary deficiencies do not necessarily lead to the conclusion that the Trustee's application for directions should be refused. In the circumstances of the present case, I think it is possible, subject to a matter to which I shall refer, to provide directions to the Trustee without determining whether equity would have imposed a constructive trust in favour of the Category A creditors in respect of Bullion stored by the bankrupt or the proceeds derived by him from the improper sale of Bullion. I am prepared to assume, in favour of the Category A creditors, that equity would have acted in this way (but not, for reasons already given, on the basis that the Bankrupt owed fiduciary duties to them). Even if that assumption is made, I do not think that on the material before me, the Category A creditors can make out a claim that they are entitled to receive a distribution from the Bankrupt's estate in priority to the claims of other creditors.
59 The claims of the Category A creditors rested heavily on much-criticised observations made by the Privy Council in Space Investments. Their Lordships made these observations when considering the hypothetical position of a bank trustee which had unlawfully borrowed trust moneys. Lord Templeman said this (at 1074):
A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee to protect the interest of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank. Where an insolvent bank goes into liquidation that equitable charge secures for the beneficiaries and the trust priority over the claims of the customers in respect of their deposits and over the claims of all other unsecured creditors. This priority is conferred because the customers and other unsecured creditors voluntarily accept the risk that the trustee bank might become insolvent and unable to discharge its obligations in full."
It has been said that this analysis "arguably represents a high-water mark for the rights of tracing claimants": M Christie, "Tracing" in P Parkinson (ed), The Principles of Equity (1996), at 840.
60 As the English Court of Appeal has pointed out, Lord Templeman's observations were obiter, since the Privy Council in Space Investments held that the bank trustee was authorised by the trust instrument to deposit trust money with itself as banker. Accordingly, there was no misappropriation by the bank: Bishopsgate Investment Ltd Management (in liq) v Homan [1995] Ch 211, at 217, per Dillon LJ. Nonetheless, in a subsequent case, Sir Robin Cooke, who had been a member of the Board in Space Investments, took Lord Templeman's observations as authoritatively establishing that a distinction is to be drawn between "trust beneficiaries not taking a risk of insolvency and lenders taking that risk": Liggett v Kensington [1993] 1 NZLR 257 (NZ CA), at 274. For this reason, Cooke P held in Liggett that "unallocated purchasers" of gold bullion from a trader (that is, purchasers of bullion which was to be stored in vaults by the trader on their behalf in an undifferentiated mass) could claim priority over a bank which held a debenture over the trader's assets. Gault J also found in favour of the unallocated purchasers in Liggett, on similar grounds. McKay J dissented.
61 The majority decision in Liggett was reversed by the Privy Council on appeal,in Goldcorp, to which reference has already been made. Interestingly enough, although the advice of the Privy Council was delivered by Lord Mustill, the Board included Lord Templeman. Lord Mustill rejected the broad construction of the observations in Space Investments. He said this (at 104-105):
"Their Lordships...find it difficult to understand how the judgment of the Board in [Space Investments], on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: see, for example, In re Diplock [1948] Ch 465. The observations of the Board in the Space Investments case were concerned with a mixed, not a non-existent, fund."
His Lordship also endorsed what might be thought to be the conventional view of equitable tracing remedies expressed by the Court of Appeal in In re Diplock (at 521):
"The equitable remedies pre-suppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself. If the fund, mixed or unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, of course, award damages but specific relief would be out of the question. It is, therefore, a necessary matter for consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief."
62 As was pointed out in Bishopsgate, at 219, the Privy Council in Goldcorp approved the decision of Sargant J in James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62. It was there held that trust moneys could be traced into the general account of the trustee only to the extent that the ultimate credit balance did not exceed the lowest balance of the account in the intervening period. Any payment of further moneys by the trustee into the account could not be appropriated to the replacement of the trust money, at least in the absence of proof of a specific intention: James Roscoe, at 69; Bishopsgate, at 219.
63 Lord Mustill in Goldcorp appeared to accept (at 109) that, where a bank uses all borrowed moneys as a mixed fund for lending or investing, any trust funds unlawfully borrowed by the bank trustee are "latent" in the property acquired by the bank and will support an equitable lien over that property for the recovery of the trust money. But it is clear that his Lordship rejected the broad view of Space Investments. It was for this reason that the Court of Appeal in Bishopsgate held that, where a trustee corporation improperly paid trust funds into overdrawn bank accounts maintained by a third party, the liquidator of the trustee could not trace the funds into assets held by the third party, whether by way of equitable charge or otherwise.
64 It follows then that, on the current English authorities, the Category A creditors cannot enforce an equitable charge or other remedy in respect of the First and Second Accounts. As is conceded, orthodox tracing remedies are not available. The wider construction of Space Investments has been rejected. Since this is not a case of a banker trustee, the narrow view of Space Investment does not assist the creditors.
65 The Category A creditors nevertheless relied on the dissenting judgment of Gummow J in Stephenson Nominees to support their contention that they were entitled to an equitable charge over the First and Second Accounts. Gummow J pointed out (at 552) that a
"constructive trust may be imposed upon a particular asset or assets not because pre-existing property of the plaintiff has been followed in equity into those assets but because, quite independently of such considerations it is, within accepted principle, unconscionable for the defendant to assert a beneficial title thereto to the denial of the plaintiff."
His Honour went on to say (at 556) that where the beneficiary of a constructive trust deals with the constructive trustee as a fiduciary and the general creditors do not do so, the case for preferring the fiduciary claimants is "more readily apparent". In that context, his Honour referred with apparent approval to the dicta in Space Investments. There is nothing to indicate, however, that Gummow J would have applied Space Investments to a case, such as the present, where there was no pre-existing fiduciary relationship between the constructive trustee and the claimants. Similarly, Melbourne Asset Management, in which Northrop J applied (at 358-359) Gummow J's observations, was a case involving a fiduciary relationship.
66 The gaps in the agreed statement prevent me reaching any conclusion as to whether equity would have imposed a constructive trust in favour of the Category A creditors over Bullion held by the Bankrupt or over the moneys received by him in consequence of the sale of the Bullion. However, on the material before me, even if the Category A creditors could show that the Bankrupt held the Bullion or the proceeds of sale on a constructive trust for them, they cannot establish that the Trustee holds the funds in the First and Second Accounts in trust for them or subject to a charge in their favour.