Re French Caledonia Travel [2003] NSWSC 1008

48 ACSR 97 Reported Decision : 59 NSWLR 361 (2004) 22 ACLC 498

CITATION : Re French Caledonia Travel [2003] NSWSC 1008 HEARING DATE(S) : 27 August 2003 JUDGMENT DATE : 24 November 2003 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Clayton's Case not applicable in distribution of trust monies. In particular circumstances of this case, liquidator justified in pari passu distribution amongst claimants on trust fund

CATCHWORDS : TRUSTS - remedies of beneficiaries - mixing of money held on trust for several beneficiaries in bank account - insufficiency of account to meet claims on it - how insufficiency should be borne - whether Clayton's Case applicable to decide proprietary interests in money remaining in account - CORPORATIONS - winding up - liquidator of company which held money of several beneficiaries in trust account - liquidator's responsibility concerning distribution - whether Clayton's Case applies - BANKING AND FINANCIAL INSTITUTIONS - banker and customer and business of banking generally - present role of Clayton's Case - CORPORATIONS - winding up - liquidator's application for directions - application concerning one question in which representative of affected class appointed, and concerning other questions where no representative of affected persons appointed - who bound by decision - TRUSTS - money paid into trust account - whether trust created - PRECEDENT - effect of first instance decision altered on appeal - PRECEDENT - decisions of English Court of Appeal - PRECEDENT - effect of judge's decision about legal rights arising in a factual situation which he has held does not exist - CORPORATIONS - winding up - liquidator of company which is trustee of assets, and has other assets - when liquidator's costs paid from assets subject of security - when liquidator's costs payable from trust assets Companies Act LEGISLATION CITED : Companies Act 1962 (SA) Corporations Act 2001 (Cth) 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 Adamopoulos v Olympic Airways SA (1991) 25 NSWLR 75 Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082 Chesterman J, 27 March 2001, unreported Australian Securities and Investment Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719 Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424 Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (receiver and manager appointed) (1994) 49 FCR 334 Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (in liquidation) and Anor [2000] HCA 25; (2000) 202 CLR 588 Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22 Behrens v Bertram Mills Circus Ltd [1957] 2 QB 1 In Re Berkeley Applegate (Investment Consultants) Ltd (in liquidation); Harris v Conway [1989] 1 Ch 32 In Re Birkbeck Permanent Benefit Building Society [1912] 2 Ch 183 Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 Brady v Stapleton (1952) 88 CLR 322 Bristol-Myers Squibb Co v F H Faulding & Co Ltd (2000) 170 ALR 439 In Re British Red Cross Balkan Fund; British Red Cross Society v Johnson [1914] 2 Ch 419 Brown v Adams (1869) LR 4 Ch App 764 Buckley v Gross (1863) 3 B&S 566 Burt v Barry & Roberts Ltd [1956] QSR 207 Clayton's Case; Devaynes v Noble (1816) 1 Mer 572; 35 ER 781 Commissioner of Stamp Duties (Q) v Jolliffe (1920) 28 CLR 178 Cook v Cook (1986) 162 CLR 376 Cory Brothers & Company Limited v The Owners of the Turkish Steamship Mecca [1897] AC 286 Creak v James Moore & Sons Proprietary Limited (1912) 15 CLR 426 Deeley v Lloyds Bank Limited [1912] AC 756 In Re Diplock; Diplock v Wintle [1948] 1 Ch 465 Re Eastern Capital Futures Ltd (in liquidation) [1989] BCLC 371 Re Farmer [1939] Ch 573 Federal Commissioner of Taxation v St Helen's Farm (ACT) Pty Ltd (1981) 146 CLR 336 Federation Insurance Limited v Wasson (1987) 163 CLR 303 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 Firth v Centrelink [2002] NSWSC 564; (2002) 55 NSWLR 451 Foskett v McKeown [2001] 1 AC 102 French Caledonia Travel Service Pty Ltd (in liquidation) - Application of Roderick Mackay Sutherland [2002] NSWSC 641; (2002) 42 ACSR 524; (2002) 20 ACLC 1486 Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 Garcia v National Australia Bank Ltd (1998) 194 CLR 395 Re Global Finance Group Pty Ltd (in liq) [2002] WASC 63; (2002) 26 WAR 385 Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301 Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 In Re Guardian Permanent Benefit Building Society (1882) 23 ChD 440 Hagan v Waterhouse (1991) 34 NSWLR 308 In Re Hallett's Estate; Knatchbull v Hallett (1879) 13 Ch D 696 Hancock v Smith (1889) 41 ChD 456 Hepburn v TCN Channel Nine Pty Ltd [1984] 1 NSWLR 386 Re Hobourn Aero Components Ltd's Air-Raid Distress Fund [1946] 1 Ch 86 Re Hobourn Aero Components Ltd's Air-Raid Distress Fund [1946] 1 Ch 194 Hodges & Hurley v Kovacs Estate Agency Ltd [1961] WAR 19 Hopkinson v Rolt (1861) 9 HL Cas 514 Jacobs v London County Council [1950] AC 361 Re James R Rutherford & Sons Ltd [1964] 1 WLR 1211 CASES CITED : James Roscoe (Bolton) Limited v Winder [1915] 1 Ch 62 Joachimson v Swiss Bank Corporation [1921] 3 KB 110 Re Jones (Deceased); Ex parte Mayne (1953) 16 ABC 169 Jones v Bartlett (2000) 205 CLR 166 In Re Joscelyne; Allen's Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4 Kauter v Hilton (1953) 90 CLR 86 In Re Kayford Limited (in liquidation) [1975] 1 WLR 279 Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 In Re Laughton [1962] Tas SR 300 Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353 Lippmann Gorman v Karpnale Ltd [1991] 2 AC 548 London Jewellers Ltd v Attenborough [1934] 2 KB 206 In Re Marine Mansions Company (1867) LR 4 Eq 601 Re Martin [1953] QSR 37 Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215 Murray v Scott (1884) 9 App Cas 519 Mutton v Peat [1899] 2 Ch 556 Mutton v Peat [1900] 2 Ch 79 Natwest Markets Australia Ltd v Mannix (1995) 7 BPR 14,668 In Re Oatway; Hertslet v Oatway [1903] 2 Ch 356 Re Ontario Securities Commission and Greymac Credit Corp (1986) 30 DLR (4th) 1 Re Ontario Securities Commission and Greymac Credit Corporation (1988) 52 DLR (4th) 767 In Re Oriental Hotels Company; Perry v Oriental Hotels Company (1871) LR 12 Eq 126 Osborne v Rowlett (1880) 13 ChD 774 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Parr's Banking Company Ltd v Yates [1898] 2 QB 460 Pennell v Deffell (1853) 4 DeGM&G 372; 43 ER 551 In Re Regent's Canal Ironworks Company; Ex parte Grissell (1875) 3 ChD 411 Re Registered Securities Ltd [1991] 1 NZLR 545 Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch); [2003] 2 All ER 478 Scott v Scott (1963) 109 CLR 649 Sharah v Healey [1982] 2 NSWLR 223 In Re Sherry; London and County Banking Company v Terry (1883) 25 Ch D 692 Shirlaw v Taylor (1991) 31 FCR 222 Shoreline Currencies (Australia) Pty Ltd (in liquidation) and the Companies (New South Wales) Code (Kearney J, 14 October 1988, unreported) Sibbles v Highfern Proprietary Limited (1987) 164 CLR 214 Sinclair v Brougham [1914] AC 398 Spence v Union Marine Insurance Co Ltd (1868) LR 3 CP 427 In Re Stenning; Wood v Stenning [1895] 2 Ch 433 Stephens Travel Service International Pty Ltd (receivers and managers appointed) v QANTAS Airways Ltd (1988) 13 NSWLR 331 Re Stillman & Wilson (1950) 15 ABC 68 In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99 Re Thomas Mortimer Limited [1965] Ch 186 In The Trusts of the Abbott Fund; Smith v Abbott [1900] 2 Ch 326 Re Universal Distributing Co Ltd (1933) 48 CLR 171 Re Walter J Schmidt & Co 298F 314 (1923) Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 Re Wilson [1940] Ch 966 Windsor Mortgage Nominees Pty Ltd (as trustee) v Raymond Griffith Cardwell (1979) ACLC 40-540 Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 Re Yeovil Glove Co Ltd [1962] 3 All ER 400 Re Yeovil Glove Co Ltd [1965] Ch 148 PARTIES : Roderick Mackay Sutherland - First Applicant French Caledonia Travel Service Pty Limited (in liquidation) - Second Applicant FILE NUMBER(S) : SC 3173/02 COUNSEL : Golledge, solicitor - First Applicant A Lo Surdo - QT Travel Pty Limited SOLICITORS : The Argyle Partnership - First Applicant Norton White - QT Travel Pty Limited

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

3173/02 RODERICK MACKAY SUTHERLAND RE; FRENCH CALEDONIA TRAVEL SERVICE PTY LIMITED (IN LIQUIDATION) JUDGMENT PART A - INTRODUCTION 1 HIS HONOUR: On 15 January 2002 Mr Roderick Sutherland was appointed as administrator of French Caledonia Travel Service Pty Limited ("the Company"). A second meeting of creditors held on 11 February 2002 resolved that the Company be wound up. Mr Sutherland has become the liquidator. 2 The Company operated a business as a travel agent. Nearly all of its business involved selling travel packages, including airfares, accommodation and transfers to travel agents, on behalf of customers of those travel agents. As well, it sold such packages to travellers directly. 3 After Mr Sutherland was appointed administrator some travellers who had made bookings through the Company, paid for those bookings, and had travel documents issued, found that some of those travel documents were not honoured. Other travellers who had made bookings or paid deposits, but not received travel documents, could not get back from the Company the amount which they had paid. Some providers of travel services honoured travel documents which had been issued, but have not been paid for the services which they provided. 4 At the time of the administration commencing, the Company had a bank account with the Commonwealth Bank entitled "French Caledonia Travel Service Pty Limited Trust Account" ("the Trust Account") which was in credit in an amount of a little under $97,000. It had another account entitled "French Caledonia Travel Service Pty Limited General Account" ("the General Account"), which was in credit in an amount of a little less than $8,000. It had a third account, of a type known as a Cash Deposit Account with the Commonwealth Bank, which was also entitled "French Caledonia Travel Service Pty Limited Trust Account" ("the CD Account"). At the start of the administration, that account was in credit a little over $75,000. 5 The Commonwealth Bank had a fixed and floating charge over the whole of the assets and undertaking of the Company. Under that charge, it has taken the money standing to the credit of the General Account, some chattels, and a few other assets of no great value. The only assets which remain are the amounts in the Trust Account and the CD Account. 6 In the ordinary course of operating its business, the Company received monies into the Trust Account. For any traveller's booking, it was usual for the Company to receive at least two payments - a deposit at the time the booking was made, and one or more further payments. Money would be credited to the Trust Account by:

(a) a traveller or travel agent sending a cheque to the Company, which the Company would bank,

(b) a travel agent making a direct deposit into the bank account of the Company, or

(c) money transfer through intermediary companies, called Money Direct Pty Limited, and Travel Industries Automated Systems Pty Limited. 7 In the ordinary course of the business, payments by the Company to providers of travel services would be made from the Trust Account. 8 From time to time the Company would transfer round sums from the Trust Account to the CD Account. Money in the CD Account earned a higher rate of interest than money in the Trust Account. From time to time, there would be transfers of money back from the CD Account to the Trust Account, again in round sums. The only dealings with the CD Account were transfers to and from the ordinary Trust Account, in this fashion. 9 From time to time, the Company would also transfer round sums from the Trust Account to the General Account. 10 When the Company purchased air tickets, it did so on the terms of a Passenger Sales Agency Agreement made on 1 November 1994 between itself and the International Air Transport Association ("IATA"). That agreement authorised the Company to sell air passenger transportation services on behalf of the various airlines. Clause 7.2 included provision that: "All monies collected by the Agent for transportation and ancillary services sold under this Agreement, including applicable commissions which the Agent is entitled to claim thereunder, shall be the property of the Carrier and shall be held by the Agent in trust for the Carrier or on behalf of the Carrier until satisfactorily accounted for to the Carrier and settlement made." 11 By early June 2002, the liquidator had received various claims to monies held in the Trust Account and the CD Account. Those claims came from airlines, individual travellers, and various travel agencies which claimed to have paid the Company for travel services which were ultimately not provided. The liquidator had received claims of approximately $1.43 million. If those claims were all properly payable, that meant there would be a deficiency on the two accounts of in excess of $1.25 million. 12 The liquidator has had difficulties in analysing those claims because the books and records of the Company were not adequately kept. There was no documentation which explained how the round sums which were transferred from the Trust Account to the General Account were made up. While the Company would have had an entitlement to commission, which it would ultimately be entitled to receive from the gross price paid to it by or on behalf of a traveller, there was no documentation which demonstrated that those round sums consisted only of commission. When a money intermediary paid money to the Company, it was frequently on account of bookings of more than one traveller; the liquidator did not have individual transaction listings from each of the money intermediaries. He did not have details of all travellers who had paid money into the Trust Account and who had not had their travel arrangements honoured. Nor did he have copies of all bank transactions relating to deposits and withdrawals on the Trust Account. 13 The liquidator approached the Court for directions under section 479(3) Corporations Act 2001. The application sought certain orders concerning the payment of the liquidator's costs, and also an order that he would be justified in distributing the balance of the funds in the trust accounts: "pro rata between all persons who in the [liquidator's] opinion, or as determined by the Court, have a claim on the trust accounts and who: (a) Have previously made claim to such fund to the [liquidator]; or (b) Make claim following the giving of notice in accordance with order 1 above within the time specified in the notice." 14 On 19 July 2002 I gave directions that the liquidator would be justified in giving notice to all claimants on the monies in the Trust Accounts by:

(a) delivery to the International Air Transport Association,

(b) faxstream to all travel agents to whom the Company sold travel packages,

(c) delivery to all persons or their legal representatives who have indicated their intention to make a claim on the funds in the said account,

I also directed that the liquidator would be justified in providing notice of the application by serving:

(a) a copy of the Originating Process on any person lodging a claim with him, and

(b) a copy of the Originating Process and any supporting affidavit on the Department of Employment and Workplace Relations, in respect of the General Employee Entitlements and Redundancy Scheme ("GEERS") and any employees whose claims have not been paid or approved by GEERS. 15 In reasons for judgment given concerning those directions (In the Matter of French Caledonia Travel Service Pty Ltd (in liquidation) - Application of Roderick Mackay Sutherland [2002] NSWSC 641; (2002) 42 ACSR 524; (2002) 20 ACLC 1486) I noted that, while the giving of notices inviting claims would set the outer limits of the class amongst whom division of the monies in the Trust Account could occur, there was a problem, which could not be solved by a simple application for advice, about the manner in which the money in the Trust Account should be divided. That problem concerned whether the money in the Trust Account should be divided amongst the people who claimed to be beneficiaries of it in accordance with the rule in Clayton's Case (Clayton's Case; Devaynes v Noble (1816) 1 Mer 572; 35 ER 781), or in accordance with some form of rateable division. 16 After those directions were given the liquidator was able, by working through the bank accounts backwards from 15 January 2002, to identify what he called "the FIFO date". This was the date which, if the correct way of appropriating payments in and out of the Trust Account and the CD Account was on a "first in first out" basis, was the date on which the first payment of money which remained in those accounts at the time of the Company going into administration had been paid into the Trust Account. After that date, QT Travel Pty Limited ("QT") paid into the Trust Account an amount of $2,082.80, in connection with travel booked on behalf of Mr Gregory and Ms Skinner. Mr Gregory and Ms Skinner had paid QT for that travel by charging it to their credit card. They did not receive the services they had paid for, and their credit card provider then gave Mr Gregory and Ms Skinner a credit for the amount they had paid to QT for the travel, and 'back-charged" QT for that amount. Hence it was QT which bore the loss arising from the travel arrangements being dishonoured. It has made a claim on the liquidator for the amount of that loss. 17 If the correct way of ascertaining the beneficial ownership of monies in the Trust Account is by applying Clayton's Case, then QT would be entitled to receive back the whole of the $2,082.80 which it paid into the Account on 9 January 2002. On 25 June 2003 I ordered that QT Travel Pty Ltd be added as a defendant in these proceedings to represent the class of potential beneficiaries (including itself) to the monies in the Trust Accounts of the Company, being the class identified by the application of the principles in Devaynes v Noble (Clayton's Case). QT was represented by counsel at the hearing. By agreement the costs of QT have been capped at $10,000. Who This Judgment Binds, Concerning What 18 When a representative of the class of potential beneficiaries who would take if Clayton's Case were applicable has been made a defendant and argued in these proceedings, and the solicitor who argued the case for the liquidator presented argument to oppose a distribution in accordance with Clayton's Case, people who are members of that class are bound by the result of the proceedings so far as the applicability of Clayton's Case is decided: Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 680. All questions other than the applicability of Clayton's Case decided in this judgment are decided as on a liquidator's ex parte application for directions. Thus, the answers I come to concerning questions other than the applicability of Clayton's Case are ones which will, if the liquidator has made a full and fair disclosure of the material facts, entitle him to act in accordance with the direction without incurring personal liability to any of the persons in whose interest the liquidation was conducted: Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674. No other rights or liabilities of persons not represented in the proceedings are affected by this judgment. Is the Money Held on Trust? 19 That the Trust Account and the CD Account were each called a "trust account" does not as a matter of law necessitate a conclusion that monies paid into them were held on trust. All relevant circumstances must be examined in order to determine whether the Company really intended to create a trust: Commissioner of Stamp Duties (Q) v Jolliffe (1920) 28 CLR 178; Kauter v Hilton (1953) 90 CLR 86 at 100; Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (in liquidation) and Anor [2000] HCA 25; (2000) 202 CLR 588 at [33]. But opening an account entitled "trust account", and paying into that account money received from customers in payment for services which they have not received at the time of payment, is a powerful indication that a trust is intended: In Re Kayford Limited (in liquidation) [1975] 1 WLR 279. There are no countervailing factors of any significance. The liquidator is justified in proceeding on the basis that money standing to the credit of the Trust Account and the CD Account are monies which are held on trust. So far as monies collected for airlines are concerned, which also found their way into the Trust Account or the CD Account, Clause 7.2 of the IATA agreement would provide a separate basis for the existence of a trust of those monies. In circumstances where payment for airline services found its way into the Trust Account or the CD Account, and those services were actually provided, the trust would probably be in favour of the airline; if the services were not provided the trust would probably be a resulting trust in favour of the person who paid the money. It is not, however, necessary to make a final decision about this - what matters for present purposes is that the monies paid into the Trust Account were each held on trust, that money held on trust for many different beneficiaries has become mixed in the Trust Account and the CD Account, and that there is now not enough money in those accounts to pay all the beneficiaries. PART B - CLAYTON'S CASE Clayton's Case Itself 20 Devaynes v Noble; Clayton's Case (1816) 1 Mer 572; 35 ER 781 related to how the liabilities of a partnership of bankers to a customer should be borne amongst the partners. Devaynes was a member of a partnership of five bankers. Clayton was a customer of that partnership. At the time of Devaynes death, Clayton's account with the partnership had a credit balance. The four surviving partners continued on the banking business, but became insolvent some time later. Clayton continued to make deposits to, and withdrawals from, his account with the partnership during the time that the four surviving partners operated it. At the time of the bankruptcy of the four surviving partners, the partnership owed Clayton a significant sum. The estate of Devaynes was solvent. Hence Clayton tried to throw liability onto Devaynes' estate, to the extent he could. 21 At the death of Devaynes, Clayton's account with the partnership had a balance of £1,713 in credit. After the death of Devaynes, and before paying any more money into the account, Clayton drew out money which reduced his cash balance to £453. Thereafter, he continued to make both payments and withdrawals of large sums. At the time of the bankruptcy of the remaining four partners, his cash balance exceeded £1,713. 22 Clayton alleged that the estate of Devaynes remained a debtor to him in the sum of £453 (minus the proportion attributable to £453 of dividends he had received from the bankruptcy of the surviving partners). 23 The problem which required solution in Clayton's Case was one involving identification of the debtor, in a relationship between banker and customer. It arose from the need to decide which of two potential debtors - the partnership of five, or the partnership of four - continued to owe a debt to Clayton. That problem was solved by appropriating payments out of the bank account, to work out whether the debt which was owing by the partners to Clayton at the time of Devayne's death had been repaid or not. 24 Sir William Grant MR held that Clayton's claim failed. He noted (at 605-608 of Mer; 791-792 of ER) that the common law contained two irreconcilable strands of authority concerning the way in which an appropriation was to be made in the situation where a debtor owed several debts to a creditor, and made a payment which did not completely repay those debts. One strand of authority was derived from the civil law, the other was one which the common law had developed for itself. Sir William distinguished both those strands of authority from the case before him by saying (at 608 Mer; 793 of ER) "They were all cases of distinct insulated debts, between which a plain line of separation could be drawn. But this is a case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence … In such a case, there is no room for any other appropriation than that which arises from the order in which the receipts and payment take place, and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. Upon that principle all accounts current are settled, and particularly cash accounts. When there has been a continuation of dealings, in what way can it be ascertained whether the specific balance due on a given day has, or has not, been discharged, but by examining whether payments to the amount of that balance appear by the account to have been made? You are not to take the account backwards, and strike the balance at the head, instead of the foot, of it. A man's banker breaks, owing him, on the whole account, the balance of £1,000. It would surprise one to hear the customer say, "I have been fortunate enough to draw out all that I paid in during the last four years; but there is £1,000, which I paid in five years ago, that I hold myself never to have drawn out; and, therefore, if I can find anybody who was answerable for the debts of the banking house, such as they stood five years ago, I have a right to say that it is that specific sum which is still due to me, and not the £1,000 that I paid in last week". That is exactly the nature of the present claim. Mr Clayton travels back into the account, 'til he finds a balance, for which Mr Devaynes was responsible; and then he says - "that is a sum which I have never drawn for. Though standing in the centre of the account, it is to be considered as set apart, and left untouched. Sums above it, and below it, have been drawn out; but none of my drafts ever reached or affected this remnant of the balance due to me at Mr Devaynes' death." What boundary would there be to this method of re-moulding an account?

And at 610 of Mer, 793 of ER: "If appropriation be required, here is appropriation in the only way that the nature of the thing admits. Here are payments, so placed in opposition to debts, that, on the ordinary principles on which accounts are settled, this debt is extinguished." 25 Sir William Grant also relied upon the fact that the customer had not informed the banker that any other method of appropriation was to be adopted, and had received statements of account drawn up as though a first-in first-out method of appropriation was being adopted. At 610 of Mer, 793 of ER: "He makes no objection to it - and the report [of the Master] states that the silence of the customer after the receipt of his banking account is regarded as an admission of its being correct. Both debtor and creditor must, therefore, be considered as having concurred in the appropriation." 26 A third reason for reaching the conclusion that Clayton's claim failed was that Clayton drew from the account immediately after the death of Devaynes. At 611 of Mer, 794 of ER: "… he drew, and that to a considerable extent, when there was no fund, except this balance, out of which his drafts could be answered. What was there, in the next draft he drew, which could indicate that it was not to be paid out of the residue of the same fund, but was to be considered as drawn exclusively on the credit of money more recently paid in? No such distinction was made; nor was there anything from which it could be inferred. I should, therefore say, that on Mr Clayton's express authority the fund was applied in payment of his drafts in the order in which they were presented." The Mecca 27 Cory Brothers & Company Limited v The Owners of the Turkish Steamship Mecca [1897] AC 286 was a case where Cory held four bills of exchange given by a company which owned both the Mecca and the Medina. Two of the bills had been given for necessaries supplied to the Mecca, two had been given for necessaries supplied to the Medina. After some threats by Cory to seize both vessels, the owners arranged for a lump sum of £900 to be paid, on Cory undertaking not to enforce its claim against the two vessels for three months. Cory wrote a letter, acknowledging receipt of the £900, which listed the four bills which had been received, the amount of each bill, various incidental expenses, set out the total of the bills and those expenses, and deducted £900 from it, to show a balance due of £401. 28 When, after expiry of the three-month period of grace, the £401 balance was still unpaid, Cory began an action in rem against the Mecca. The owners alleged that the listing of the bills in the receipt (which put a bill relating to the Medina for £630 last in the list) had the effect that the £900 had been appropriated to payment of the bills which related to the Mecca, and hence no sum remained owing in connection with the Mecca. The House of Lords rejected that contention. Each of Lord Halsbury LC, Lord Herschell, Lord Macnaghten and Lord Morris was of the view that Clayton's Case did not apply. Lord Halsbury LC said, at 290, that the rule in Clayton's Case: "… is not an invariable rule of law; but the circumstances of a case may afford ground for inferring that transactions of the parties were not so intended as to come under this general rule."

He held that that case was not within the rule at all. At 291 he said that the letter acknowledging receipt of the £900: "… is not an account current; there is no setting one item against another; credit is given for the £900 at the end of all the items. They are all separate transactions, and, although on one piece of paper, seem to represent only historically the transactions as they occurred." 29 Lord Macnaghten set out the general principles of law concerning appropriation of payments by a debtor to a creditor, at 293-4: "When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor. In 1816, when Clayton's Case was decided, there seems to have been authority for saying that the creditor was bound to make his election at once according to the rule of the civil law, or at any rate, within a reasonable time … But it has long been held and it is now quite settled that the creditor has the right of election "up to the very last moment", and he is not bound to declare his election in express terms. He may declare it by bringing an action or in any other way that makes his meaning and intention plain. Where the election is with the creditor, it is always his intention expressed or implied or presumed, and not any rigid rule of law that governs the application of the money. The presumed intention of the creditor may no doubt be gathered from a statement of account, or anything else which indicates an intention one way or the other and is communicated to the debtor, provided there are no circumstances pointing in an opposite direction. But, so long as the election rests with the creditor, and he has not determined his choice, there is no room, as it seems to me, for the application of rules of law such as the rule of the civil law, reasonable as it is, that if the debts are equal the payment received is to be attributed to the debt first contracted."

After discussing the facts of Clayton's Case , he continued, at 295: "The facts of the present case are very different. There is no current account between the parties here. There was no account between them at all until the bills were dishonoured. The debts were distinct. But it is, I think, important to observe that even in cases prima facie falling within the doctrine of Clayton's Case the account between the parties, however it may be kept and rendered, is not conclusive on the question of appropriation." 30 He went on to quote various authorities to the effect that the rule in Clayton's Case provided, in situations where there was a current account between parties, a presumption of what the intention of the parties was concerning appropriation of payments, but that that presumption could be rebutted or modified by other evidence. He held that the giving of the receipt did not amount to an appropriation of the £900 to any particular debt, that Cory had made clear that it reserved the right to arrest whichever of the vessels it could lay hands on, and that by the time of the arrest of the Mecca no appropriation of the £900 had been made. 31 In the nineteenth century case law and textbooks it is common to find a current account with a banker spoken of as a series of loans and repayments. Some examples of this understanding are collected in Joachimson v Swiss Bank Corporation [1921] 3 KB 110 at 116, 120-121, and 122. If the account was one that was maintained in credit, each deposit was a loan by the customer to the bank; every time the bank met a draft or cheque drawn on the account it repaid in whole or part one or more of those loans. If the account was one where there was an overdraft, each occasion when the bank allowed the account to go into overdraft, or further into overdraft, by meeting a cheque or draft drawn on the account, was the bank making a loan to the customer; the customer from time to time repaid one or more of those loans, in whole or part, by making deposits into the account. The rule in Clayton's Case was a rule for appropriating payments made by a debtor in such a running account. For credit accounts, where it was the bank which was the debtor, the function of the rule in Clayton's Case was to decide which of the loans made by the customer to the bank was repaid when the bank met a cheque or draft. For overdraft accounts, where it was the customer who was the debtor, the function of the rule in Clayton's Case was to decide which of the loans which the bank had made to the customer was repaid by a deposit into the account. 32 This nineteenth century understanding of how a banking current account operated was clarified significantly, and altered somewhat, by the decision in Joachimson v Swiss Bank Corporation [1921] 3 KB 110. It held that for a bank account in credit, a demand is a necessary precondition to the customer having a cause of action to recover all or part of the balance of the account (though service of a court initiating process or a garnishee order can itself be sufficient demand, and there are various other implied terms arising from the relationship on banker and customer). In Joachimson at 127 Atkin LJ rejected the proposition that a current account can be analysed as a simple contract of loan, with a superadded obligation of the bank to honour the customer's drafts to any amount not exceeding the credit balance at any time. He said "I think there is only one contract made between the banker and its customer. " - ie, when a customer sues the bank to recover money in its current account, the customer is suing on the banker-customer contract, not suing for repayment of a loan or set of loans constituted by deposits. 33 Clayton's Case continues to be part of the law in Australia: Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 676. It operates by providing a presumption concerning the debtor's intention in making a payment on a current account, which operates only in the absence of some other agreement or direction or reason for not applying the presumption: Creak v James Moore & Sons Proprietary Limited (1912) 15 CLR 426 at 433 per Griffiths CJ; Deeley v Lloyds Bank Limited [1912] AC 756 at 771 per Lord Atkinson; Re British Red Cross Balkan Fund [1914] 2 Ch 419; Sibbles v Highfern Proprietary Limited (1987) 164 CLR 214 at 222; Natwest Markets Australia Ltd v Mannix (1995) 7 BPR 14,668 at 14,674. Appropriation of payments within a current account is a task which needs to be performed, even if the current account is no longer seen as constituting a series of debts which can be sued on. 34 The sort of situations where the principle in Clayton's Case is used, apart from the situation in Clayton's Case itself of deciding who is the debtor when a partnership of debtors changes, include: · In the application of the Limitation Act to a debt owing to a bank on an overdraft account. If the contractual arrangements are such that a demand is not a prerequisite to the accrual of a cause of action, time runs separately in relation to each advance from the date it is made, and Clayton's Case is used to determine which advance is the oldest which has not been repaid (Parr's Banking Company Ltd v Yates [1898] 2 QB 460; Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833). · If the bank with a first mortgage over property, as security for the debt in a current account, receives notice of a second mortgage over that same property, the bank will not be entitled to priority for advances made after the date it receives notice of the second mortgage: Hopkinson v Rolt (1861) 9 HL Cas 514. If the bank's mortgage secures a debt in a current account, and the bank, after receiving notice that the customer has granted a second mortgage over the mortgaged property, permits the customer to continue to operate on the account, the effect of the rule in Clayton's Case will be that fresh deposits to the account are treated as paying off the debt for which the bank had security: Deeley v Lloyds Bank Limited [1912] AC 756; Sibbles v Highfern Proprietary Limited (1987) 164 CLR 214 at 222. Conversely, if the bank has a guarantee of a customer's current account, and receives notification of the death of the guarantor, it can (unless prevented from doing so by contract) prevent the rule in Clayton's Case from operating to reduce the amount guaranteed by opening a new account and requiring all deposits thereafter made to be made to that account: In Re Sherry; London and County Banking Company v Terry (1883) 25 Ch D 692. · If a section, such as section 588FJ Corporations Act 2001, invalidates a floating charge given by a company within six months of the commencement of its winding up, except the extent of any cash paid to the company at the time or subsequently to the creation of the charge, the amount of "cash paid to the company" by a financier with whom the company already has a current account in overdraft is decided, in accordance with Clayton's Case, by treating payments made by the company as appropriated to the earliest advances, and each withdrawal from the account as a fresh advance, regardless of whether the net balance of the account increases: Re Thomas Mortimer Limited [1965] Ch 186; Re Yeovil Glove Co Ltd [1962] 3 All ER 400 at 407, 409; Re Yeovil Glove Co Ltd [1965] Ch 148; Re James R Rutherford & Sons Ltd [1964] 1 WLR 1211. PART C - THE MAIN ENGLISH CASES TO RE: DIPLOCK 35 I will deal first with the main English cases which bear upon the problem of how the money in the Company's trust accounts should be allocated. In this judgment I will use the expression "the Problem" as meaning "how the balance remaining in a bank account containing funds held on more than one trust is allocated amongst the beneficiaries of those trusts, when the balance in the bank account and any assets purchased from the bank account are insufficient to satisfy the claims of all the beneficiaries." The focus of this Part will be to see what, if any, precedent there is for applying Clayton's Case to decide the Problem, and also to consider to some extent what support in principle there is for applying Clayton's Case to decide the Problem. Pennell v Deffell 36 Pennell v Deffell (1853) 4 DeGM&G 372; 43 ER 551 was a suit for the administration of the deceased estate of Green, who had been one of the official assignees of the Court of Bankruptcy. Pennell was his successor in that office. Green had maintained two bank accounts, one with the Bank of England, the other with the London Joint Stock Bank. Each account was in his own name; neither was described as a trust account or in any other way made reference to his official capacity. Into each account he paid both monies received in his official capacity which he held on trust for various bankrupt estates, and monies of his own. From one account, that with the Bank of England, he drew money both for the purpose of administering the various bankrupt estates, and for his own private purposes. From the other account, that with the London Joint Stock Bank, he withdrew money only for his own private purposes. The Master, on an inquiry, was able to identify, in the periods concerning which there was any dispute, which payments in and out were for private purposes, and which for administration of the bankrupt estates, and, in the latter case, to which particular bankrupt estate each payment in or out related. The Master held that during the disputed period Green had taken more out of the Bank of England account for his private purposes than he had paid in for his private purposes, and that the whole of the balance standing to the credit of that account at the time of his death belonged to various bankrupt estates and was recoverable by Pennell. The Master held that the whole of the London Joint Stock Bank account apart from £85-odd, was recoverable by Pennell. 37 On appeal, Lord Romilly MR decided that the balances in both accounts were part of the general estate of the testator - ie, no part of them was held on trust. Against that decision, Pennell appealed a second time, "on behalf of the several persons interested in those trusts." (381 of 4 DeGM&G; 555 of ER) to the Court of Appeal in Chancery. The Master's factual findings were accepted as accurate, and the appeal turned on the legal consequences of those findings. The appeal succeeded largely, but not completely. 38 In relation to the account with the Bank of England, an amount £648 of undoubted trust money stood to the credit of the account on 3 October 1849. After that date, withdrawals were made from the account, partly for Green's private purposes, and partly for trust purposes, totalling £470. Those withdrawals occurred over the period to 20 October. Various sums of money were paid into the bank account after 3 October, all of which apart from an amount of £72 paid in on 5 October was trust money. The method by which Knight Bruce LJ proceeded was to say that the total withdrawals from the account (£470) had to be regarded as being taken from the opening balance of £648. That meant that the £72 of Green's own money, which had been paid in on 5 October, was still there at the time of his death, and Pennell could not have it. Pennell was entitled, however, to the balance. 39 A similar methodology was applied to the account with the London Joint Stock Banking Company. The opening balance of that account as at 31 December 1848, of £642 15s 7d, and the next payment in, of £210, were items which the Master found were Green's own money. The total withdrawals from the account during 1849 were £796 4s 7d. If all those withdrawals were treated as being taken first from the opening balance, and then from the deposit of £210, it would leave £56 11s of the deposit of £210. That £56 11s was money which Green's executors were entitled to. The other deposits which had been made to the account during 1849 were allocated so that the executors were entitled to the total amount of those other deposits which had come from Green's private sources, and Pennell was entitled to the rest. 40 It is to be noted that even though Green had paid funds of various different bankrupt estates into his bank accounts, the funds held on trust were treated, in the reasons for judgment, as though they were held on a single trust. Concerning the Bank of England account, where trust funds had been misappropriated, there was no finding about how the loss would fall between the various bankrupt estates. Thus Pennell v Deffell is only authority for the proposition that Clayton's Case is to be used to allocate a loss in a mixed account between the trustee and the beneficiary. It is not an authority which itself deals with the question of how the loss is to be distributed between several beneficiaries whose funds are mixed in a bank account. Its reasoning could readily be extended to that sort of case, however, to require the application of Clayton's Case. Brown v Adams 41 Brown v Adams (1869) LR 4 Ch App 764 concerned a solicitor whose client had paid £5,000 into the solicitor's general banking account, for the purpose of investment on mortgage. The investment was never made. At the time of the payment in, the solicitor's bank account was a little over £4,000 in credit. After the payment in, the solicitor paid in various amounts of his own, and withdrew over £18,000. At the time of his death around £2,700 remained in the account. Sir G M Giffard LJ held that the client's money had been completely withdrawn. He said, at 767: "There can be no question that at law, as between a banker and his customer, the debt is extinguished by the first payments made, and it would be an extraordinary thing if the debt could be in existence in equity when it is extinguished at law."

This passage is one which reflects the 19th century view of a banker's current account maintained in credit as being a series of loans made by the customer to the banker. 42 Brown v Adams is, like Pennell v Deffell, a case which dealt only with the application of Clayton's Case as between trustee and beneficiary whose monies were mixed in a bank account. It did not itself deal with how losses were to be borne between two beneficiaries whose money was mixed in a bank account. In Re Hallett's Estate - An Account of the Case 43 In Re Hallett's Estate; Knatchbull v Hallett (1879) 13 Ch D 696 was an action for administration of the deceased estate of a solicitor. The plaintiff in the action was one of the solicitor's general creditors. Other claimants against the estate were the trustee of the solicitor's marriage settlement, and one of the solicitor's clients, Mrs Cotterill. There was a dispute as to their respective entitlements to money standing in the solicitor's bank account. 44 At the start of business on 3 November 1877 the solicitor's bank account had (simplifying figures somewhat) £1,796 standing to its credit. On 3 November he paid in £341, concerning which he had a fiduciary obligation to account to Mrs Cotterill. On 14 November he paid in two amounts. The bank account records the order in which they were paid in. First he paid in £770, a sum which he had a fiduciary obligation to hold on the trusts of the marriage settlement. Then he paid in £1804, which was another amount concerning which he had a fiduciary obligation to account to Mrs Cotterill. Each of the payments connected with Mrs Cotterill was one where Hallett had sold an asset of Mrs Cotterill, which his obligation had been to keep in specie. Hallett, then, before his death, drew out various sums for his own purposes, so that the balance to his credit at the time of his death (if nothing more had been paid in by him after 14 November) would have been £1,708. He had, however, paid in other sums, so that he had at the time of his death a balance at his bankers of £3,029. For a reason which does not appear from the report, only £2,600 of this amount was paid into court to the credit of an action for the administration of his estate. 45 The reported case was a priority dispute about entitlement to that £2,600. The trustees of the marriage settlement claimed the whole amount of £770. Mrs Cotterill claimed £1,708, on the basis that that was the sum remaining in the banker's hands out of the proceeds of the sale of her assets. It is to be observed that the total amount claimed by the trustees and Mrs Cotterill together was £2,478, which was less than the £2,600 paid into court. 46 The trial judge, Fry J, held that the two creditors to whom Hallett owed a fiduciary obligation prevailed over the general creditors, but that the rule in Clayton's Case applied as between the two creditors to whom Hallett owed a fiduciary obligation. He specifically rejected (at 703-704) an argument that the amount which remained in the bank account should be divided rateably between the trustees of the marriage settlement and Mrs Cotterill. In consequence, as Mrs Cotterill's money had been paid in last, she had established her right to the £1,708 she claimed, and the trustees of the marriage settlement received nothing. 47 Appeals against the decision of Fry J by the general creditors were dismissed (13 Ch D at 705-724). Insofar as the general creditors disputed the decision of Fry J that the trustee of the marriage settlement prevailed over the general creditors, the argument turned on a question of fact, concerning whether certain bonds from which the £770 was derived had been appropriated to become assets of the marriage settlement. Fry J's decision on that point was upheld (706-707). Insofar as the general creditors disputed the decision of Fry J that Mrs Cotterill prevailed over the general creditors, it sufficed that Mrs Cotterill established that Hallett had owed her a fiduciary obligation concerning the asset which he had wrongly sold, and (because various earlier statements that "money has no earmark" no longer applied to prevent tracing in equity into a mixed fund) that fiduciary obligation enabled Mrs Cotterill to trace into the bank account and obtain a charge over it - and that charge meant that she prevailed over the general (unsecured) creditors (707-724). 48 As well, the trustees of the marriage settlement and Mrs Cotterill both appealed against the decision that the claim of the trustees was to be governed by Clayton's Case. Mrs Cotterill's appeal involved a repudiation of the argument which she had put to Fry J. Fry J summarised the argument which she put to him (at 701) by saying "In this case Mrs Cotterill claims to have such a portion of the residue of the balance standing to the credit of the late Mr Hallett's banking account as may be attributable to her after applying the rule in Clayton's Case to that account." 49 Mrs Cotterill had not, at first instance, made a claim to anything larger than £1708, and the case had been argued at first instance as though that £1,708 was part of the £1,804 paid into the account on 14 November. She did not make any claim at all to the £341 which had been paid into the account on 3 November. Presumably, this stance was taken because her counsel assumed that the application of Clayton's Case would result in her money being eroded, in part, by drawings which Hallet made for his own purposes after 14 November, notwithstanding that Hallet paid money of his own into the account after 14 November. 50 The appeal by the trustees and Mrs Cotterrill succeeded. The basis of the appeal succeeding, so far as Jessel MR was concerned, was that a trustee who created a mixed fund was presumed, consistently with honesty, to draw his own money out first. If the trustee mixed his own coins with trust coins in a bag, and drew some coins out of the bag, he would be presumed to be taking his own money out first -- and the fact that the money was in a bank account, instead of a bag, made no difference. At 727-8 he said: "it is obvious he must have taken away that which he had a rights to take away, his own £100. What difference does it make if, instead of being in a bag, he deposits it with his bankers, and then pays in other money of his own, and draws out some money for his own purposes? Could he say that he had actually drawn out anything but his own money? His money was there, and he had a right to draw it out, and why should the natural act of simply drawing out the money be attributed to anything except to his ownership of money which was at his bankers." 51 Baggallay LJ gave a fuller account of the facts than had been given below, including the fact (731) that the balance to the credit of the account never fell below the aggregate of the two sums of money which had been paid in on 14 November. He says (731) that if the principle that the drawings of Mr Hallett will be appropriated to his own money standing in the account from time to time, were to be applied thoroughly, Mrs Cotterill would have been entitled to the full sum of £1,804 of her money which had been paid in on 14 November, and not merely to the £1,708 which she claimed. 52 Thus, there never was any competition, on the appeal, between the respective claims of the trustee of the marriage settlement, and Mrs Cotterill. Both were able to be satisfied in full, as to the claims which they had made at first instance. The judgment on the appeal showed that Mrs Cotterill could well have succeeded had she made a more ambitious claim at first instance, but on appeal she was limited by the case she had put at first instance. Thus the decision in the Court of Appeal provides no authority as to whether or not the rule in Clayton's Case ought apply to decide the Problem. 53 There are, however, some dicta in the Court of Appeal in Hallett's Case about the role which Clayton's Case plays in tracing. Jessel MR said, at 728, that the rule in Clayton's Case was: "… a very convenient rule, and I have nothing to say against it unless there is evidence either of agreement to the contrary or of circumstances from which a contrary intention must be presumed, and then of course that which is a mere presumption of law gives way to those other considerations. Therefore, it does appear to me that there is nothing in the world laid down by Sir William Grant in Clayton's Case , or in the numerous cases which follow it, which in the slightest degree affect the principle, which I consider to be clearly established."

The "principle" had been identified at 727: "Now, first upon principle, nothing can be better settled, either in our own law, or, I suppose, the law of all civilised countries, than this, that where a man does an act which may be rightfully performed, he cannot say that that act was intentionally and in fact done wrongly. A man who has a right of entry cannot say he committed a trespass in entering. A man who sells the goods of another as agent for the owner cannot prevent the owner adopting the sale, and deny that he acted as agent for the owner. It runs throughout our law, and we are familiar with numerous instances in the law of real property. A man who grants a lease believing he has sufficient estate to grant it, although it turns out that he has not, but has a power which enables him to grant it, is not allowed to say he did not grant it under the power. Wherever it can be done rightfully, he is not allowed to say, against the person entitled to the property or the right, that he has done it wrongfully. That is the universal law."

It was as an example of the application of that principle to the case of a trustee who had blended trust monies with his own that Sir George gave the "coins in a bag" example, which I have mentioned at paragraph [50] above. The sense of Sir George's reasons, as I follow them, is that the presumption which would ordinarily arise from Clayton's Case was rebutted in the case where a trustee had mixed trust money with his own money in a bank account, because a different presumption, that the trustee had acted honestly and drawn his own money out first, displaced it. 54 At 738 Baggallay LJ noted that in Pennell v Deffell (1853) 4 De M&G 372; 43 ER 551 the court had stated "that, as a general principle, the rule in Clayton's Case must be applied to the banking account of trustees for the purpose of determining the proportions in which the cestuis que trust and the general creditors, or the several classes of their cestuis que trust , are entitled to the debt due from the bankers in closing the account. "

However, Baggallay LJ said, at 739, "that such presumption was liable to be rebutted, or its effect modified, by any equities affecting Mr Greenwood, and those claiming through him, unless there was sufficient reason to the contrary."

("Greenwood" is presumably a misnomer for "Green".)

Baggallay LJ held that in Pennell v Deffell there was such an equity, namely "the obligation … of attributing to the trustee, when the circumstances would admit of it, an intention to act honestly" (739-740). He, like Jessel MR, regards the failure of the Court of Appeal in Chancery to apply that principle as fundamentally undermining the decision in Pennell v Deffell . Concerning that decision, he says at 743: "… I cannot regard it as satisfactory, if it is to be considered as establishing as a general proposition that in all such cases as that then under their consideration the presumption of an honest intention on the part of the trustee is to be altogether disregarded, however favourable to such a presumption the circumstances of any particular case may be, and that the rule of appropriating in strict order of date the drawings out to the payments in is alone to be applied. On the contrary, I entertain a very decided opinion that in cases like Pennell v Deffell , or in such as that which is the subject of the present appeal, full effect should be given to the principle of attributing the honest intention whenever the circumstances of the case admit of such a presumption."

That amounts to saying he was declining to follow Pennell v Deffell . 55 He went on to say, at 743: "It may, of course, happen that, through the acts of a trustee, whether wilfully dishonest or not, the ultimate balance may not be sufficient to meet the full amounts of all the trust monies which may have been paid into a blended banking account, and the question then raised may be as to the various claims in respect of distinct trusts; in such a case the strict application of the general rule of appropriating in order of date the drawings out to the payments in may, and probably would, be correct.".

That is, of course, only obiter dicta . 56 Thesinger LJ dissented, on the ground that previous authority, namely Pennell v Deffell, required a different conclusion to that which the majority had arrived at. In Re Hallett's Estate - Matters Arising 57 The decision of the majority in the Court of Appeal in Hallett was inconsistent with Pennell v Deffell in the most direct way - Hallett came to a different conclusion to the conclusion which would have been arrived at if Pennell v Deffell remained good law. When Pennell v Deffell was expressly considered by Jessel MR and Baggallay LJ, and they came to a different conclusion to that which Pennell v Deffell dictated, Pennell v Deffell must be regarded as overruled. Though Brown v Adams was not expressly referred to, it should be regarded as impliedly overruled. In In Re Oatway [1903] 2 Ch 356 at 360 Joyce J said that Brown v Adams ought not be followed since the decision in In Re Hallett's Estate. 58 The headnote to the report of Hallett, at 696, includes the statement "Held, by Fry J, that, as between two cestuis que trust whose money the trustee has paid into his own account at his bankers, the rule in Clayton's Case applies, so that the first sum paid in will be held to have been first drawn out. " 59 Insofar as Fry J decided that the trustees of the marriage settlement lost in a competition with Mrs Cotterill, this is indeed the basis of his decision. However, it is not a decision which survived the Court of Appeal. In the Court of Appeal, the trustees of the marriage settlement succeeded in recovering the money they claimed, and, as we have seen, there was no occasion for a competition between the two cestuis que trust. When the result in the Court of Appeal is different to the result achieved in the Court below, the reasons for which the court below reached its conclusion is not part of the ratio decidendi of the case. Even if the ratio decidendi is more than the principle upon which the case is decided (as Jessel MR stated in Osborne v Rowlett (1880) 13 ChD 774 at 785) and extends to any point of law that is put in issue by the parties and which the judge decides that he should resolve (Bristol-Myers Squibb Co v F H Faulding & Co Ltd (2000) 170 ALR 439 at 482-483; [2000] FCA 316 at [148]-[160] per Finklestein J; cf Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 417-418 [56]-[59]), a dissenting judgment in an appellate court cannot provide a binding authority (Federation Insurance Limited v Wasson (1987) 163 CLR 303 at 314; Jones v Bartlett (2000) 205 CLR 166 at 232 per Kirby J.) A first instance decision altered on appeal can be of no higher precedent status than a dissenting judgment on appeal. As Aikin J said in his dissenting judgment in Federal Commissioner of Taxation v St Helen's Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 410 "… there is no basis on which one point in the judgment of a primary court should be regarded as authoritative where the judgment is reversed on other grounds." Thus, the decision of Fry J can be at best only a persuasive precedent. Even though my task is to decide if Clayton's Case should be applied in New South Wales to solve the Problem, it is still of some relevance to enquire whether decisions which have applied Clayton's Case to solve the Problem in England are binding authorities within the English legal system. Also relevant are the number of such decisions, the courts each was made by, and the time at which each was made. 60 In considering how persuasive the decision of Fry J is, it is relevant that he was not very happy with it himself. He said, at 699: "The second question is whether Clayton's Case applies. Now, if the matter were unfettered by authority, it would appear to me clear that where a man has a balance to his credit consisting in part of funds which are his own, and which he may lawfully draw out and apply for his own purposes, and in part of funds which he may not lawfully draw out and apply for his own purposes, his drawings for his own purposes ought to be attributed to his own funds, and not to the trust funds. But it appears to me that I am not at liberty, in the existing state of the authorities, to act according to the inclination of my own mind."

He went on to refer to Pennell v Deffell . At 704, in the course of deciding the question of priority between the trustees of the marriage settlement and Mrs Cotterill, he referred to Clayton's Case , and said, at 704: "The difficulty seems to be that the rule in that case has been applied by the Court of Appeal to a case between trustee and cestuis que trust . I have already stated how I should be inclined to act if I had liberty, but I am not at liberty."

If a judge comes to a decision reluctantly, because he considers himself bound by an earlier decision he regards as wrong, and that earlier decision is later over-ruled, that judge's decision is under a distinct handicap in its ability to persuade. 61 There are two respects in which the judgments in the Court of Appeal in Hallett's Case do not seem, considering them today, to sit happily with Fry J's decision at first instance. The first arises from the way that both the majority judgments in the Court of Appeal explain how an equitable obligation can attach to the proprietor of a bank account in which trust money and his own money are mixed by using the analogy of a bag into which coins belonging to first the trustee, then the beneficiary, are placed, and from which the trustee withdraws coins. The trustee is presumed to act honestly, and so to draw his own coins out first. At one level of legal analysis, there is a vast difference between a credit in a bank account, and money in a bag. The first is an inchoate chose in action (inchoate because of the need to make demand before there is a cause of action that can be sued on), while the second is a chose in possession. Coins in a bag are each separate and individually identifiable things, even though coins of the one denomination are for most practical purposes interchangeable, and adding more coins to a bag is simply adding an additional number of things of that type to the bag. In contrast, a debt owed by a banker to a customer is a single thing - an obligation to pay X dollars - and the client's paying more money into a bank account results in the creation of a different thing - an obligation to pay some larger number than X dollars. However the purpose of the activity that the Court of Appeal was engaged in was working out whether the defaulting solicitor could, conscientiously, deny that some of the money which remained in the bank account - the inchoate chose in action to pay the balance to the customer - was money of a particular client. For that purpose, there was no difference between a bank account, and coins from various sources placed in a bag. Functionally, the bank account and coins in the bag operated identically. In other words, the tracing exercise which the Court of Appeal engaged in was one in which the actual legal character of the bank account, as being a debt owed by the banker, was unimportant. Yet the rule in Clayton's Case is a rule which is concerned with the appropriation of payments made between debtor and creditor who have a running account. It is odd to apply it for the purpose of tracing, when the tracing exercise focuses on the functional operation of the bank account rather than its legal attributes. 62 The second is that there is some arbitrariness in saying that Clayton's Case may not be used to decide whether a withdrawal should be appropriated to the money of the trustee, or the money of the beneficiary, but that it is in order to use Clayton's Case to appropriate a withdrawal between two beneficiaries. And there is more than arbitrariness to it if a trustee has mixed together money of two trust funds, and dissipated part of the mixed fund, for conscionable behaviour on his part is not determined only by reference to the relationship between him, and each beneficiary. As well, conscionable behaviour on his part should take into account the relationships between the two beneficiaries. Both these matters give rise to some further caution about accepting the decision of Fry J. 63 There is another respect in which the reasoning of the decision of the Court of Appeal itself in Hallett's Case causes discomfort. The majority in Hallett's Case noted that the rule in Clayton's Case operates by presumption of intention concerning which money is being drawn out. They held that, in the circumstance where the trustee had choice about drawing out his own money and the beneficiary's money, he ought be presumed to draw his own money out first. 64 There are two difficulties with this. The first is that it is hard to see why, in principle, the presumed intention of the trustee should have any role to play at all in these circumstances. After all, the fact that trust monies have become mixed with the trustee's own money in itself shows that there has already been a breach of trust. The fact that the question even arises of which of the beneficiaries' money will be treated as being withdrawn shows that the trustee has no money of his own in the account. At least in circumstances where the trustee is intending to withdraw the money to dissipate it, that means he is contemplating a further breach of trust. When a trustee has wrongfully taken property from a trust fund, his first obligation is, so far as the trust property can be seen as remaining in his hands, to make restitution - ie, to put back in specie into the trust fund whatever of the trust property he still retains. Tracing is the means by which the Court identifies what property of the trust the trustee still retains, for the purpose of the Court crafting orders which aim to make the trustee perform this obligation. When the task which equity is engaged in here is deciding how the trustee must act in dealing with the property he retains, given that he has engaged in a breach of trust in the first place, it is hard to see why the trustee's intentions, which are not actual intentions but rather intentions presumed pursuant to a rule of law, should be given effect to. There are cases where a trustee's actual intention about which beneficiary's money it is that he has withdrawn has been given effect to: Re Stillman & Wilson (1950) 15 ABC 68; Re Global Finance Group Pty Ltd (in liq) (supervisor appointed) and Global Mortgage Investments Pty Ltd (in liq); Ex parte Read and Herbert (as liquidators of Global Mortgage Investments Pty Ltd and as liquidators of Global Finance Group Pty Ltd) [2002] WASC 63 at [189]-[194]; (2002) 26 WAR 385. As well, if the trustee had not mixed the funds of the two beneficiaries he would still have had a power to choose which of the beneficiaries would be the victim of his misappropriations. However it is difficult to see why that process of giving effect to the intention of the trustee about which trust he will breach should be taken any further than necessary, by presuming a trustee to have intentions he does not actually have. 65 The second difficulty is that Clayton's Case is concerned with an intention to appropriate arising between banker and customer. The presumption that a trustee has intended to act honestly is one which arises between trustee and beneficiary. There is no reason why the banker ought be presumed to know of, or be in any way affected by, this presumption of honest intention between trustee and beneficiary. In the ordinary course of applying Clayton's Case to a bank account in credit, it is the action of the banker in drawing up the account which effects the appropriation - why should that be altered in any way, as both Jessel MR and Baggallay LJ seem to think it is, by an intention which the trustee is presumed to have in his relationship with the beneficiary? All those difficulties and discomforts are resolved by a different analysis of how tracing operates, which emerges in cases discussed later in this judgment. Hancock v Smith 66 In Hancock v Smith (1889) 41 ChD 456 the plaintiff was an execution creditor of the defendant, seeking to garnishee funds standing in the defendant's bank account. The defendant was a stockbroker, who used that account only for transactions involving his clients' money. The broker identified the funds in the account as belonging to four named clients. Two of those clients satisfied the Chief Clerk they had a claim to money in the account. The claim of the remaining two was considered by North J in chambers, and rejected. Those two then moved North J to discharge his order rejecting their claims. Concerning both of those clients, payments of clients' money into the account could be identified. However if the bank account was analysed in accordance with Clayton's Case, the payments in and payments out were such that none of the money of either of those clients remained. North J refused to vary his order rejecting their claims. He accepted that all monies paid into the account were trust monies, and (at 459) "as between the persons to whom those monies belonged the payments are to be taken to be set off against the monies first paid in in order of date. That was settled by Lord Justice Fry in the case of In Re Hallett's Estate ; and his decision on that point was not questioned in the Court of Appeal."

He then quoted the portion of the headnote in In Re Hallett's Estate which I have earlier set out at paragraph [58] above. 67 For the reasons which I have already given, this statement of North J is not an accurate statement of what In Re Hallett's Estate decided. The Court of Appeal decided that Clayton's Case did not apply as between trustee and beneficiary, because it was inconsistent with honesty on the part of the trustee for it to apply. And the decision of Lord Justice Fry did not "settle" anything, in the sense of creating a precedent which was a binding one within the English legal system, about whether Clayton's Case applied as between two beneficiaries. 68 North J's decision was reversed in the Court of Appeal. This means that, like the decision of Fry J at first instance in Hallett, his decision is at best a persuasive precedent. 69 The Court of Appeal was satisfied that the plaintiff could not receive the funds in the account, because a garnishee was entitled only to funds in the bank account which were the defendant's own property, and all the funds in the bank account were the property of clients, whoever they might have been. The Court of Appeal then received new evidence, from the broker, to the effect that the only money he paid into the account was money of clients, that he had satisfied from the account the purposes for which all clients except the four claimants had paid him the money, and that the amount in the account was equal to the amount he had received from those four client, plus some small transfer fees which he had paid for clients without withdrawing them from the account. In light of that evidence, the Court of Appeal decided that the appeal should succeed. Lord Halsbury LC said, at 461: "The rule in Clayton's Case is a very sound rule in cases such as that in which it was first applied, but here the circumstances are entirely different. The whole fund here consists of money not borrowed by the Defendant from his clients, but received by him as agent for them, and therefore for the present purpose may be treated as trust money. Now as between cestuis que trust the rule is applicable, but it cannot be applied here, because no question arises between the different cestuis que trust." 70 Cotton LJ said, at 461: "The rule in Clayton's Case would apply as between the cestuis que trust if there was not enough to pay them all. Here there is no conflict between them, for the evidence shews that there is no client of the defendant who can claim an interest except these four persons, and there is money in hand to pay them, so the rule in Clayton's Case does not apply." 71 Fry LJ, at 462 said: "An execution creditor can only take subject to all equities. The plaintiff therefore stands in the shoes of Smith, and the case is as between Smith and the person whose moneys he had in his hands. Smith could not set up the rule in Clayton's Case , and say that this money was his: so neither can the plaintiff. I think that this case is decided by In Re Hallett's Estate , not by that branch of the case on which Mr Justice North relied, but by the other branch."

• ie, by the part of the decision in In Re Hallett's Estate which decided that the trustee of the marriage settlement prevailed over the general creditors. The statements of Lord Halsbury LC and Cotton LJ about the rule in Clayton's Case applying as between the cestuis que trust if there had been a deficiency in the account are dicta. In Re Stenning 72 In Re Stenning; Wood v Stenning [1895] 2 Ch 433 involved the insolvent estate of a deceased solicitor, which was being administered by the court. The solicitor had mixed client monies and his own monies in a bank account. A client, Mrs Smith, claimed the right to be paid in specie the sum remaining in that bank account at the solicitor's death. Payments had been made into the account as follows: Date Item Amount 13 March Money of Mrs Smith £593 23 April Money of client T £999 21 August Money of client C £1,094 30 August Money of client D £500

73 The balance of the account as at 31 August was £1,088. From some source other than the account the solicitor had paid Mrs Smith part of the amount due to her, so that at the time of his death she was entitled to £448. From 13 March to the date of the solicitor's death the balance of the bank account had always exceeded £448. None of the other clients T, C or D had made a claim in specie to the amount in the bank account, though client T had proved as an ordinary creditor for £999. 74 North J denied Mrs Smith's claim. North J's preferred reasons (at 435) was that the money received from Mrs Smith was not received on trust, but rather as a loan at interest. 75 His Honour then considered what would happen if the money paid in on 13 March was money held on trust for Mrs Smith. North J held that, on that hypothesis, Mrs Smith's money had all been paid out prior to 31 August. He said, at 436: "According to In Re Hallett's Estate , the rule in Clayton's Case applies as between two cestuis que trust, whose money the trustee has paid into his own account at his bankers, and therefore this balance consisted of those trust monies which had been most recently paid in." 76 This statement is, in my view, an obiter dictum. It also suffers from the same defects, insofar as it relies on In Re Hallett's Estate, as does North J's earlier judgment in Hancock v Smith. 77 In coming to the view that this statement of North J is an obiter dictum, I accept that if a judge gives two reasons for a decision, both reasons are binding: Behrens v Bertram Mills Circus Ltd [1957] 2 QB 1 at 25; London Jewellers Ltd v Attenborough [1934] 2 KB 206 at 222; Jacobs v London County Council [1950] AC 361 at 369; Re Martin [1953] QSR 37; Burt v Barry & Roberts Ltd; ex parte Barry & Roberts Ltd [1956] QSR 207. However In Re Stenning is not a case where the judge gave two reasons, each of which he regarded as applicable to reality as he found it, for coming to his decision. Rather, it was a case of the type described by Cross, Precedent in English Law (Oxford University Press, 2nd ed 1968) at 58-59: "In the majority of cases in which the judge discusses the law and later makes findings of fact which when that his earlier remarks unnecessary to his decision, the statements of law are plainly obiter dicta … A proposition of law applied to assumed or undetermined facts may sometimes be ratio , but this can never be the case with regard to a proposition of law applied to facts the existence of which has been denied." Mutton v Peat 78 In Mutton v Peat [1899] 2 Ch 556 Byrne J said in a dictum at 560 that the rule in Clayton's Case applies "as between cestuis que trust in an appropriate case", but held that in the case before him Clayton's Case did not apply because the bankers had specifically appropriated monies in a way inconsistent with it. That decision was reversed on appeal: Mutton v Peat [1900] 2 Ch 79. The Court of Appeal reversed the decision of Byrne J on a question of fact, and made no mention of Clayton's Case. Consequently, Mutton v Peat provides no authority in favour of the application of Clayton's Case to the Problem. Re Oatway - Account of the Case 79 In In Re Oatway; Hertslet v Oatway [1903] 2 Ch 356 involved a trustee who paid £3,000 of trust money into his own banking account (which was then in credit), purchased shares with money withdrawn from the account, then spent the rest of the money in the account. Joyce J held that the beneficiaries of the trust were entitled to the proceeds of sale of the shares. When a trustee mixes trust money and his own money in a bank account, and there is a credit in the bank account (at 360): "… it is settled that he is not entitled to have the rule in Clayton's Case applied so as to maintain that the sums which have been drawn out and paid away so as to be incapable of being recovered represented pro tanto the trust money, and that the balance remaining is not trust money, but represents only his own monies paid into the account … It is, in my opinion, equally clear that when any of the money drawn out has been invested, and the investment remains in the name or under the control of the trustee, the rest of the balance having been afterwards dissipated by him, he cannot maintain that the investment which remains represents his own money alone, and that what has been spent can no longer be traced and recovered was the money belonging to the trust. In other words, when the private money of the trustee and that which he held in a fiduciary capacity have been mixed in the same banking account, from which various payments have from time to time been made, then, in order to determine to whom any remaining balance or any investment that may have been paid for out of the account ought to be deemed to belong, the trustee must be debited with all the sums that have been withdrawn and applied to his own use so as to be no longer recoverable, and the trust money in like manner be debited with any sums taken out and duly invested in the name of the proper trustees."

Note that this is the language of ex post facto accounting, not of presumption of intention. 80 Even though the amount standing in the account at the time the shares were purchased included money which was the trustee's, of an amount greater than the purchase price of the shares, this did not mean that the trustee was entitled to the shares: (at 361) "… he was never entitled to withdraw the [purchase price of the shares] from the account, or at all events, that he could not be entitled to take that sum from the account and hold it for the investment made therewith, freed from the charge in favour of the trust, unless or until the trust money paid into the account had been first restored, and the trust fund reinstated by due investment of the money in the joint names of the proper trustees which was never done." 81 The purchase price of the shares was less than the £3,000 of trust money which had been paid into the bank account. Though the shares rose in value somewhat between the time of purchase and time of sale, the proceeds of sale were less than £3,000. Because the beneficiaries had a charge over the shares for £3,000, they were entitled to the whole of the proceeds of sale. Re Oatway - Matters Arising 82 The principle in Re Oatway has been applied by the High Court of Australia in Scott v Scott (1963) 109 CLR 649. The principle in Re Oatway enables a beneficiary to claim an equitable interest in an asset purchased from a mixed fund. There is another principle which prohibits a trustee from making a profit from his trust. Scott combined those two principles to enable a beneficiary, who could trace his money through a mixed account into a particular asset, to claim a proportionate beneficial interest in that asset, rather than merely a charge, if the value of the asset had gone up since the date of purchase. The House of Lords reached a similar conclusion in Foskett v McKeown [2001] 1 AC 102 at 130 per Lord Millet (with whom Lord Browne-Wilkinson (at 111) and Lord Hoffman (at 115) agreed concerning this point.) 83 There are two different senses in which the caselaw talks about there being a "charge" over assets in, or acquired from, a mixed fund. One sense is that which applies when a court grants a remedy of a charge over a particular item of property, ordering that that item of property be used as a fund from which a particular monetary amount is to be raised. The other sense is the sense in which there is, even prior to the grant of a remedy by the Court, a charge over all the assets which are in, or have been acquired from, the mixed fund. A charge in that sense arises from the way in which equity reasons towards the granting of a remedy. When a trustee has wrongfully taken property from a trust fund, his first obligation is, so far as the trust property can be seen as remaining in his hands, to make restitution - ie to put back in specie into the trust fund whatever of the trust property he still retains. Until he has performed that obligation, equity will not permit him to assert that he has unfettered ownership of any of the property into which any part of the trust property has been converted or mixed. In this way, there is a potential for any of the property into which the trust property has been converted or mixed to be the subject of, eventually, an order for restitution in specie. That all the property into which the trust property has been converted or mixed is subject to this potential for being the property which might be seized upon as the subject of an order means that it is all subject to a charge, in this second sense. A charge of this second type arises as soon as the wrongful conversion or mixing occurs, because from that time the converted property or mixed fund is potentially subject to this sort of an order to restore the trust fund. 84 When tracing can occur into an asset purchased with money taken out of the mixed fund, and not only into what remains of the mixed fund in the bank account, this means identification of the property over which the Court grants a proprietary remedy is an ex post facto exercise, and depends upon what property remains at the time of the hearing, out of all the property over which a charge (in the second sense) once existed. It also follows from this that a beneficiary, in exercising rights arising from tracing, has to some extent an election about which property he will take, over which a charge (in the second sense) continues to exist at the date of the hearing. As Ford and Lee, Principles of the Law of Trusts, 3rd edition, para [17210] say, "The beneficiary's right of property in the targeted property crystallises only when the court makes a proprietary order with respect to it." 85 That a beneficiary has this right to elect, at the time of trial, whether he will seek a remedy against what remains of the mixed fund, or against an asset or assets purchased from the mixed fund, assists in showing that the explanation of tracing given in Hallett's Case based upon a presumption of honest intention in making a withdrawal from the mixed fund, is not adequate. The explanation is not adequate in two ways. First, (and this is not a consequence of the beneficiary's right of election concerning remedies) in many factual situations a presumption of honesty on the part of the trustee does not enable one to decide whether a particular withdrawal of money from a trust account has been of trust money, or the trustee's own money. If a withdrawal from a trust account is made, and invested in some investment which is of a kind which might well retain its value, or increase in value, presuming that the trustee is honest does not enable one to say whether the money withdrawn is trust money, or not. Second, remedies which follow the identification of the property which is charged with the obligation to restore the trust fun, are granted over that item or those items of property which, at the time of the trial, have values which will provide the best remedy to the beneficiary. The values of items of property into which a mixed fund has been converted might fluctuate significantly between the time of their acquisition and the time of trial. Presuming the trustee to be honest at the time of making a withdrawal is not enough to identify the property over which the remedy will, eventually, be granted. 86 The fact that a beneficiary has a right to elect, at the time of trial, which asset or assets he will claim a remedy against also creates a serious problem for the application of Clayton's Case to withdrawals from a mixed bank account. When Clayton's Case applies, it operates to effect an appropriation of the withdrawal, at either the time that the withdrawal is made, or the time that the current account is drawn up (if that is later than the withdrawal). In the situation where money of two different beneficiaries has been paid, successively, into a bank account, and a withdrawal is made of an account equal to the amount of the first beneficiary's money, the operation of Clayton's Case would mean that the withdrawal is treated as being, definitely, from the time the appropriation is made, a withdrawal of the money first paid in. In a situation where, from a mixed account of that kind, one withdrawal is made and dissipated, then another withdrawal is made and invested with spectacular success, it should be possible for both beneficiaries to trace into the successful investment. For a charge (in the second sense) exists over the whole mixed fund, in favour of both beneficiaries - the defaulting trustee cannot assert an unqualified title to the mixed fund until both beneficiaries have had their respective trust funds restored. Yet, if Clayton's Case is rigidly applied, the appropriation would be regarded as having been made, and there would be none of the money of the first beneficiary remaining in the account, which could be traced into the successful investment. British Red Cross Balkan Fund 87 In Re British Red Cross Balkan Fund; British Red Cross Society v Johnson [1914] 2 Ch 419 involved a charitable trust to which members of the public subscribed, but which was not fully expended on the charitable purposes. The subscribers were asked whether the unexpended balance could be devoted to the general purposes of the Society. People who had subscribed over 80% of the funds agreed; subscribers of 1% of the money contributed expressly disagreed, and the balance sent no reply. The fund's accounts enabled those people who had subscribed last, and whose money would have remained in the fund if the rule in Clayton's Case was applied, to be identified. If the rule in Clayton's Case applied, those people would get their money back in full. The Court accepted the principle that if there is a charitable trust, which is performed so far as it can be, and there is no general charitable intention, there is a resulting trust for the subscribers to the fund: In The Trusts of the Abbott Fund; Smith v Abbott [1900] 2 Ch 326. The Court was informed that (at 420) "The plaintiffs paid [contributions] into their bank and presumably paid them in as and when received." The whole of Astbury J's judgment in In Re British Red Cross is as follows: "The rule in Clayton's Case 1 Mer 572, 608 as restated by Lord Halsbury LC in The Mecca [1897] AC 286, 290 is that "where an account current is kept between parties as a banking account, 'there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place and are carried into the account. Presumably, it is the sum first paid in that is first drawn out. It is the first item on the debit side of the account that is discharged or reduced by the first item on the credit side; the appropriation is made by the very act of setting the two items against each other.'" It is a mere rule of evidence and not an invariable rule of law, and the circumstances of any particular case may or may not afford ground for inferring that the transactions of the parties were not intended to come under the general rule. In the present case the rule is obviously inapplicable. At the outbreak of the Balkan war a public appeal was made for subscriptions for a special fund for assisting the sick and wounded. Subscriptions were obtained and duly applied, and at the close of the war there was an unexpended balance of 12,655 l 19 s 6 d . That balance belongs to all the subscribers rateably in proportion to their subscriptions, and subscribers who wish their money returned and are unwilling to leave it for the general purposes of the society are entitled to such proportion of their subscriptions as the total amount unexpended bears to the total amount subscribed." 88 Thus, the basis of the decision was that it was inferred that Clayton's Case did not accurately state the intention with which money was withdrawn from the bank account for the purposes of the Fund. Crace-Calvert's Case 89 In Re Guardian Permanent Benefit Building Society (1882) 23 ChD 440 concerned a building society which had a rule which gave it an unlimited power to borrow money. The Court of Appeal found that that rule was itself ultra vires. One aspect of the decision, Crace-Calvert's Case, arose when Mrs Crace-Calvert lent money to the society, and received as security some title deeds. The court below (the Vice Chancellor of the County Palatine Court of Lancaster) decided that she could realise the securities, use the proceeds to repay her loan, and prove in the building society liquidation for any shortfall. Upon appeal to the Court of Appeal Sir George Jessel MR (with whom Cotton and Bowen LJJ concurred) held that because the borrowing was ultra vires it created no personal obligation, and the security was in consequence a security for nothing, and had to be given up. He then turned, at 451, to the bigger picture: "… of what is to be done with the assets of the society? … after paying the strictly outside creditors and the sums subscribed by the unadvanced members, there will be a very large surplus to be disposed of. It is plain that it can not be said on behalf of the society that the surplus so obtained ought to be retained by the members of the society. It was obtained by their own innocent mistake, because they had passed a rule authorising the directors to borrow. They advertised for loans, and so obtained the money. It was a mistake common to both sides. The surplus which arises from the advances so made must obviously on the plainest principles of equity be returned to the people who advanced. Nobody can have a claim upon it except those whose money it is. The actual money cannot be traced, but after the prior claims on the assets of the company have all been paid off the surplus must come to them …"

He went on to say, at 452. "…The outside creditors had nothing to do with the adoption of the mistaken rule, they were not bound in any way, and they are therefore entitled to come upon the society and say that the assets were liable to satisfy their demands."

The unadvanced members of the society were, he held, entitled to payment out of the assets, "And it is impossible to point to any part of those assets as coming from any particular part of the money as distinguished from the rest."

The order he proposed, at 452 was: "… to order payment of the liquidator's costs, then those of the respondents; next; payment of the outside creditors, then of the ordinary unadvanced members, and then distribute the surplus pro rata among the persons who advanced their money by way of loan upon those invalid contracts." 90 It will be seen that what was being engaged in here was not an exercise in tracing of the type performed in Re Hallett's Estate. In Re Hallett's Estate, an individual could identify where her money had gone, and claim a specific asset, which could be identified as one over which she had an equitable charge. In Crace-Calvert's Case, no individual was seeking to identify where his or her money has gone. Rather, the manner of operation of the building society as a whole was being examined. Different classes of people who had contributed to the assets available for distribution were identified, and the relative merits of those classes were determined. The criteria by reference to which the relative merits of the classes were determined included that the supposed loans were ultra vires, that in consequence the intending "lenders" still retained proprietary rights in the money that they thought they were lending, that "loans" had swelled the value of the assets of the Society, that the only potential claimants for the swelling in value were the members of the Society and the "lenders", and that the members and the "lenders" were both acting under an innocent mistake when the "loan" transactions were entered. Even though it was not possible to trace the lending of any particular lender, it could still be said that the assets of the society had been swelled by the amount of the outstanding loans, and that, to the extent to which there remained assets of the society after payment of other claims properly made upon it, the lenders, as a class, should share any surplus. 91 An appeal to the House of Lords in the Crace-Calvert case succeeded: Murray v Scott (1884) 9 App Cas 519. The House of Lords held that the society's borrowings were not ultra vires. Their Lordships therefore altered the order of application of assets from that which had been decided by the Court of Appeal, without needing to discuss the correctness of the views of the Court of Appeal about how the assets should be divided if the borrowing had been ultra vires. Though therefore not a binding precedent within the English legal system, Sir George Jessel's judgment remains of importance because of the way it was treated in Sinclair v Brougham [1914] AC 398. The Cases Re Birkbeck Permanent Benefit Building Society - Sinclair v Brougham 92 In Re Birkbeck Permanent Benefit Building Society [1912] 2 Ch 183 involved another building society which had carried on an ultra vires banking business. It was placed into liquidation. The funds in the hands of the liquidator were insufficient to repay both the shareholders of the building society, and depositors in the banking business. The liquidator took out a summons seeking directions about how to apply the available funds. Neville J, at 197 said: "To permit the members of the society to divide amongst themselves, as profit, money obtained as this money was from the depositors appears to me inconsistent with the most elementary notions of justice, and at variance with previous decisions." 93 No depositor tried, in the proceedings before Neville J, to trace his or her deposit into any particular asset. Neville J recognised, at 198, that, "The difficulty of tracing the moneys in the manner suggested would no doubt be great, no separate accounts having been kept."

In that situation, he made an order of the same kind as had been made in Crace-Calvert's Case . 94 An appeal to the Court of Appeal was dismissed. Cozens-Hardy MR said, at [1912] 2 Ch 209, concerning the Crace-Calvert case, that "… I feel a difficulty in discovering the principle on which it was based. It seem to me a rough and ready tracing judgment, illogical, but possessing the merit of attempting to do partial justice to the lenders." 95 Fletcher Moulton LJ said that the decision of the Court of Appeal in the Crace-Calvert Case (at 214) "… has been generally regarded as establishing the law applicable to such cases … I am not aware that this part of the judgment of the Court of Appeal in the Crace-Calvert Case has ever been accepted by or received the sanction of the House of Lords (or even of the Court of Appeal) in any subsequent case, but the great authority of the judges taking part in the decision rightly gives to it great weight …" 96 In Birkbeck (1912) 2 Ch at 234-235 Buckley LJ said: "I confess myself unable to say what was the plain principle of equity to which Sir George Jessel referred in In re Guardian Permanent Benefit Building Society under which the surplus after giving 20 s in the pound to the members belongs to the improper lenders. … I am glad … that it is not necessary for me to say what was the equity in In Re Guardian Permanent Benefit Building Society , or whether that case was rightly decided or not, if it were (which it is not) competent for me to review it."

This puzzlement of the members of the Court of Appeal was resolved when the case went to the House of Lords. 97 Sinclair v Brougham [1914] AC 398 was the Birkbeck Building Society Case on appeal to the House of Lords. There, the depositors contended they were entitled to recover their money either as money had and received, or through tracing. After a full study of the record in the case which culminated in Sinclair v Brougham, Lord Greene MR ascertained, in In Re Diplock; Diplock v Wintle [1948] 1 Ch 465 at 527 that it was only in argument in the House of Lords that, for the first time, any submission was made that In Re Hallett's Estate bore upon the matter. Sinclair v Brougham - Viscount Haldane LC and Lord Atkinson 98 Viscount Haldane LC (with whom Lord Atkinson agreed) held that the money had and received action failed, because it depended upon the law implying a promise to repay, and a promise to repay, which was ultra vires, would give no remedy. In principle there was, however, nothing to stop the equitable remedy of a charge being imposed on property into which ultra vires deposits had been converted. It was fundamental to the approach of Viscount Haldane that (at 418): "The evidence is very scanty, but it must be taken that the depositors' money was used on a large scale in acquiring the assets now in the liquidator's hands; for the value of these assets is far in excess of the contributions of the shareholders, and much of it can be due to the money of the depositors alone. The difficulty of establishing a title in rem in this case arises from the apparent difficulty of following money. 99 Viscount Haldane referred to equity's power to create a charge over a bank account "in favour of the person whose money it really was", and noted that Jessel MR in Hallett's Case had pointed out that "this equity was not confined to cases of trust in the strict sense, but applied at all events to every case where there was a fiduciary relationship." (421) He stated that Chancery's remedy of declaring a charge over a banker's debt was one which applied "whenever money was held to belong in equity to the plaintiff." When that was the circumstance in which the remedy was granted, "… I see no reason why the remedy explained by Jessel MR in Hallett's Case , of declaring a charge on the investment in a debt due from bankers on balance, or on any mass of money or securities with which the plaintiff's money had been mixed, should not be applied in the case of a transaction that is ultra vires. The property was never converted into a debt, in equity at all events, and there has been throughout a resulting trust, not of an active character, but sufficient, in my opinion, to bring the transaction within the general principle." 100 At 421-2 he noted that in Hallett's Case Jessel MR and Baggallay LJ "held that the rule in Clayton's Case did not apply so as to determine by reference to dates the appropriation of cheques drawn on the bank account, in as much as they considered that a person standing in a fiduciary relationship must be taken to have intended to draw cheques for his own purposes only on so much of the balance as was his."

and that Thesinger LJ had disagreed. He expressly stated that he was not indicating any opinion on that point.

So far as the money which shareholders contributed to the Society was concerned, it became the money of the Society, and (423) "A large part of it has probably been applied ultra vires in the acquisition of the assets of the banking business. These assets can accordingly be claimed only by the society itself as belonging to it, and the shareholders have no direct title to them." 101 Precisely because the activities of the Society in conducting the banking business were ultra vires, the only rights which the Society could assert to the assets which had been amassed in the banking business was whatever right it could assert in rem. Thus, both the Society, and the depositors, each were potential claimants in rem as the assets which had been amassed in the banking business. Each could trace into those assets. 102 At 424, Viscount Haldane noted: "There has been no breach of fiduciary duty on the part of the society, and it appears to me that this circumstance is material in distinguishing the consequences here from those which followed in Hallett's Case on the footing that there the agent could not gain, at the expense of the principal, an advantage for himself or his general creditors by in effect setting up a breach of duty."

This statement harks back to an explanation which Viscount Haldane gave, at 422, of Hallett's Case : "The loan to the banker was regarded as an investment pro tanto of the principal's money, and the latter was treated as entitled to waive the breach of duty by his agent, and to claim the investment to the extent of the amount due to him as made on his behalf. The agent could not set up that any part of the money in the bank was his until he had made good his breach of duty, and in that sense there was a charge." 103 What Viscount Haldane meant in the passage quoted from 424, was that, because the society was not a fiduciary, it was not precluded in the same way as a defaulting fiduciary was from claiming any title at all to the mixed fund until it had made good the claim of the depositors. 104 He continued: "The depositors can, in my opinion, only claim the depreciated assets which represent their money, and nothing more. It follows that the principle to be adopted in the distribution must be apportionment on the footing that depreciation and loss are to be borne pro rata. I am, of course assuming in saying this that specific tracing is not now possible." 105 The fact that tracing by individual depositors of money they had deposited with the society into specific assets was impossible affected significantly the approach which Viscount Haldane took. He said, at 424: "What is there must be apportioned accordingly among those whose money it represents, and the question of how the apportionment should be made is one of fact. In the present case the working out of a proper apportionment based on the principle of tracing not only would involve immense labour but would be unlikely to end in any reliable result. The records necessary for tracing the dealings with the funds do not exist. We have therefore, treating the question as one of presumption of fact, to give such a direction to the liquidator as is calculated to bring about a result consistent with the principles already laid down. I think that this direction should be that, without disturbing anything that has up to now been settled or agreed, he should apportion the entirety of the remaining assets (including mortgages and loans) between the depositors and the shareholders in proportion to the amounts paid by the depositors and the shareholders respectively. In this way I am of opinion that the nearest approach practicable to substantial justice will be done. I think that this is the utmost extent to which, consistently with well-established principles, a Court of justice can go in compelling the society to restore that on which it has become possessed through its ultra vires transactions." 106 In this passage Viscount Haldane talks about the assets being divided between the depositors and the shareholders. He had earlier held that it was the Society, not the shareholders, who had the right in rem to trace into the assets of the banking business. But in the context where the Society was in liquidation, its assets were divisible amongst the shareholders, and the liquidator was seeking directions about the way in which he should divide those assets, the direction to divide the assets between depositors and shareholders is, with respect, correct. The route by which the shareholders are entitled is that the Society has an entitlement in rem, through tracing, to the assets, and the assets thus recoverable by the Society are then distributable amongst its shareholders in the liquidation. 107 That the direction to the liquidator was not based upon the rights of individual depositors to trace is reflected in the fact that the order proposed by Viscount Haldane at 426-427 (and adopted by the House at 460) was that: "subject to matters which have already been settled by the consent of the parties, and subject to any application which may be made by any individual depositor or shareholder with a view to tracing his own money into any particular asset, and subject to the payment of all proper costs, charges, and expenses, the liquidator ought to proceed in distributing the remaining assets of the society between the depositors and the unadvanced shareholders, on the principle of distributing them pari passu in proportion to the amounts properly credited to them respectively in the books of the society at the date of commencement of the winding up." (emphasis added) 108 Thus, the direction to the liquidator was not an application of the individual equitable property rights of any depositor, or any shareholder. Rather, it recognised that individual depositors would in principle have a right to trace into the assets of the ultra vires business, but that the evidentiary basis for establishing those rights was lacking, and likely to continue to be lacking. (Individual shareholders would not, qua shareholders, have any right to trace into the assets of the ultra vires business - to that extent the saving of any right of a shareholder to make an application to trace his own money into any particular asset seems redundant.) In that circumstance, the nearest approach to practical justice was to direct the liquidator to divide the assets in accordance with a principle which treated the shareholders as a whole as though they constituted one contributor to the assets of the ultra vires business, to treat the depositors as a whole as though they constituted a single contributor to the ultra vires business, and to divide the assets in the proportion of those contributions. This was not applying the precise equitable principles of tracing as expounded in Hallett to the contributions of the class of depositors, and the class of shareholders, respectively - because those principles of tracing would apply only if there were a fiduciary relationship, and would result in the interest of the fiduciary being one which he could not assert until he had remedied his breach of duty. But tracing, resulting in an order for an equitable charge, could occur into an asset in the custody of an entity which was not a fiduciary, if the person seeking to trace had an equitable right of property in that asset. Here, both the depositors, and the Society, had equitable rights in the nature of a resulting trust in the assets of the banking business. 109 Even though no proof by individuals of equitable interests in the assets of the banking business was possible, the remedy was crafted by reference to some of the principles which underlie tracing. First, it was a remedy which proceeded on the basis that the Society had become possessed of assets as a result partly of receiving the property of others (the depositors) and partly of applying its own money in acquiring those assets. Second, regardless of the fact that neither individual depositors nor the Society itself could trace their money into the assets of the banking business, it was clear that the depositors as a group had contributed to those assets, and that, to the extent of those contributions, the assets were held on resulting trusts for the depositors and the Society respectively. Third, it proceeded by enquiring to what extent the Society ought be required to give up those assets. The answer was that the Society could not keep the assets, to the extent to which the depositors collectively had contributed to them, even though any individual depositor's claim to trace would fail to discharge the onus of proof. To the extent to which the Society could not assert an unqualified title to the assets, the same effect arose as when an equitable charge was seen to exist over assets by reason of a breach of fiduciary duty. Finally, the extent to which the assets were less in value than the amounts which the depositors and the Society had respectively contributed, the interest of each should abate pro rata to their respective contributions. Because the Society had not engaged in a breach of fiduciary duty it was not required to refrain from asserting its beneficial interest in the assets until such time as the equitable interest of the depositors collectively had been satisfied, but neither could it ignore the equitable interest of the depositors in the assets. Though the word "unconscionable" does not appear in the judgment, the process of reasoning is in substance one of enquiring what order should be made to prevent the Society (the entity which had possession of the assets) from acting unconscionably by retaining the assets. And it could be unconscionable for the Society to assert an unqualified title to the assets, regardless of the fact that individual depositors could not trace. Sinclair v Brougham - Lord Dunedin 110 Lord Dunedin dealt with the matter by applying principles of fair dealing which were at a more elemental level than principles of law. He said, at 431: "Now I think it is clear that all ideas of natural justice are against allowing A to keep the property of B, which has somehow got into A's possession without any intention on the part of B to make a gift to A."

If the property in question is a chattel, then, he says, an action for its restitution will lie. If the property in question is money, "The familiar case is the paying of money by A to B under the mistaken impression in fact that a debt was due, when in truth there was no debt due. It was to fit cases of this sort that the common law evolved the action for money had and received. I think one cannot help feeling that this action was truly the putting of an equitable doctrine under a legal form. I am using the word equitable in a non-technical sense, for I am not suggesting for a moment that the action was borrowed from technical equity."

At 432 he refers to "the equity as based on inherent ideas of justice … " He accepts, at 433, that the action for money had and received is based on a fictional contract, and that where there is an ultra vires borrowing, "how is it possible to say that there is a fictional contract which is binding in circumstances in which a real contract is not binding?" 111 Lord Dunedin considers, at 436, what would happen if no remedy were available to the depositors under an ultra vires contract: "The appalling result in this very case would be that the society's shareholders having got proceeds of the depositors' money in the form of investments, so that each individual depositor is utterly unable to trace his money, are enriched to the extent of some 500 percent." 112 At 434-5 Lord Dunedin considered the closest analogy he could find in the Roman law to an ultra vires contract. It was the situation concerning contracts of pupils, who were totally incapable of contracting. He said: "Now, the Roman law met the situation by recognising that there was the super-eminent equity with which I started."

(Which, I take it, is the proposition of "natural justice" which I have set out above at paragraph [110].) "and proceeded to apply it, while giving full effect to the doctrine of there being no contract. The super-eminent equity was expressed by the Roman jurists in the brocard nemo debet locupletari jactura aliena [no man ought to enrich himself by another's loss]. When, therefore, the advance was made to the pupil, there was no longer, as in the case of an ordinary person, an obligation to restore - a debt taking its place along with other debts - but the pupil was bound to give up in quantum locupletior ; that is to say, to give up the superfluity which he was possessing. But only a superfluity - that is to say, something which if he kept would be pure gain to him." 113 At 435, Lord Dunedin quotes from Pothier's Treatise on Obligations passages which translate as "114. In contracts, it is the consent of the contracting parties which produces the obligation; in quasi contracts there is not any consent. The law alone, or natural equity, produces the obligation, by rendering obligatory the fact from which it results. 115. All persons, even infants and persons destitute of reason, who are consequently incapable of consent, may be obliged by the quasi contract, which results from the act of another, and may also oblige others in their favour; for it is not the consent which forms these obligations; they are contracted by the act of another, without any act on our part."

[This translation is from the 1806 translation by William David Evans, barrister-at-law, published London 1806 by Joseph Butterworth, Law Book Seller, Fleet Street and J Cooke, Ormond-Quay Dublin.]

He continues at 435: "I have made these citations to show that other great systems of law have not been unable to solve the problem arising where the equity of restitution comes in contact with the doctrine of nullity of contract. Is English equity to retire defeated from the task which other systems of equity have conquered?" 114 Thus, so far, he has been proceeding at the level of the highest generality of principle. At 437, he says that equity (and he has made clear that he is now speaking of technical equity) can "help the common law by tracing, and can say that if the proceeds of property can be shown to be what I have called a superfluity in the person of the recipient, then it will hold that that property is traced just as surely as if it were still in the original form. To do this is to give full effect to the doctrine of ultra vires - for the party receiving is not ordered to pay as a debt the equivalent of what he originally got, but merely ordered to surrender what he still has as a superfluity, an enrichment which but for the original reception of the money, he would have been without." 115 After that statement of principle, applicable to an individual item of property, his Lordship next states, "It, therefore, in each case becomes a question of evidence", and then passes seamlessly to discussing the situation of the depositors as a class, and the shareholders as a class. He says, at 437-438: "The shareholders are entitled to share among them the proper assets of the society. But they are not entitled to be made rich at the expense of the depositors, by swelling the assets of the society by means of the proceeds of moneys which they themselves never contributed. There is a mixed mass of assets as to the precise composition of which as to source it is impossible to pronounce. Had the assets never shrunk there would be enough to pay both in full. But they have shrunk, and someone must bear the loss. Now there are certain situations, of which Hallett's Case is an example, where the one sharing party has a right to say to the other, it is not in your mouth to say that the assets are not all mine, to the extent of my full claim. I do not think this is one of those positions. Neither party here is in any fiduciary position to the other."

This leads him to state again "it is a mere question of evidence" , and to characterise the factual situation as follows: "The directors of the Society have taken the moneys of the shareholders which they had a right to receive, and the money of the depositors which they had not, and mixed them so that they cannot be discriminated from each other, and have put them, so to speak, in the Society's strong box, where the mixed mass is found by the liquidator."

• Language, and metaphor, of the type found in the tracing cases. He concludes, at 438 "There being no direct evidence, the only equitable means is to let each party bear the shrinkage proportionately to the amount originally contributed, and this is the judgment of my noble and learned friend on the Woolsack, in which I concur." 116 That reasoning, like that of Viscount Haldane LC, is not giving effect to any individual depositor's or shareholder's right to trace his own individual item of property. However it is not clear what is the connection between that reasoning, and the supposed principle requiring a recipient of property "to surrender what he still has as a superfluity". The basis upon which his Lordship reaches his conclusion is not, with respect, clear. Sinclair v Brougham - Lord Parker 117 Lord Parker of Waddington had, at 441 accepted: "… that the lender in an ultra vires loan transaction has a right to what is known as a tracing order. A company or other statutory association cannot by itself or through an agent be party to an ultra vires act. If its directors or agents affecting to act on its behalf borrow money which it has no power to borrow, the money borrowed is in their hands the property of the lender." 118 As a variant on the view of Viscount Haldane LC that an ultra vires loan gave rise to a kind of resulting trust, Lord Parker at 441-2 considered that when there is an ultra vires loan, equity "… considered that the relationship between the directors or agents and the lender was a fiduciary relationship, and that the money in their hands was for all practical purposes trust money. Starting from a personal equity, based on the consideration that it would be unconscionable for anyone who could not plead purchase for value without notice to retain an advantage derived from the misapplication of trust money, it ended … in creating what were in effect rights of property, though not recognised as such by the common law."

In explaining how equity provides tracing, he continued, at 442: "Suppose the property is acquired by means of money, part of which belongs to one owner and part to another, the purchaser being in a fiduciary relationship to both. Clearly each owner has an equal equity. Each is entitled to a charge on the property for his own money, and neither can claim priority over the other. It follows that their charges must rank pari passu according to their respective amounts."

He then considers the situation of a fiduciary agent who has parted with money he held in a fiduciary capacity to a third party, and says, at 442-443: "If the third party had notice that the money was held in a fiduciary capacity, he would be in exactly the same position as the fiduciary agent, and could not, therefore, assert any interest in the property until the money misapplied had been refunded. But if he had no such notice this would not be the case. There would on his part be no misconduct at all. On the other hand, I cannot at present see why he should have any priority as against the property over the owner of the money which had, in fact, been misapplied." 119 He went on to consider In Re Guardian Permanent Benefit Building Society (Crace-Calverts' Case) (1882) 23 Ch D 440. He identified, at 444, the equity which Sir George Jessel had there applied as being: "… that it would be unconscionable for the Society to retain the amount by which its assets had been increased by, and in fact still represented, the borrowed money. It would be inequitable for the Society to take advantage of the misapplication by its agents of money belonging to others and held by them in a fiduciary capacity. In other words, it was the same equity as that on which a tracing order is based."

He disapproved, though, of the way that principle had found expression in the actual order made in the Guardian Case . 120 Lord Parker then considered a hypothetical situation of the Society, at a time when it had engaged in no ultra vires borrowing, having insufficient assets to pay the creditors in full, or to pay anything to the contributories. He assumed that the Society then received money through ultra vires borrowing, and in consequence, both creditors and contributories could be paid in full. For the sake of the example, he assumed that both creditors and contributories remained the same as before the ultra vires borrowing occurred. He enquired, at 444, "Would it be in accordance with equity and good conscience that these creditors or contributories should claim to be paid in full? I cannot think that it would. It seems to me that in equity and good conscience the amount of increase in the assets due to the ultra vires borrowings ought to be restored to the lenders. Neither creditors nor contributories ought in equity to be allowed to retain an advantage derived by reason of the misapplication by the Society's agents of moneys which were in the position of trust moneys." 121 The reason why these moneys were "in the position of trust moneys" was, he had earlier explained, because the directors who purported to borrow on behalf of the Society were not, precisely because the transaction was ultra vires, acting on behalf of the Society in so doing, and when they received the money the money remained the property of the "lenders". It will be seen that this is a notion very close to Viscount Haldane's view that the property was held on a kind of resulting trust. 122 Lord Parker then considered the situation of an ultra vires business carried on partly with money borrowed through ultra vires loans, and partly with money belonging to the Society. In that case, the Society does not actually own the assets of the ultra vires business. He continues, at 447: "But the fact that the Society's own money had been employed by its directors or agents in an ultra vires business would entitle the Society to an additional equity. It would be entitled, on the principles of In Re Hallett's Estate , to follow the money as long as it or any property acquired by its means could be identified. In other words, it would have exactly the same equities in this respect as the ultra vires lender, including the equity which in my opinion underlies the Crace-Calvert Case . It follows from this that it would be entitled to take or claim a lien on any assets of the business acquired exclusively with its money, and to a lien or charge on any asset or mass of assets acquired partly only with its money, subject nevertheless to this, that if the ultra vires lender could establish a similar lien or charge, the two liens or charges would rank pari passu." 123 His Lordship then considered whether the fact that some of the money of the Society had been used for purposes which were intra vires, namely making loans to members to enable them to acquire houses or land, made any difference. In circumstances where it was not possible for any ultra vires lender to trace into those intra vires loans, and where the directors had treated the loans in question as part of the banking business, in the Society's accounts, he decided that that fact made no difference. 124 Lord Parker of Waddington concluded as follows, at 448. "Here is a mass of assets arising in the course of an ultra vires business carried on by the directors and agent of the society. There are … liabilities … . No one claims any interest in the assets except the ultra vires lenders, the members of the society and the creditors, in respect of the liabilities to which I have referred. The ultra vires lenders and the members are willing that these liabilities and the costs of the liquidation, which are in effect costs of administering the fund, shall be first paid. If this is done, what is left may be taken to represent in part the money of the ultra vires lenders and in part the money of the society wrongfully employed in the business. The equities of the ultra vires lenders and of the society are equal, and it follows that the remainder of the assets ought to be divided between the ultra vires lenders and the society rateably, according to the capital amount contributed by such lenders and the society respectively." Sinclair v Brougham - Lord Sumner 125 Lord Sumner agreed that the depositors had no action for money had and received. Of the order in Crace-Calvert's Case, he said, at 457: "Should that case come before your Lordships' house directly for review, as it clearly is open to review, I confess that I should be slow in arriving at the conclusion that I could not assent to the decision of so strong a court."

And at 457: "I think the order made was rightly described by Cozens-Hardy MR as a rough tracing order. A ruthless logic would have given all to the shareholders, principal, interest, bonus, and surplus, but this would have held the shareholders entitled to approbate the gains, while bound in law to reprobate the borrowing by which they were acquired. It is plain that Jessel MR thought that, by giving what was given to the shareholders, the Court had eliminated all but the proceeds of the ultra vires borrowing, and I should hesitate to reject this view, if the only alternative were to find the shareholders entitled to everything, though I recognise that it was not more than approximately exact.

And at 458: "My Lords, I think the present case must be decided upon equitable principles upon which there is no direct authority. … What ought to be done I think is clear; the only difficulty is how to describe the principle and how to affiliate it to other legal or equitable rules. The question is one of administration. The liquidator, an officer of the Court, who has to discharge himself of the assets that have come to his hands, asks for directions, and, after hearing all parties concerned, the Court has the right and the duty to direct him how to distribute all the assets. No part of them can remain undistributed as res nullius. No one has ventured to argue before your Lordships that the shareholders take everything, to the exclusion of the depositors, and so make a huge windfall. In my opinion, if precedent fails, the most just distribution of the whole must be directed, so only that no recognised rule of law or equity be disregarded. In this case, neither the shareholders nor the depositors have the better equity; the money of each has, with the consent of all, been indiscriminately applied in acquiring assets beyond as well as within the society's powers, the former in much the larger measure. The claims of each class are equal, and, I think, for the present purposes identical."

He referred to cases where chattels of one kind, but belonging to different owners, had been mixed together, where the resulting mass was owned by those whose property had contributed to it, in the proportions in which they had made contribution: Buckley v Gross (1863) 3 B&S 566 at 574; Spence v Union Marine Insurance Co Ltd (1868) LR 3 CP 427.

The final paragraph of his reasons, at 459 says: "… The principle on which Hallett's Case is founded justifies an order allowing the appellants to follow the assets, not merely to the verge of actual identification, but even somewhat further in a case like the present, where after a process of exclusion only two classes or groups of persons, having equal claims are left in and all superior claims have been eliminated. Tracing in a sense it is not, for we know that the money coming from A went into one security and that coming from B into another, and that the two securities did not probably depreciate exactly in the same percentage, and we know further that no one will ever know any more. Still I think this well within the "tracing" equity, and that among persons making up these two groups the principle of rateable division of the assets is sound." 126 At first sight it may appear that there are two inconsistent strands in the reasoning of Lord Sumner. It is one thing to say that the Court's task was to give directions to the liquidator about the mode of distribution of the assets, and that the Court's discretion about that mode of distribution is confined only by the requirement that no recognised rule of law or equity be disregarded. It is another thing to give directions to the liquidator to distribute in a particular manner because an equitable principle requires that mode of distribution. Reading his judgment as a whole, however, it seems to me that his Lordship is concluding that the principle on which Hallett's Case is founded requires the rateable division of the assets. Sinclair v Brougham - Conclusions 127 While there are differences in the principles stated by their Lordships in Sinclair v Brougham, there are some propositions which can be drawn from the case as a whole. In these conclusions I leave to one side the speech of Lord Dunedin. First, the result was arrived at by the application of equitable principles underlying tracing. In circumstances where, as their Lordships conceived it, the fact that the banking business was ultra vires meant that no rights in personam arose concerning money which had been lent for the purpose of the banking business, any claims necessarily had to be claims in rem. Second, the reasoning of none of their Lordships is dependent upon either an actual intention or a presumed intention of the entity which had possession of the assets, the Society. Nor is the reasoning dependent on an actual or presumed intention of depositors or shareholders. Rather, at least so far as Viscount Haldane, Lord Atkinson and Lord Parker are concerned, the right in rem was one which arose from the mere fact that assets, in which different people had an equitable interest, had been mixed, and in consequence each of those people had an equitable charge over the mixture. Viscount Haldane and Lord Atkinson expressly refrained from deciding the correctness of Jessel MR's views about the role of a presumption of honest intention (paragraph [100] above). Third, the solution was arrived at without any need to appropriate any particular withdrawals which were made from the assets of the banking business to any particular payments which had been made into that business, and indeed where such appropriation was unlikely to be possible. Fourth, equity would recognise an equitable charge as existing in favour of a class of people, such as the depositors, and would treat the members of that class as though they were a single individual, for the purpose of working out proprietary rights in the mixed fund, even if no individual depositor could identify an asset as purchased from his own deposit. Even though a more precisely adjusted working out of equitable obligations would be possible if individual deposits could be traced, it would still be unconscionable for the equitable rights of the class of depositors to be ignored when no such individual tracing was possible. Fifth, where it was not possible to demonstrate that for some reason the charge of the depositors, or of the Society, should be regarded as being for some lesser sum than the amount which they had respectively contributed to the assets of the banking business, they should each be regarded as having a charge for the full amount of their respective contributions. Sixth, when two people, or entities, each had a charge over the one mass of assets, ordinary equitable principles of priority will be applied in deciding the ranking of those charges. In circumstances where the Society was not a fiduciary acting in breach of fiduciary obligations in effecting the mixing, and there were no other factors which affected the relative priorities of the two charges, the equities between them were equal, and so the appropriate remedy was for the mixed fund to be held proportionate to contributions made to it by the lenders collectively, and the Society respectively. 128 Two important aspect of the decision in Sinclair v Brougham have been departed from, in the years since it was decided. First, the theory that an action for money had received depends upon implied contract, rather than on the law simply imposing an obligation, has been rejected at the highest level in both England and Australia: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 63-64 per Lord Wright; Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 and 227,255; Lippmann Gorman v Karpnale Ltd [1991] 2 AC 548, 578; Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70; Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 710, 718, 738. Second, the House of Lords has held that the circumstances in which the Society obtained money of the depositors pursuant to ultra vires contract ought not result in any equitable proprietary rights arising - Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 713, 718, 738 - and hence the beginning of any claim to trace has gone. Even so, the account given by their Lordships of how equitable claims to trace property operate and interact with one another, and how those principles can be applied in the context of a winding up, remains, in my respectful opinion, a sound one. In Re Diplock 129 In Re Diplock; Diplock v Wintle [1948] 1 Ch 465 involved a deceased estate which the executors, acting on a mistaken view as to the correct construction of the will, distributed to many charities. The next-of-kin, who on the true construction of the will had been entitled to the assets which were distributed, sought to recover from the charities. The judgment of the Court of Appeal (Lord Greene MR, Wrottesley and Evershed LJJ) dealt first with the next-of-kin's claim to have a right in personam to recover from the various wrongly paid charities. The Court held that the next-of-kin had that right, subject only to an obligation to give credit for an amount (to be divided rateably between the various charities) which the next-of-kin had recovered from the executors. The Court went on to express their views on whether, as well, the next-of-kin had a claim in rem against any of the assets of the charities (page 516 ff). They did this (as explained at 516-517) in deference to the detailed argument they had received, because their views on the topic might be material to an application for leave to appeal to the House of Lords, and because those views would be relevant if the House of Lords were to uphold an appeal against the Court's decision about the availability of the right of recovery in personam. As well though (and importantly for present purposes), the right of recovery in personam was one which the Court allowed without interest on the amounts recovered. (The unavailability of interest in the action in personam might have been a peculiarity of that particular case, rather than a universal rule: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 694, 729.) If the next-of-kin were to succeed in their claims in rem, interest might possibly have been paid. 130 In summary, the Court of Appeal in Re Diplock held that there could be tracing into assets held by a volunteer, such as the charities involved in Re Diplock. Their Lordships held that tracing can occur into a mixed fund (such as the bank account of a charity) even if the person who does the mixing is not a fiduciary, but rather is a volunteer (523-526). Sinclair v Brougham was not decided on a different principle to that applied in Hallett's Case - it was decided on the same principle, "but in its application to new facts fresh light was thrown upon it, and it was shown to have a much wider scope than a narrow reading of Hallett's Case itself would suggest." (526)

The Court said that, in Sinclair v Brougham the House of Lords had applied Hallett's Case , so that the class of depositors shared rateably with the class of shareholders, and said (526-7). "this application of the principle is an extension of it since, although the right of individuals to trace their own money (if they could) was preserved in the order of the House, the order provided for tracing the aggregate contributions of the two classes as classes. Hallett's Case was, of course, based on the right of an individual to follow what he could in equity identify as his own money. The extension of the principle in Sinclair v Brougham was the obvious and, indeed, on the facts, the only practical method of securing a just distribution of the assets." 131 There were three specific distributions to charities concerning which the Court discussed the application of Clayton's Case. The fullest discussion appears concerning a distribution of estate money made to Dr Barnardo's Homes. The next-of-kin claimed a right to trace into some loan securities, of face value of £40,000, which Dr Barnardo's Homes had purchased for a little less than the face value. The purchase was made using funds drawn on the charity's current account. On 14 December 1936, that account was in credit some £46,000. Then, on 14 December, £3,000 of Diplock money was paid in. Over the next week or so around £22,000 was withdrawn. Then the £39,000-odd, used to purchase the loan securities, was withdrawn. Thus, if Clayton's Case applied, the loan securities would have been purchased, as to roughly three thirty-ninths, with Diplock money. The Court said the following, about whether Clayton's Case ought be applied, at 553-4. "It might be suggested that the corollary of treating two claimants on a mixed fund as interested rateably should be that withdrawals out of that fund ought to be attributed rateably to the interests of both claimants. But in the case of an active banking account this would lead to the greatest difficulty and complication in practice and might in many cases raise questions incapable of solution. What then is to be done? In our opinion, the same rule as that applied in Clayton's Case should be applied. This is really a rule of convenience based on so-called presumed intention. It has been applied in the case of two beneficiaries whose trust money has been paid into a mixed banking account from which drawings were subsequently made, and, so far as we know, its application has not been adversely criticised (see per Fry J in Hallett's Case (13 ChD 696) and per North J in In Re Stenning [1895] 2 Ch 433). In such a case both claimants are innocent, neither is in a fiduciary relation to the other, and if the mixed fund had not been drawn upon they would be entitled to rateable charges upon it. Exactly the same occurs where the claimants are not two beneficiaries but one beneficiary and one volunteer, and we think, accordingly, that the same principle should be adopted."

Thus, the Court held that the securities were subject to a charge for the £3,000 of Diplock money which had gone into them. 132 The Court also decided, without further discussion, that Clayton's Case might also be applied to decide whether certain investments of St George's Hospital, purchased from a banking account into which Diplock money had been paid, were ones in relation to which a tracing order could be made (550). 133 This is to be contrasted with the decision reached concerning the Royal Sailors Orphan Girls School and Home. At a time when it held £9,700 of War Stock, it used £2,000 of Diplock money to buy more War Stock. The War Stock was uncertified inscribed stock, such that the newly purchased stock could not be identified from the previously held stock. Further, various sales of War Stock were made by the charity before it was given notice of the claim of the next-of-kin. The Court rejected the view that Clayton's Case should be applied to those stockholdings, saying, at 555-556: "We do not accept the view that the case ought to be treated as though it were subject to the rule in Clayton's Case . We see no justification for extending that rule beyond the case of a banking account. Here, before the sales took place, the mass of stock, if the question had then been raised, would have been regarded in equity as belonging rateably to the charity and to the Diplock estate. The only equitable way of treating the situation appears to us to be to regard each sum of stock withdrawn from the mass as having been made up in the same proportions. In so far as, upon this principle, withdrawals represented in part Diplock money and the sums received on the sale of the stock withdrawn were expended on general purposes and cannot now be traced into any existing asset, that amount of Diplock money must be regarded as having disappeared. But in respect of so much of the Diplock interest as is not thus accounted for, we are of opinion that the claim to a rateable proportion of the stock still held is established." 134 In relation to those charities concerning which a tracing claim succeeded, the Court held that the next-of-kin were entitled to a sum representing the interest in fact earned by the investments into which the Diplock money was traced (557). As no interest was payable on amounts which the Diplock next-of-kin could recover from charities pursuant to the action in personam, the fact that interest was allowed on those items where a claim in rem could be made out means that the Court's decisions about how Clayton's Case affects a tracing remedy cannot be dismissed as mere obiter dicta. PART D - McCONVILLE, HIGGINS AND AFTER The McConville and Higgins Articles 135 In 1963 an article by D A McConville, "Tracing and the Rule in Clayton's Case" appeared: (1963) 79 LQR 388. That article argued that (at 401): "As between the trustee and the beneficiary the bank account is a piece of property or an asset in the trustee's hands. This is something quite distinct and independent of its position as between the banker and the trustee, where it is a series of debts or personal liabilities inter se."

And that (at 407-408): "since the rule in Clayton's Case relates merely to the mode of accounting adopted between the trustee and his banker, it is immaterial to the question who is entitled or has the better right to the asset, that the bank account is in the hands of the trustee … It is submitted the rule in Clayton's Case does not apply to any tracing situation and that it should be confined to its proper sphere in the law of debtor and creditor. The dual nature of a bank account should be recognised and the fiction of "presumed intention" discarded. Tracing depends on strictly proprietary principles deducible from Re Oatway and Roscoe v Winder , which mark the proper limits of the action." 136 In 1964 P F P Higgins published "Re Diplock - A Reappraisal" in 6 University of Western Australia Law Review at 428. He criticised the application of Clayton's Case which had been made in In Re Diplock, listing, at 437-438 two objections: "In the first place, [ Clayton's Case ] decided that in the absence of an express appropriation by either the customer or the banker, the manner in which the banker kept his books is the best evidence of his intention to appropriate in that manner. It is difficult to see how the actions of the banker, carried out without reference to the customer, can be evidence of the customer's intention to appropriate. Secondly, even if the banker's books are admissible in evidence, when he is not a claimant, it is difficult to see how they can rebut the evidence of the admitted fact that the withdrawals were actually applied to the purposes of the volunteers and not to those of the beneficiaries."

Higgins went on to argue (at 439) that: "… insofar as Re Diplock decided that the rule in Clayton's Case is to be applied to the determination of the respective rights of claimants to the balance of a mixed fund, when the equitable rights of the claimants are equal, it was contrary to the express decision of the House of Lords in Sinclair v Brougham that in such circumstances the balance is to be shared rateably." 137 The publication of these articles led, after the delay often involved in academic writings becoming the subject of judicial consideration, to a series of cases which decided against, or questioned, the application of Clayton's Case to decide where a loss should fall between two beneficiaries whose money had been mixed. This process was assisted by the articles having a favourable reception in other academic writings. For example, the 3rd edition (1971) of Jacobs Law of Trusts in New South Wales (edited by R P Meagher and W M C Gummow) said, at 678: "The view that the rule in Clayton's Case applies to determine the rights of beneficiaries inter se has not gone unchallenged. It has been convincingly argued that such a view is inconsistent with principle, in that Clayton's Case is a rule of common law applicable to determine the rights of a creditor against his debtor, but inapplicable to determine the competing equitable rights of beneficiaries in trust property."

followed by a reference to the McConville article. Cases Taking up McConville and/or Higgins 138 Re Ontario Securities Commission and Greymac Credit Corp (1986) 30 DLR (4th) 1 is a decision of the Ontario Court of Appeal that Clayton's Case should not be used to determine beneficial interests in bank accounts into which monies of different trusts could be traced, but that, rather, such trusts should share in proportion to their contributions. Morden JA, delivering the opinion of the Court said, at 13, that the fundamental question was whether the rule in Clayton's Case "… should have any application at all to the resolution of problems connected with competing beneficial entitlements to a mingled trust fund where there have been withdrawals from the fund. From the perspective of basic concepts I do not think that it should. The better approach is that which recognises the continuation, on a pro rata basis, of the respective property interests in the total amount of trust monies or property available."

He quoted with approval from both the Higgins article (at page 11-12), and the McConville article (at page 14-15, 17, 19). On further appeal to the Supreme Court of Canada, the appeal was dismissed, and the reasons of Morden JA were adopted as those of the Supreme Court: Re Ontario Securities Commission and Greymac Credit Corporation (1988) 52 DLR (4th) 767. 139 The decision in Re Ontario Securities Commission and Greymac Credit Corp (1986) 30 DLR (4th) 1 was noted without disapproval in the New South Wales Court of Appeal by Handley JA (with whose reasons Kirby P and Mahoney JA agreed (79)) at 86 in Adamopoulos v Olympic Airways SA (1991) 25 NSWLR 75, in the course of holding that when a mixed fund was held on trust for two beneficiaries those beneficiaries could agree how the fund should be divided between them. 140 Shoreline Currencies (Australia) Pty Ltd (in liquidation) and the Companies (New South Wales) Code (Kearney J, 14 October 1988, unreported) was a liquidator's application for directions as to the mode of distribution of funds held in two accounts styled "trust accounts" which were maintained by the company. The directors had disappeared, and the company's records were both inadequate and inaccurate. Kearney J was satisfied, however, that some of the payments into the trust accounts, in a particular dollar figure, were payments which had been made to the company by persons who intended to invest with it, but who had not signed an investment contract. Upon signing an investment contract, money contributed by an investor would become general funds of the company, but until such time as the contract was signed the company held the money on trust. The amount standing to the credit of the trust accounts was less than the total amount which was identifiable as having been paid by investors who had not signed a contract. Kearney J decided that this loss should be borne by the investors pro rata to their contributions. His Honour said, at 7: "The approach suggested by long standing authority would apply a mode of tracing of the amounts on the basis of the rule in Clayton's Case (1816) 1 Mer 572. However, the application of this rule as between beneficiaries of a mixed fund of various trust sums has been roundly condemned in Scott on Trusts, 3rd ed vol 5, p 3641, and has also been criticised in Hanbury & Maudsley, "Modern Equity" , 11th ed at 660 and in Jacobs "Law of Trusts in Australia" 5th ed p 698. Indeed it is convincingly demonstrated in the articles "Tracing and the Rule in Clayton's Case " by DA McConville 79 LQR 388 and " Re Diplock - a Reappraisal" by PFP Higgins 6 Univ of WAL Rev 428 that such application of Clayton's Case is not only inconsistent with principle but also with the express decision of the House of Lords in Sinclair v Brougham [1914] AC 398." 141 His Honour went on to say, at 7-8: "While it is tempting on the basis of these criticisms to decline to apply the rule in Clayton's Case , nevertheless it is a decision of long standing and I do not think that as a judge of first instance, not having had the benefit of full argument on the matter, it would be proper to adopt the course of simply not following that decision. However, as pointed out by Astbury J in Re British Red Cross Balkan Fund [1914] 2 Ch 429, the rule is not a rule of law but one of evidence based upon presumed intention. The rule applies a "first in first out" approach in the case of trust monies in a bank account on the presumed intention that the monies first paid in were intended to be first paid out."

His Honour went on to say that, on the facts of the case before him, that intention was not to be presumed. "The moneys which were standing for the longest time in the account were obviously monies where the proposing investor had not in fact continued with his proposal and had not returned his contract. In those circumstances the monies were repayable by the company to such a person. Indeed, the evidence shows that in many such instances the investor who had decided not to proceed after having made the initial payment had been seeking repayment of his money from the company. In these circumstances it does not seem to me that the company ought to be treated as having first withdrawn from the account the monies which were no longer even potentially available for the company to deal with. Accordingly, I consider that the presumed intention forming the basis of the rule in Clayton's Case is displaced in the circumstances of this case." 142 In Re Registered Securities Ltd [1991] 1 NZLR 545 the New Zealand Court of Appeal gave directions to liquidators of a company which had operated a mortgage investment scheme. Money received for investment in the scheme, and mortgages which the company acquired in the course of the scheme, were all held on trust for investors. Somers J, giving the judgment of the Court (Richardson, Somers and Casey JJ) said, at 553: "The automatic application of the rule in Clayton's Case as between beneficiaries will not in our view withstand scrutiny. In the first place, the rule is founded on presumed intention. It is in truth a fiction and cannot be allowed to work an injustice. The point was discussed by Learned Hand J in Re Walter J Schmidt & Co 298F 314 (1923). The example he gave at p 136 was as follows: "Suppose three claimants, A B and C, for $5,000 each, whose money was deposited at intervals of a month, January, February and March. Suppose that the fund had been reduced on some day in January to $3,000. A has lost $2,000, which he cannot throw on B. Hence, when B's money is deposited on February 1, A and B will share $8,000 in the proportion of 3 to 5. Suppose that during February the account gets as low as $4,000. A and B cannot throw this loss on C, and when C's money is deposited they will share the $9,000 in the proportion of 3, 5 and 10. But any subsequent depletion below $9,000 though must bear in that proportion, just as A and B bore theirs in February." 143 Somers J referred to the Higgins article, and continued: … In the second place, because the rule in Clayton's Case is based upon a presumed intent, it must give way to an express contrary intention or to circumstances which point to a contrary conclusion; see Re Hallett's Estate at p 728 per Jessel MR and at p 738 per Baggallay LJ; Cory Brothers & Co v Owners of Turkish Steamship "Mecca" [1897] AC 286 at p 290 per Lord Halsbury LC and at p 296 per Lord Macnaghten. It must follow in our view that where a trustee mixes the funds of different beneficiaries a withdrawal which is expressly or by implication intended to be to the account of one particular beneficiary must be so treated. In such a case there is no apparent equity in that beneficiary entitling him to impose part of the loss on the other." 144 In Hagan v Waterhouse (1991) 34 NSWLR 308 Kearney J said, at 358: "Since Re Hallett's Estate the presumption that a trustee is withdrawing his own money first and the "first in first out" principle of Devaynes v Noble ; Clayton's Case (1816) 1 Mer 572; 35 ER 781 are not available to the trustee for his own advantage … Moreover, I endorse the emphatic pronouncement in Jacob's Law of Trusts in Australia , 5th ed (1986) par 2714 at 695 that: " Clayton's Case regulates the state of account between banker and customer, and has nothing to say as to the relationship of trustee and beneficiary."" 145 Kearney J went on to set out some of his remarks on this topic in Shoreline Currencies (the passage quoted at paragraph [140] above, minus its first sentence), and to refer to the decisions in Re Ontario Securities Commission and Greymac Credit Corporation (1986) 30 DLR (4th) 1, and Re Registered Securities Ltd [1991] 1 NZLR 545. Though Hagan v Waterhouse was not a case which involved deciding which beneficiary's money should be treated as having been drawn out, when money of several beneficiaries was mixed together in a bank account, these dicta are a good indication of how the tide of judicial opinion in New South Wales was running. 146 The next development of significance in New South Wales on this topic was the decision of the New South Wales Court of Appeal in Keefe v Law Society of New South Wales (1998) 44 NSWLR 451. In the judgment which I gave concerning directions in this matter (In the Matter of French Caledonia Travel Service Pty Limited (in liquidation) - Application of Roderick Mackay Sutherland [2002] NSWSC 641; (2002) 42 ACSR 524 I set out the relevant matter arising from the decision in Keefe as follows: "It may well now be the law in New South Wales that where money has been deposited into a trust account, on trust for various individual depositors, and the trust account has been mismanaged so that the amount available in the account is not adequate to meet all claims on it, the account is held upon trust for the depositors collectively, with each depositor being entitled to a share proportionate to the contribution he or she has made to the account. In Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 Priestley JA dealt with this topic, at 460-461. His Honour described the point as one "of some importance" . He said the point was one which was "not taken before this Court, and not noticed by the Court in the course of argument" . The topic was, in Keefe , relevant to the formulation of a charge of professional misconduct against a solicitor, which in turn depended on whether a sum of money which had been received from a client, and paid into the solicitor's trust account, had become unavailable to be paid to her or as she directed. His Honour considered the position at some length, as follows: "A question arises, on facts such as the present, whether the beneficiaries (the clients) entitled to the trust moneys in a trustee's (solicitor's) possession, when those trust moneys are less than the total due to all those beneficiaries, become rateably entitled to the available funds, or whether the shortfall should be allocated on a first in, first out basis. If the latter position is the correct one, then in the present case, if the dates listed in the trial balance set out above were the actual dates of deposit of each amount, Mrs Grapsas's money would be part of the $3,526.50 which had wrongly gone from the trust account and the solicitor was in breach of trust in regard to her. If the former (rateable) view is correct, then also there is no doubt the solicitor was in breach of trust in respect to her. The point was the subject of academic consideration by D A McConville (1963) 79 LQR 388 in an article entitled "Tracing and the Rule in Clayton's Case". The author advances powerful arguments for the rateable solution (at 403 and following). The same view is taken in the 6th ed (by Meagher and Gummow) of Jacob's Law of Trusts in Australia (1997) Butterworths, pars 2711 and 2712 at 749-751. At the level of legal precedent, the same view was adopted by Kearney J in Hagan v Waterhouse (1991) 34 NSWLR 308 at 358-359. His decision should, in my opinion, be approved by this Court. (The application of the rateable approach can itself be subject to complication depending on the timing of deposits to and wrongful withdrawals from a trust account in which the funds of different beneficiaries are held, as was pointed out by Learned Hand J in Re Walter J Schmidt & Co; Ex parte Feverbach 298 F 314 (1923). That does not however detract from the soundness of its application in straightforward situations.) On the rateable approach once the amount to the credit of the solicitor's trust account became less than it should have been, he was in breach of trust to all fourteen clients for whom funds were held in it. Thus, in Mrs Grapsas' case, assuming the correctness of the dates of deposit in the trust trial balance figures, on the rateable approach, part of the amount held by the solicitor on trust for Mrs Grapsas was paid away otherwise than in accordance with s 61, or, if the rateable approach be not correct, the whole of it was." (emphasis added) This judgment of Priestley JA was agreed in by both Sheller JA and Powell JA. While it has, strictly, the status of obiter dicta , it is a considered statement, which must be considered very carefully by any trial judge." Effect of Stephens Travel Service 147 In the present case counsel for QT Travel relied on certain remarks by Hope J (with whom Kirby P and Priestley JA agreed) in Stephens Travel Service International Pty Ltd (receivers and managers appointed) v QANTAS Airways Ltd (1988) 13 NSWLR 331. There, his Honour considered at 347 the situation where a trustee mixes money of one trust with his own money, and there is sufficient money to meet the beneficiary's claim. Hope JA noted that the decision of the High Court in Brady v Stapleton (1952) 88 CLR 322 made clear that, if a trustee mixed trust money with his own money in a bank account, the beneficiary was not restricted to a remedy of a charge over the bank account, but could require the transfer to it of part of the money standing to the credit of the bank account. He held that the aspect of the decision of the English Court of Appeal in Re Diplock that decided that in such a case the only remedy available was a charge over the bank account, was not to be followed in Australia, because it was inconsistent with Brady v Stapleton. He continued at 348: "Assuming the sufficiency of the fund, the same principle should apply to cases where the trustee mixes the money of two or more trusts, with or without money of his own. The position may be different where there is insufficient money to meet the entitlement of all beneficiaries. There, possibly depending in the case of a particular beneficiary upon the application of the rule in Devaynes v Noble, Clayton's Case (1816) 1 Mer 572; 35 ER 781, the beneficiaries may be able to claim and recover only a part of the monies to which they are entitled; that is, their claims on the fund may have to abate because of the trustee's default. In such a case it may be that the appropriate remedy is a charge. It may be arguable that otherwise the result would be that two or more beneficiaries would have overlapping titles to the same money. My tentative view is that if the entitlements of beneficiaries with charges over a fund can and must abate if the fund is insufficient to meet all claims, there is no reason why the entitlements to take in specie should not be abatable." 148 I do not regard this part of the judgment of Hope JA as endorsing the application of Clayton's Case between two beneficiaries whose money are mixed. Rather, his Honour was recognising that there was an argument, which he was not purporting to decide, about whether Clayton's Case would apply in such a situation. If anything, his Honour's tentative view that entitlements should abate if the fund was insufficient is inconsistent with the application of Clayton's Case. Effect of a Changed Understanding of Banker's Current Accounts 149 One of the motive forces leading 19th century English judges to suppose that Clayton's Case should be used to allocate losses between beneficiaries whose money was paid into a mixed bank account arose from their concept of a bank account maintained in credit being a series of debts owed by the banker - see paragraph [32] above. For a beneficiary to trace into a bank account, he needed to be able to identify one or more of those debts, arising from payment of trust money into the account, and say "that debt is mine." Once a debt arising from trust assets being paid into a bank account had been repaid, however, there was nothing the beneficiary could point to as being his. And whether the debt had been repaid depended on Clayton's Case. This notion is explicit in the judgment of Knight Bruce LJ in Pennell v Deffell (1853) 4 DeGM&G 372; 43 ER 551 at 383 of DeGM&G, 556 of ER. "When a trustee pays trust-money into a bank to his credit, the account being a simple account with himself, not marked or distinguished in any other manner, the debt thus constituted from the bank to him is one which, as long as it remains due, belongs specifically to the trust as much and as effectively as the money so paid would have done, had it specifically been placed by the trustee in a particular repository and so remained: that is to say, if the specific debt shall be claimed on behalf of the cestuis que trustent , it must be deemed specifically theirs , as between the trustee and his executors and the general creditors after his death on the one hand and the trust on the other." (emphasis added)

He continued, at 384 of DeGM&G, 556 of ER. "This state of things would not, I apprehend, be varied by the circumstance of the bank holding also for the trustee, or owing also to him, money in every sense his own. It may be, however, and as I think is true, that cheques drawn by the trustee in a general manner upon the bank, would for every purpose be ascribed and affect the account in the mode explained and laid down by Sir W Grant, in Clayton's Case . The principles there stated would, I conceive, be applicable, notwithstanding the different nature and character of the sums forming together the balance due from the bank to the trustee, whatever the purposes and objects of the cheques." 150 Turner LJ in Pennell v Deffell expressed a similar way of regarding the matter at 390-391 of DeGM&G; 559 of ER. "Suppose a trustee pays into a bank account monies belonging to his trust to an account not marked or distinguished as a trust account, and pays in no other monies, could it for one moment be denied, that the monies standing to the account of the debt due from the bankers arising from the monies so paid in would belong to the trust and not to the private estate of the trustee? Then suppose the trustee subsequently pays in monies of his own, not belonging to the trust, to the same account. Would the character of the monies which he had paid in - and of the debt which had before accrued - be altered? Again, suppose the trustee, instead of subsequently paying monies into the bank, draws out part of the trust monies which he has before paid in, would the remainder of those monies and of the debt contracted in respect of them lose their trust character? Then, can the circumstances of the account consisting of a continued series of monies paid in and drawn out alter the principles? It may indeed increase the difficulty of ascertaining what belongs to the trust , but I can see no possible ground on which it can affect the principle. … I take it to be now well settled, that monies drawn out of a banking account are to be applied to the earlier items on the opposite of the account. By every payment which he makes, the banker discharges so much of the debt which he first contracted. If that debt arose from the trust-monies paid in by the customer, so much of those trust-monies is paid off , and, unless otherwise invested, on account of the trust, falls into the customer's general estate and is lost to the trust, because it cannot be distinguished form the general estate of which it has become part. If, on the other hand, the earliest debt due to the banker arose from the customer's own money paid in by him, that debt is pro tanto discharged, and the trust-monies subsequently paid in remain unaffected. The same principle runs through the whole account; each sum drawn out goes to discharge the earliest debt due from the banker which is remaining unpaid; and thus, when it is ascertained what monies have been paid in belonging to the trust, it becomes clear to what portion of the balance which remains the trust estate is entitled." (emphasis added)

At 393-394 of DeGM&G, 560 of ER, Turner LJ expressed the absurdity of not applying Clayton's Case to such a mixed account by saying: "Now Green opened and kept these banking accounts upon the usual footing, and the plaintiff, taking the benefit of the accounts, cannot, as I think, be entitled to alter their character. Adopting them for the purpose of establishing his demand against Green's estate he must, I think, adopt them with all their incidents, one of which is that the monies drawn out are to be applied to the monies first paid in. Upon any other footing this consequence would follow, that a debt which had been extinguished at law by the course of payment would be revived in equity by an alteration in that course." (emphasis added)

This argument, that a debt constituted by a deposit which has been discharged at law cannot be held to exist in equity, was repeated in Brown v Adams (see paragraph [41] above). 151 The conceptual underpinning for this line of argument was held invalid by Joachimson's Case. A deposit paid into a bank account does not result in the creation of an ordinary debt, which can itself be the subject of a trust. It is elementary that before there is a trust there must be trust property. While a chose in action is capable of being trust property, a deposit paid into a bank account is not in itself a chose in action. Rather, the deposit needs to be seen as an incident in the operation of the whole banker-customer contract, and the legal rights which the customer has against the banker are rights arising from that banker-customer contract. 152 Hallett overruled Pennell v Deffell for reasons of trust law, without questioning the account of banker-customer relations it assumed. The application of Clayton's Case as between two beneficiaries whose assets were mixed was a logical extension of Pennell v Deffell, and one which was not necessarily inconsistent with the basis on which Hallett refused to follow Pennell v Deffell (though still arbitrary) once Hallett had refused to follow Pennell v Deffell so far as trustee-beneficiary relations were concerned. The view of banker-customer relations in Joachimson removed, though, the basis on which Pennell v Deffell had applied Clayton's Case to any question of trustee-beneficiary relations at all. 153 To be able to trace through a mixed bank account, it is necessary for a beneficiary to be able to say that he has an equitable right of property in some asset which the trustee holds. But it is possible for the beneficiary to have an equitable right of property in the chose in action which is, at the time of trial, owed by the banker to the customer, to the extent that the trustee could not deny that the money of the beneficiary remained there. And, as the conclusion reached in Hallett's Case shows, the trustee could not deny that the beneficiary's money remained in that chose in action while ever there was enough money in the bank account to enable the trustee to perform his obligation of restoring the trust fund. While the explanation given in Hallett's Case for that conclusion, based on a presumption of honest intention on the part of the trustee, is not satisfactory (see paragraphs [63], [66] and [85] above), Sinclair v Brougham provides a satisfactory alternative explanation. It is that the beneficiary once had an equitable title to assets, those assets have in fact become mixed with other assets, and it is unconscionable for the holder of the mixed asset to deny the beneficiary an equitable title in the mixed asset, to the extent to which the mixed asset has in fact been contributed to by the beneficiary's asset. And equity regards there as being a charge over all the assets which are, or are derived from, the mixed asset, until such time as those obligations of conscience have been discharged. If this alternative explanation is adopted, the puzzle about how a presumed intention between trustee and beneficiary could affect a presumed intention between banker and customer (paragraph [65] above) does not need to be solved. 154 The analysis which applies when one beneficiary's money has been mixed in a bank account applies equally well if the money of several beneficiaries has been mixed in the bank account. They each have a charge over the chose in action. That a particular sum has been withdrawn from the bank account provides no reason for denying either of them such a charge, though it may well affect the value for which each of them can obtain a court order for a charge. 155 (I mention also that the reporter has incorrectly transcribed Knight Bruce LJ's judgment in the part of Pennell v Deffell quoted in paragraph [149] above by showing the plural of cestui que trust as being cestuis que trustent. The plural is cestuis que trust, because trust is not there a verb. The Shorter Oxford Dictionary 3rd ed p 309 says the phrase is a contraction of cestui a que use (= al use de qui) le trust est créé. A contributor identified only as CS in (1910) 26 LQR 196 says, relying on Maitland for support, that "cestui que trust means 'he upon trust for whom' certain property is held". See also Scott on Trusts 2nd ed s 3.2, Walker, The Oxford Companion to Law (1980) p 198, Jowitt's Dictionary of English Law 2nd ed 1977 p 309.) Should Re Diplock be Followed? 156 The discussion of English cases in Part C of this judgment has shown that only English case after Hallett which has adopted Clayton's Case as the means for deciding which of several beneficiaries whose assets have been mixed will be treated as being withdrawn is In Re Diplock. A judge of the Supreme Court of New South Wales is not bound to follow decisions of the English Court of Appeal, and such decisions are followed only to the degree of the persuasiveness of their reasoning: Cook v Cook (1986) 162 CLR 376 at 390, 394; Sharah v Healey [1982] 2 NSWLR 223 at 227-228. I did not regard the reasons which led the Court of Appeal in Re Diplock to apply the rule in Clayton's Case as being persuasive. In the passage which I have quoted at paragraph [131] above, their Lordships acknowledge that two claimants on a mixed fund should be interested in it rateably for as long as the fund is not depleted. That is uncontentious. The only conclusion which they consider, as following for that proposition, is that withdrawals from the mixed fund ought be attributed rateably to the interests of both claimants. That is not the whole picture which arises from two claimants on the mixed fund being interested rateably. The right of election of the claimants, concerning whatever property they might be able to trace into at the time of trial, the charge each has over the fund and any asset acquired from it, and the possibility of them having a proportionate beneficial interest in assets purchased from the mixed fund, mean that the possible avenues for tracing are not so limited. It is not necessary to be able to decide, at the time a withdrawal is made, whose money is being withdrawn. In other words, the task that Clayton's Case is designed to perform is not one which needs to be carried out, for tracing to occur.

157 Their Lordships say, "… in the case of an active banking account this would lead to the greatest difficulty and complication in practice and might in many cases raise questions incapable of solution." That remark is one which arises from their assumption that the only way of effecting tracing is to attribute withdrawals rateably to the interests of both claimants. Its strength is limited accordingly. As well, though, the principles of law in this area are ones which deal with claims to trace where the facts are simple, and as well as ones where the facts are complex. That the tracing of the asset of a particular beneficiary which has become mixed might in some circumstances be complex, or prove impossible, if proper principles are adopted, is not a reason for denying the application of proper principles in those circumstances where they can be applied. It is well-known that, outside this particular area of mixing of trust funds of two beneficiaries, or of a beneficiary and an innocent volunteer, tracing is a complex exercise, and sometimes plaintiffs seeking to make out a tracing claim fail to discharge their onus of proof. That is not a reason for changing the principles. As well, as Sinclair v Brougham makes clear, the principle which underlies tracing can sometimes result in members of a class being entitled to an equitable interest in property, even in circumstances where an individual member of that class could not discharge the onus of proof to trace into individual assets. Further, it is not as though tracing is the only remedy which a beneficiary has when there has been a breach of trust. While the first duty of a trustee who has mixed assets in breach of trust is to put back into the trust fund such of the trust assets as still remain in his hands, such a trustee also has a duty to make good the trust fund from his own assets. This personal obligation of the trustee means that tracing is usually only of practical importance in circumstances where the trustee has disappeared or is insolvent. 158 Insofar as the Court of Appeal relied upon the previous occasions when Clayton's Case had been applied in a case of two beneficiaries whose trust money had been paid into a mixed banking account from which drawings were subsequently made (the decision of Fry J in Hallet's Case, and North J in In Re Stenning), the weaknesses which I have previously identified concerning the application of Clayton's Case in those decisions makes the reliance of the Court of Appeal on them unpersuasive. The account given elsewhere in these reasons for judgment of the proper basis for tracing through mixed funds (particularly paragraphs [83]-[86], [127], [151]-[154] and [176]-[185]), and how the interest of two beneficiaries whose funds are mixed can be traced without resort to Clayton's Case lead me to not follow Re Diplock in so far as it applied Clayton's Case. Other Australian Decisions 159 Whether Clayton's Case should be used to solve the Problem, has not been considered by the High Court of Australia. There is one decision of a single judge of an Australian Supreme Court which certainly applies Clayton's Case for the purpose of solving the Problem (Hodges & Hurley v Kovacs Estate Agency Ltd [1961] WAR 19, at 24. Two other decisions of a single judge of a State Supreme Court may also provide some authority for the use of Clayton's Case in this area: (In Re Laughton [1962] Tas SR 300; In Re Joscelyne; Allen's Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4). 160 Various decisions of Australian superior courts have declined to apply Clayton's Case to decide how the loss should fall between several beneficiaries whose funds had been mixed: Re Jones (Deceased) Ex parte Mayne (1953) 16 ABC 169; Windsor Mortgage Nominees Pty Ltd (as trustee) v Raymond Griffith Cardwell (1979) ACLC 40-540 at 32,199-32,200; Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (receiver and manager appointed) (1994) 49 FCR 334 at 358-359, 365. In these cases the impossibility of carrying out the tracing exercise was a factor which led to the court's conclusion to effect a pari passu distribution. In Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082 (Chesterman J, 27 March 2001, unreported) orders were made under section 1114 Corporations Law for the distribution of the assets of a managed investments scheme which had been placed into receivership. A rateable distribution was ordered amongst the investors, partly on the basis that no particular investor could identify his money in any asset. In Australian Securities and Investment Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719 Austin J gave directions to a liquidator for the distribution of funds held on trust for various investors which had become mixed. His Honour expressed the view, at [24]-[26], that Australian authority had reached the point where the rateable solution was to be preferred to the first in, first out approach when trust funds are mixed, regardless of whether it was impossible on the facts to apply the first in, first out approach. In Re Global Finance Group Pty Ltd (in liq) (supervisor appointed) and Global Mortgage Investments Pty Ltd (in liq); Ex parte Read and Herbert (as liquidators of Global Mortgage Investments Pty Ltd and as liquidators of Global Finance Group Pty Ltd) [2002] WASC 63; (2002) 26 WAR 385 McLure J dealt with tracing claims of great complexity, arising from the mixing of funds held on various trusts. However, the forensic frame in which her Honour was working was one where no party contended that Clayton's Case provided the appropriate method of allocating losses amongst the beneficiaries - see page 430, [227]. Thus the decision cannot assist in deciding whether Clayton's Case ought be used to solve the Problem. 161 There is no Australian authority which is binding on me and is to the contrary of the dictum of the Court of Appeal in Keefe's Case that the decision of Kearney J in Hagan v Waterhouse should be approved. That dictum of the Court of Appeal is itself not binding on me: Hepburn v TCN Channel Nine Pty Ltd [1984] 1 NSWLR 386. However, that the Court of Appeal pronounced that dictum at all is a matter which, from my position in the judicial hierarchy, needs to be accorded considerable weight. 162 Australian text writers favour not using Clayton's Case to solve the Problem. Jacobs, Law of Trusts in Australia, 6th edition (1997), para [2711]-[2712] continues not to favour it. 163 Ford and Lee, Principles of the Law of Trusts, 3rd edition, para [17250] refers to cases where consideration has been given to whether Clayton's Case operates to allocate losses between several beneficiaries whose money has been mixed, and says: "In some of these cases judges correctly reject the application of Clayton' Case as irrelevant. Clayton's Case provides a means of ascertaining each depositor's entitlement within the bank account; but it has never been applied to differentiate between depositors if a subsequent deficiency arises in the account. Then each depositor is entitled to the proportion that his or her ascertained entitlement bears to the value remaining in the account. Unfortunately some commentators have entertained an opinion that Clayton's Case applies as between existing depositors at the date when the account becomes deficient in the wake of a delinquent withdrawal, allocating the delinquent withdrawal amongst the depositors on a first in first out basis, so that the withdrawal that creates the deficiency is attributed to those clients whose deposits in the account are earlier, later deposits being paid in full … Most commentators repudiate that opinion. Scott (Fratcher ed) observes at para 519: "The rule is so clearly arbitrary and unfair that one must suspect the soundness of the reasons on which it is based; and indeed, the only basis turns out to be the application of presumptions based on fictions." Birks, Law of Restitution (1989) says at 364 that this exception should be regarded as "open to review". Goff & Jones, The Law of Restitution (3rd ed, 1986) condemns it at p 59. Moffatt, Trusts Law Text and Materials (2nd ed. 1994) doubts it as do Underhill & Hayton, Law of Trusts & Trustees (5th ed. 1995) at 860-861. It has been expressly rejected by the Ontario Court of Appeal in Ontario (Securities Commission) v Greymac Credit Corp (1986) 30 DLR (4th) 1 Jacobs' (6th ed at [2712]) offers the same view. Lewin on Trusts (17th ed, 2000) having considered it at 41-53, say at 41-47 that the application of the rule is arbitrary." Recent English Cases 164 The English courts have not felt free to acknowledge that Clayton's Case does not as a matter of principle apply to solving the Problem. The recent English cases to which my attention has been drawn have all been ones which have not applied Clayton's Case to solve the Problem, but rather have distinguished it on the facts. Morritt J did so in Re Eastern Capital Futures Ltd (in liquidation) [1989] BCLC 371 at 375. 165 Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22 arose from the failure of a managed investment scheme, which had been placed into receivership. Dillon LJ referred to: Clayton's Case; The Mecca; Re British Red Cross Balkan Fund; Re Hobourn Aero Components Ltd's Air-Raid Distress Fund [1946] Ch 86; Sinclair v Brougham; In Re Hallett's Estate; Hancock v Smith; Pennell v Deffell and Re Diplock's Estate. He concluded, at 33: "… the decisions of this Court, in my judgment, establish and recognise a general rule of practice that Clayton's Case is to be applied when several beneficiaries' money have been blended in one bank account and there is a deficiency. It is not, in my judgment, for this Court to reject that long-established general practice."

He went on to hold, on the facts, Clayton's Case was not applicable. 166 Woolf LJ at 38 held that he was bound by the reasoning in Re Diplock's Estate, and, at 39, that: "… it is settled law that the rule in Clayton's Case can be applied to determine the extent to which, as between each other, equally innocent claimants are entitled in equity to monies which have been paid into a bank account and then subject to the movements within that account. However it does not … follow that the rule has always to be applied for this purpose. In a number of different circumstances the rule has not been applied. The rule need only be applied when it is convenient to do so and when its application can be said to do broad justice having regard to the nature of the competing claims. Re Hallett's Estate shows that the rule is displaced where its application would unjustly assist the trustee to the disadvantage of the beneficiaries. In Re Diplock's Estate the rule would have been displaced by the trustee subsequently earmarking the beneficiaries funds. It is not applied that this is the intention or presumed intention of the beneficiaries. The rule is sensibly not applied when the cost of applying it is likely to exhaust the funds available for the beneficiaries."

His Lordship held that, on the facts, the rule should not be applied in that instant case, because (in a situation where the funds of investors had, wrongfully, been pooled rather than kept separate), ".. the Court has to presume what would have been the intention of the investors had they contemplated the creation of this pool. So far as that intention is concerned I have no doubt that it is correct to presume that the investors would have intended that what could be salvaged, as a result of the "common misfortune" they had suffered, should be dealt with in accordance with the third solution and not in accordance with the rule. It can be presumed that they would not want to subject what was left of the pool to the vagaries of chance which would follow from the application of the first in, first out principle."

Similarly Leggatt LJ, at 44, held that: "… it is not open to this Court to disregard the rule in Clayton's Case in this context." 167 In light of the conclusion to which I have come, I say nothing about the soundness of the tests put forward in Barlow Clowes for deciding when Clayton's Case should be distinguished. 168 More recently, Lindsay J, in Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch); [2003] 2 All ER 478 at 494, [55] says: "The modern approach in England has generally not been to challenge the binding nature of the rule but rather permit it to be distinguished by the reference to the facts of the particular case. Thus in Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22 at 36-40 Woolf J, after a full citation of the authorities, held (at 41) that the rule did not apply where circumstances from which a counter intention might be presumed were found. Such relevant circumstances could include acts and omissions after the investor made his investment and also the injustice between investors if a rule so arbitrary in its effects were imposed (see [1992] 4 All ER 22 at 42). Leggatt LJ also saw the rule as capable of being displaced by a presumed intention. He regarded (at 46) it as capricious, arbitrary and inapposite. It is plain from all three of the judgments in the Barlow Clowes case, the third being that of Dillon LJ, that the rule can be displaced by even a slight counterweight. Indeed, in terms of its actual application between beneficiaries who have in any sense met a shared misfortune, it might be more accurate to refer to the exception that is, rather than the rule in, Clayton's Case .

He went on to hold that the nature of the investment before him was one which made the application of Clayton's Case inapplicable, and divided the losses between investors pari passu. Nothing in these more recent English cases causes me to conclude that it is appropriate to follow Clayton's Case in New South Wales to solve the Problem. Conclusion - Clayton's Case not Applicable 169 The principles upon which tracing operates, and the proper scope of application of the rule in Clayton's Case, both favour the rule in Clayton's Case not being used to allocate losses suffered by beneficiaries whose funds are mixed. This conclusion is arrived at as a matter of principle, regardless of whether or not there is sufficient information to enable an allocation of withdrawals to deposits, in accordance with Clayton's Case, to be made in any particular case. Alternatively, Distinguishing Clayton's Case 170 Even if I were wrong in the conclusion I have just come to, I would not, on the facts, apply Clayton's Case in the present case. The situation in which Clayton's Case came to be applied in Re Diplock is distinguishable from the situation of the trust accounts of French Caledonia Travel. 171 The situation under consideration in In Re Diplock was that of a charity, which had been given money from the Diplock estate to which it thought it was entitled. It paid that money into its general account, and then drew against the general account. It had no consciousness that the money received from the Diplock account was, at that time, anything other than its own money. In those circumstances, the presumed intention which arises from Clayton's Case has some reality. It is not really comparable with the situation of the operator of a trust account containing money which it knows is money of many beneficiaries. 172 The fact that the trust account operated by French Caledonia was the type it was - where money was contributed by numerous intending travellers, each intending to pay for their own travel - is in itself a reason why, as between trustee and the beneficiaries, Clayton's Case ought not be treated as applying. If such a trust account were operated properly, the intention one would presume, when any money was drawn from the trust account, to pay the expenses of any particular traveller, was that it was the money of that traveller which was being drawn upon, regardless of whether, of the money then standing in the trust account, that traveller's money had been paid in first, last, or somewhere in between. If the operator of such a trust account misappropriated money from it, the intention one would presume is that the operator was wrongly taking money of all the people whose money was in the account. PART E - PARI PASSU DISTRIBUTION? 173 Having concluded that the liquidator should not apply Clayton's Case does not of itself lead to a conclusion about what manner of distribution the liquidator should adopt. To say that he should adopt a "pari passu distribution" glosses over some questions of principle, and of evidence. Roscoe v Winder 174 James Roscoe (Bolton) Limited v Winder [1915] 1 Ch 62 concerned a person who paid trust money into his personal bank account, spent everything in that bank account apart from £25, and then replenished the bank account. Sargant J held that the beneficiary could trace only in relation to £25. His Honour accepted (at 69) that if there was evidence that the intention of the trustee, in replenishing the account, was to substitute the additional monies for the original trust monies, that intention could be given effect to. But in circumstances where the account in question was a general trading account of the trustee, the mere fact of payment in of funds was not enough to result in such an intention being attributed to the trustee. 175 Roscoe v Winder is authority for the "lowest intermediate balance rule". Under it, absent any payment in of money with the intention of making good earlier depredations, tracing cannot occur through a mixed account for any larger sum than is the lowest balance in the account between the time the beneficiary's money goes in, and the time the remedy is sought. In a case where the type of tracing being attempted involves detailed analysis of what has become of the property of a particular beneficiary, and into what other assets it has been converted or mixed, the lowest intermediate balance rule is fundamental to a principled approach to tracing. Remembering that the aim of tracing is to identify property which is still in the hands of a defendant, and which can be seen to be in substance the property of the plaintiff, no more than the lowest intermediate balance in a mixed account can meet that test. It is only to the extent of the lowest intermediate balance that the beneficiary can say "you cannot in conscience deny that your right to get money out of your bank account is property which you hold on trust, and which you must put back into the trust fund". Equality is Equity? 176 The maxim "equality is equity" does not require that the available funds be divided between all people who can establish that, at one time, they had a claim on a bank account in which property held on trust for several people have been mixed. It can readily enough be accepted that if several people have an equal right to be paid from a particular fund, and the fund proves insufficient, their claims will abate rateably. This happens in relation to general legacies (Re Farmer [1939] Ch 573; Re Wilson [1940] Ch 966), and with the proportionate abatement of provable debts which creditors sustain in a bankruptcy or winding up. Rateable abatement does not automatically apply whenever there is a mixed fund because there is a preliminary question, the answer to which cannot be assumed, of whether all the claimants on the fund, in the form the fund takes at the time of trial, have claims which are equal. 177 There are two senses of "have claims which are equal" which apply here. The first concerns whether, in relation to the amount of money of a beneficiary which has gone into a mixed fund, and for which that beneficiary has in one sense a claim, the beneficiary has a charge over whatever property remains from that fund for the whole of the amount of his money which went in. If it can be demonstrated that some beneficiaries have a charge over those assets for the whole amount of their money which went into the fund, while others have a charge over those assets for only part of their money which went into the fund, their claims are not equal. An example of how this happens is found in the extract from Re Walter J Schmidt & Co 298F 314 (1923) contained in the quotation from Re Registered Securities Ltd in paragraph [142] above. Modifying the example so that it talks of charges, rather than proportions, at the beginning of February A has a charge on the fund for $3000 and B has a charge on the fund for $5000. The depletion during February means that A's charge on the fund is reduced to one for $1500, and B's charge is reduced to one for $2500. At the beginning of March A and B have those charges for $1500 and $2500 respectively, and C has a charge for his full $5000. Thus, even though A, B and C each has a claim for $5000, because the charges they can demonstrate over the fund at the beginning of March are not equal, their claims as at that date are not equal.

178 The other sense in which claims might be unequal arises once the amount of the various charges of beneficiaries on the fund has been established. Then a question arises of whether in accordance with the equitable principles concerning priorities, or indeed whether by reference to any personal equities whatever which exist between the various claimants, there is any reason to treat any of the claimants as postponed to any of the others. 179 An example of such a personal equity is to be found in In Re Hobourn Aero Components Ltd's Air Raid Distress Fund; Ryan v Forrest, reported at first instance (Cohen J) at [1946] 1 Ch 86, and in the Court of Appeal (Lord Greene MR, Morton and Somervell LJJ) at [1946] 1 Ch 194. Nearly all the employees of a company agreed to deductions being made from their wages to set up a fund. The fund was administered by a committee, referred to as trustees, which had a discretion about making payments from the fund. There appeared to be a consensus that the purposes for which payments could be made were providing benefits in cash or kind to former members of the Fund who were on active service, and making grants to members in distress as a result of enemy action. The question for decision concerned how to distribute a surplus in the fund. The case proceeded on the implicit assumption that the fund was held on trust. All judges held that the fund was not held on charitable trusts, because a personal relationship to a particular entity (namely the employer company) was needed before an individual was eligible for a benefit, and distributions were made regardless of the means of recipients. 180 Cohen J held that the fund should be distributed on the basis that (97) "… each donor retained an interest in the amount of his contributions except so far as they are applied for the purposes for which they were subscribed. Moreover, the rule in Clayton's case is not applicable in such a case (see In re British Red Cross Balkan Fund )." 181 As to the manner of distribution, Cohen J referred to two cases in which orders had been made for distribution of a fund without requiring the bringing into hotchpot of benefits received. He said, at 97 "but in both those cases in the decision to this effect was based on the difficulty and the expense involved in ascertaining the amount of the respective benefits and the persons to whom they were paid. In the present case I was told by … the company's accountant, that while considerable labour would be involved, there would be no difficulty in ascertaining the amounts of the benefits or the recipients, and I have come to the conclusion that I should not be justified in deviating from the general principle, that a person seeking to participate in the distribution of a fund must bring into hotchpot anything he has already received therefrom."

He declared, at 97-98, that "the fund now available for distribution ought to be distributed amongst all the persons who during their employment by Hobourn Aero Components, Ltd, contributed to the fund at any time after December 12 1940, in proportion to the total amount contributed by them respectively to the fund, each such person bringing into hotchpot any amount received by him by way of benefit out of the fund." 182 The appeal concerned only the question of whether the fund was charitable, not the manner in which it should be distributed once it was decided it was not charitable. 183 The manner of distribution supports the view that all the contributors have a charge over the fund in which their contributions are mixed, to support their interest in the fund by way of a contingent resulting trust if the committee were not to exercise its discretion and distribute the entire fund. As contributions are made week by a week, so the interest of each contributor increases; as the fund is expended, so the interest of each contributor is proportionately decreased. Further, the requirement to bring into hotchpot benefits received from the fund is an illustration of a personal equity which results in the charge which one contributor has being held to be of lower priority than the charge which another contributor has, though with the possibility of becoming of equal ranking if one of the chargees performed an action which he had no obligation to perform, but the performance of which was a precondition to his charge being accorded equal rank. 184 The appropriate way of dividing available assets between beneficiaries whose money has been mixed in an account might also depend upon what other remedies in rem the various beneficiaries have. If there is a situation where the money of A and B is mixed in an account, some of it is withdrawn and used to purchase an asset, and then the money of C is placed in the account, and both the asset, and the account, are available at the time of trial, a liquidator might be directed to administer the fund in accordance with principles of marshalling, so that A and B satisfied themselves from the asset (which only they could trace into) to the extent that they could, leaving C to claim a higher percentage of his claim from the account balance than A and B are permitted to claim from the account balance. In Re Global Finance Group Pty Ltd [2002] WASC 63; (2002) 26 WAR 385 McLure J held that, on the facts of the case before her, a division of available monies pari passu between all claimants was inappropriate. 185 These examples show how it cannot be said that, as a matter of law, a fund in which assets of several beneficiaries have become mixed should always be distributed amongst all beneficiaries, pro rata to their claims. Tracing Principles Applied to Classes 186 As Crace-Calvert's Case and Sinclair v Brougham show, it is possible for there to be tracing which does not depend upon identifying the transmogrifications which the assets of a particular beneficiary have gone through. Sometimes, a liquidator seeking to administer a fund will know nothing more than that the fund is held on trust, and that there are a number of potential claimants to the fund, whose merits he cannot on any rational basis distinguish between. In such a situation, it may be appropriate for the court to direct a liquidator that he is justified in distributing the fund amongst the claimants proportionately to their claims. It is relevant to this that in Sinclair v Brougham the fact of monies being mixed was enough for the House to decide that there should be a pro rata distribution, and the paucity of evidence meant that there was no reason to depart from a pro rata distribution. 187 Sometimes, however, there might be facts which show that claimants fall into particular classes, such that the amount of the charge which one class has on the assets which remain is likely to be a smaller proportion of the amount of their money which went in than is the case with another class. If, for instance, there was a time when a trust account was completely depleted, beneficiaries whose money went into that trust account before the day of depletion could not have any equitable right at all to the sum which stands in the account at the date of trial. If the account in which the mixing occurred at any time reached a particularly low level, it may be that those people whose money was paid into the account before that low level was reached ought be accorded a smaller dividend on the amount of their claim than people whose money was paid in after that low level was reached. In carrying out such calculations, estimation and inference can be appropriate if precise evidence is not available. 188 Sometimes, likewise, there might be facts which showed that claimants fall into particular classes such that one class has a higher priority for the charge it can establish than does the other class. 189 While a liquidator must distribute funds of the company, or under his control through the company being trustee of trusts, in accordance with legal entitlements of people to those funds, the Court's findings about what legal entitlements exist depend upon the evidence which is placed before the Court, and inferences properly drawn from that evidence. When distribution of a fund is made by reference to classes of claimants, the available evidence is frequently evidence about the nature of a fund and the types of contribution which have gone into it. It is because the evidence is at this level of generality that the court reaches conclusions about the beneficial ownership of the fund by saying that it is divided amongst claimants in some particular way. If ever the court is able to give a remedy founded on tracing some individual claimants, it is because evidence is available which enables the property of those individual claimants to be more specifically traced. It should not be a cause for surprise that evidence of these different types can lead to different types of conclusion. 190 It is possible to recognise that, on the basis of evidence of a liquidator's investigations taken to a certain stage, distribution among claimants proportionately to their claims is proper, while at the same time recognising the theoretical possibility that further investigation might turn up facts which showed, in some way, inequality amongst the various claims. If ever a liquidator is in significant doubt about whether he ought conduct further investigations to see whether any such facts emerge, he can always ask the Court for directions on that topic. 191 In Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353 the Ontario Court of Appeal held that beneficiaries whose money had been mixed in an account, and wrongly depleted, should share whatever balance remained in the account pro rata to their contributions, without regard to the "lowest intermediate balance rule". One reason for this conclusion was pragmatic - that performing the calculations required to identify the proportions in which the fund was held following each deposit or withdrawal would be extremely complicated in principle, and often not achievable in fact. The second was that the fund was a blended fund, and when it was wrongly depleted it was the fund as a whole which was wrongly depleted, not any particular beneficiary's contributions. 192 I do not accept that either of these reasons leads to a conclusion that, always and regardless of the facts of the individual case, the lowest intermediate balance rule has no part to play in deciding how a mixed fund of several beneficiaries should be distributed in specie. As to the first reason, whether performing the calculations to carry out a full tracing exercise is complicated, or achievable, will depend upon the particular case being considered. Further, it is not as though the only available alternatives are full analysis of every transaction in the account, and dividing between all claimants equally. As to the second reason, while it is true that, when a depletion occurs from a fund, it is the fund as a whole, as it exists at that time, which is depleted, accretions to the fund after that time are, self evidently, not affected by that depletion. 193 In the present case, the liquidator puts no facts before the Court which lead to a conclusion that the various claimants ought be divided into various classes which are given different dividends. There is no reason to believe that there are any assets purchased from the accounts, into which some beneficiaries can trace but not others. The funds available are comparatively small, and likely to be completely, or substantially, depleted by the liquidator's own costs if the liquidator tried to carry out a more extensive analysis of the accounts. In these circumstances, the liquidator is justified in distributing amongst all the claimants, proportionately to their claims as assessed by him. PART F - LIQUIDATOR'S COSTS 194 The liquidator seeks an order that he is entitled to recoup all of his costs and expenses (including his remuneration) of acting, initially as administrator, and thereafter as liquidator of the Company, from the trust accounts and prior to any distributions to any beneficiary. The Company has no assets whatsoever available for distribution to its general creditors - all the assets it held which were not subject to trusts have been taken by the secured creditor under its security. 195 Section 556(1) Corporations Act 2001 provides: "Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: (a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business; (b) if the Court ordered the winding up - next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466); (c) next, the debts for which paragraph 443D(a) entitles an administrator of the company to be indemnified (even if the administration ended before the relevant date) except expenses covered by paragraph (a) of this sub-section and deferred expenses … (de) next, the deferred expenses …" 196 Section 556(2) defines "deferred expenses" in a way which includes the remuneration of a relevant authority. It also defines "relevant authority" as including both a liquidator, and an administrator. 197 In some circumstances, a liquidator is able to recover some remuneration, and some reimbursement of expenses, even from property which is the subject of a security. Section 561 Corporations Act 2001 provides that certain amounts payable by a liquidator may be paid in priority over the claims of a chargee in relation to a floating charge created by the company. Those amounts are, broadly, amounts payable to employees of the Company, whether incurred before or after the commencement of the winding up. 198 As well, a liquidator can have an equitable right to be paid expenses and remuneration in carrying out some of his activities, which has priority over even a secured creditor. Such an equitable right arises in two types of cases. The first is where the liquidator has realised the mortgaged property, in which case certain costs of realisation are payable from the mortgaged property (In Re Marine Mansions Company (1867) LR 4 Eq 601 at 611-612, where there was no objection to the liquidator being paid; In Re Oriental Hotels Company; Perry v Oriental Hotels Company (1871) LR 12 Eq 126 at 132-133, where allowance of the costs of realisation was not consented to; In Re Regent's Canal Ironworks Company; Ex parte Grissell (1875) 3 ChD 411 at 422, 423; Re Universal Distributing Co Ltd (1933) 48 CLR 171 at 175 per Dixon J; Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215 at 221 per Murphy J, 229-230 per Tadgell J (same principle applied to a receiver)). As well, sometimes, if a liquidator incurs costs of preserving mortgaged property (which is such things as "… the repairing of property, paying rates and taxes, which would be necessary to prevent any forfeiture, or putting a person in to take care of the property" - In Re Regent's Canal Ironworks Company; Ex parte Grissell (1875) 3 ChD 411 at 427) the liquidator can recover those expenses in priority to a security holder. Subject to those limited exceptions, the expenses of a winding up and liquidator's remuneration must be paid from whatever assets of the company are left after secured creditors who choose not to surrender their securities have realised those securities. 199 Section 545 Corporations Act 2001 provides: "(1) Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property." 200 The exceptions which are brought in by the words "subject to this section" are that a liquidator can be directed to incur a particular expense if a creditor or contributory requests the Court or ASIC to direct the liquidator to do so, and indemnifies the liquidator for the amount expended, and that in all events the liquidator must lodge all documents (including reports) which the Act requires him or her to lodge with ASIC. Thus, subject to these exceptions, if a liquidator does not have assets from which his fees and expenses can be paid, he is not obliged to continue to carry out the work involved in the liquidation. 201 When a company which carries on no activities other than being the trustee of a trading trust goes into liquidation, the proper costs and expenses of the liquidator can be met from the assets of the trust: In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99. King CJ reached this conclusion on the basis that a trustee had a personal right to be indemnified from the trust assets for expenses the trustee has incurred in the administration of the trust, and a lien over the trusts assets to secure that right of indemnity. The trustee also has a personal right to resort to the trust property and pay expenses of administration of the trust from the trust assets, without first paying those expenses himself. When a trustee which is a corporation goes into liquidation, those personal rights, and that lien, are assets which are divisible in the liquidation. (King CJ says they pass to the liquidator - page 104, 105, 107, 109. This is not, with respect, strictly correct, as the rights of the company remain with the company, and the liquidator acquires powers to deal with the assets of the company in lieu of the directors, but this detail does not affect the validity of the main thrust of his Honour's argument.) The liquidator can, by using those personal rights and that lien, resort to the trust property to discharge all liabilities which the trustee incurred in administration of the trust before winding up supervened. Because those liabilities are in law the liabilities of the trustee, section 292 Companies Act (now section 556 Corporations Act 2001) requires those pre-liquidation liabilities to be discharged in the order of priority there laid out, thus giving the liquidator a priority over pre-liquidation creditors of the trust business. 202 The question of the priority of the liquidator's costs, expenses and remuneration over the beneficiaries of the trust King CJ dealt with as follows, at 110 "It is part of the duty of the trustee company to incur debts for the purposes of the trust businesses and, of course, to pay those debts. Upon winding up those debts can only be paid in accordance with the provisions of the Companies Act . This requires necessarily that there be a liquidator and that he incur costs and expenses and be paid remuneration. Section 292 provides that there be paid the costs and expenses of winding up, the taxed costs of the petitioner, and the remuneration of the liquidator "in priority to other unsecured debts" (italics mine). The expression " other unsecured debts " appears to imply that the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration are regarded by the statute as debts of the company. As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity. If that reasoning is wrong, I would, like Lush J in Re Enhill Pty Ltd (1982) 7 ACLR 8) be prepared to rely on the principle enunciated by Dixon J in In Re Universal Distributing Co Ltd (in liquidation) (1933) 48 CLR 171 at pp 174-175." 203 This reasoning remains applicable under the Corporations Act 2001. Section 556 of that Act, setting out the order of priority of payments, contains the critical word "other" - section 556(1) says "Subject to this Division, in the winding up of a company, the following debts and claims must be paid in priority to all other unsecured debts and claims …" 204 Jacobs J reached the same conclusion as a matter of construction of certain provisions of the Companies Act 1962 (SA) relating to liquidations. He relied upon the provision establishing priority of debts (section 292, analogous to section 556 Corporations Act 2001), the provisions enabling a liquidator to be appointed by the Court (section 221, 222 and 231 Companies Act 1962 (SA), analogous to section 459P, 461 and 472 Corporations Act 2001), and provisions entitling the court-appointed liquidator to remuneration (section 232 Companies Act 1962 (SA), analogous to section 473 Corporations Act 2001). His Honour says, at 113, that pre-liquidation creditors of the trust, "… are persons entitled to prove for and receive dividends out of the trust assets of the company, because the trustee has a right of recourse to those assets to exonerate his personal liability … But it is important to notice that the right of the trust creditors to prove in such a case is expressed to be "subject to section 292" , which provides for the liquidator's remuneration."

He concludes, at 113, "Looking at the whole legislative scheme, therefore, I can find nothing in the language or structure of the legislation to deny the proposition that, in a case such as this, s 292 can operate upon the trust asset to provide for the remuneration of the liquidator in priority to other claims, more particularly as the other provisions of s 292 would seem clearly to be available to regulate the rights of creditors inter se. To hold otherwise would defeat, or at least frustrate, the legislation. The liquidator is appointed by the Court, and is answerable to the Court, and is clearly entitled to remuneration for his services whether fixed by the Court or by the creditors whose proofs have been admitted. He would not be available to act at all unless the Act is allowed to speak according to its tenor; and indeed, unless the Act so speaks, the Court itself would be in no better position to recover the costs and expenses of the winding up, if the winding up were undertaken by the Court without the intervention of a liquidator. I cannot think that the legislature intended such a result, and I am not persuaded that the language of the Act, or the general law, compel such a result." 205 In Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 McLelland J reached the same conclusion, that the remuneration of the liquidator of a corporation which is trustee of a trading trust and has no other activities can be paid from the trust property. 206 Where a corporation which is trustee of a trust, but also conducts other activities, goes into liquidation, different considerations arise. The assets which are divisible among the creditors of the company are those which are the property of the company. This emerges from section 555 Corporations Act 2001, which says: "Except as otherwise provided by this Act, all debts and claims provable in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately." (emphasis added)

The "property of the company" does not include the beneficial interest in assets which the company holds on trust. 207 However there is an equitable principle whereby a liquidator who performs tasks in the administration of trusts of which the company is trustee can be granted remuneration for those tasks out of the assets held on trust. In In Re Berkeley Applegate (Investment Consultants) Ltd (in liquidation); Harris v Conway [1989] 1 Ch 32 at 50-51 Edward Nugee QC said: "The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the Court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in In Re Marine Mansions Co, LR 4 Eq 601 and similar cases) or by a receiver appointed by the Court whose fees would have been borne by the trust property (as in Scott v Nesbitt , 14 Ves Jun 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v Bordman [1964] 1 WLR 993)." 208 The application of this principle was summarised by Morrit J in Re Eastern Capital Futures Ltd (in liquidation) [1989] BCLC 371, at 375 by saying: "… they are not entitled to remuneration as liquidators for their work done in relation to the trust assets, but the Court has jurisdiction to allow them remuneration out of the trust assets if thought fit."

In that case, where there was a scale for remuneration of liquidators, Morrit J decided, at 375 that: "The liquidators should retain remuneration out of the trust fund equal to what they would have got if the trust moneys had been the company's own moneys."

To apply that principle to the scale, "… the trust money should be notionally aggregated with the company's assets, the scale … should then be applied to the aggregate so as to calculate the total remuneration to which, on this hypothesis, the liquidators would be entitled. That proportion of the total remuneration which the trust assets bears to the aggregate of the trust and the company assets, should be paid or retained as remuneration out of the trust assets." 209 The principle in Berkeley Applegate was applied by McLelland J in Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-687. McLelland J noted, at 688, that no ready distinction could be drawn "between work done and expenses incurred by the liquidator in the winding up, on the one hand, and work done and expenses incurred in administering property held by the company as trustee, on the other hand." (688)

This is because "In the first place, it is clearly the duty of the liquidator for the purposes of the winding up to identify the assets of the company, and in particular to ascertain whether particular assets under the control of the company are beneficially owned by the company or by others. Secondly, in fulfilling his function to "do all such … things as are necessary for winding up the affairs of the company … " (see s 477(2)(m) of the Corporations Law and cf s 479(4)), the liquidator cannot disregard the fact that the company holds property in trust for others."

He concludes, at 689 "Where work done by a liquidator in relation to trust assets may properly be considered as having been done for the purpose of "winding up the affairs of the company" , it is I think consistent with general principle that any remuneration and expenses attributable to that work be paid out of the (non-trust) property of the company in accordance with s 556 of the Corporations Law , to the extent that there is such property available. To the extent that there is not sufficient available property, bearing in mind that generally speaking "a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property" (s 545) it would normally be appropriate to apply the principle referred to by Deputy Judge Nugee QC in the passage quoted earlier from Re Berkeley Applegate (investment Consultants) Ltd (in liq) and make an allowance to the liquidator out of trust assets."

In that case, (which was one where "the company did not (at least to any significant extent) either carry on a business as trustee, or incur debts in that capacity" - 686) his Honour decided, as there was no insufficiency of available property of the company to meet the liquidator's remuneration and expenses, no allowance should be made for liquidator's remuneration and expenses from trust assets. 210 In 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 Finkelstein J said, at 385 "These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them. The position is a little more involved as regards work done and expenses incurred in what may be described as general liquidation matters. If that work is unrelated to the beneficiaries and their claims it is difficult to see whether costs could be charged against their assets. In the case of a company which has carried on the business of trustee it might be that much of the work involved in the liquidation is chargeable against trust assets if it can be shown that the liquidation is necessary for the proper administration of the trust. But it is unlikely that this will be so where the company did not act solely as trustee or at least did not act in that capacity to a significant extent. In that event, the liquidator will be required to estimate those of his costs that are attributable to the administration of trust property and only those costs will be charged against the trust assets." 211 The overlap there is, in the duties of a liquidator of a corporate trustee, between some of the activities which he carries out qua liquidator, and some of the activities which he carries out as the person with administrative control of the trustee, is of particular importance in this case. Even though a liquidator needs to go to court to have it established that he has a right of remuneration from trust assets for work done in administering them, that right is one which is not accorded the liquidator in the exercise of some kind-hearted discretion of the Court, but is accorded to him in accordance with equitable principle. The liquidator's right to receive such a payment, when the factual circumstances are made out, is every bit as much a matter of legal right as is a solicitor's "fruits of the action" lien (Firth v Centrelink [2002] NSWSC 564; (2002) 55 NSWLR 451), or a provisional liquidator's lien over property he or she has preserved (Shirlaw v Taylor (1991) 31 FCR 222). As Lord Browne-Wilkinson said in Foskett v McKeown [2001] 1 AC 102, at 109: "The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary. This case does not depend on whether it is fair, just and reasonable to give the purchasers an interest as a result of which the Court in its discretion provides a remedy. It is a case of hard-nosed property rights." 212 To the extent that the liquidator does work which would entitle him both to remuneration as liquidator, and also to payment in accordance with the principle recognised in Berkeley Applegate, there is a situation where two funds - the distributable property of the company, and the trust assets - are each liable to bear that expense. If two funds are both liable to meet an expense, principle ordinarily requires that there be contribution between the two funds in meeting that expense. As this is a case where there are no assets of the company available to meet the liquidator's general expenses it is not necessary to decide whether, if there were both trust assets, and other assets of the company, available to meet expenses of the liquidator which fell into this "overlap" area, there is any reason to deny the application of contribution in the case of the liquidator of a corporate trustee. (Arguments for denying it and requiring the liquidator to resort primarily to the non-trust assets, so far as liquidator's remuneration were concerned, though possibly not concerning out-of-pocket expenses, might possibly be put by analogy with a trustee's inability to make a profit from his trust. An argument against denying it might be put that the trust beneficiaries ought not freeload on the general creditors concerning an expense for their mutual benefit.) The usual principle concerning contribution is that if one of two parties each liable to pay some particular amount is insolvent, the other party must bear the whole of that amount. The other party will have a right of contribution against the insolvent party, which would be provable in the bankruptcy or liquidation of the insolvent party. Whether or not contribution is available in cases where there are both trust assets and non-trust assets available to meet a liquidator's expense in the "overlap" area, the equitable lien recognised in Berkeley Applegate means that all costs of the liquidator properly attributable to the administration of the trust assets can be paid from the trust assets. Thus, a liquidator has done work which is attributable equally to the winding up of the company, and the administration of trust assets, and there are no assets of the company at all to meet his expenses in doing so, the expenses are payable solely from the trust assets. 213 However in no circumstances will the liquidator be able to recover from the trust assets the expense of doing any work which could not be fairly categorised as administering the trusts. Further, as Finkelstein J noted in 13 Coromandel Place at 586, if a liquidator is administering, through the company of which he is liquidator, more than one trust, "… the liquidator is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to the other trust. Accordingly, it will be necessary for the liquidator to estimate the costs and expenses incurred insofar as they relate to each trust and only charge those costs to the trust on whose behalf the work was performed. If that estimate is not possible then a pari passu distribution of the costs and expenses will be in order as was envisaged by King CJ in Suco Gold, supra. The second difficulty is the possibility that the liquidator has performed work on behalf of investors for whom no property is held on trust. If that is the case the liquidator could not look to the existing trust assets for the costs and expenses of that work unless, in accordance with the foregoing principles, the liquidator is entitled to charge those assets with a proportionate share of the costs. That would be so if the costs and expenses are not so divisible." 214 In the present case, the liquidator relied on the decision of Young CJ in Eq in Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301. After reviewing the cases which I have just been considering, his Honour said, at [21]: "It may be that in a particular case, beneficiaries under a trust will be able to show that it is inappropriate for the whole of the costs of the liquidation to be loaded onto the trust assets. However, the present does not appear to be such a case. The general rule is that the whole costs of the liquidator are charged on the trust assets." 215 Contrary to the liquidator's submission, I do not read the last sentence just quoted from his Honour's judgment as the articulation of any new principle. I do not read it as anything more than an empirical generalisation, about how cases where an application is made to charge costs of the liquidator on trust assets often work out. That sort of an empirical generalisation does not relieve the Court, or a liquidator, from applying appropriate principles to a particular case, to arrive at the result which is appropriate for that particular case. That the last sentence just quoted does not have the significance which the liquidator's submission seeks to read into it emerges clearly from the fact that his Honour, in the first sentence I have just quoted, expressly recognises that particular cases will result in the whole costs of the liquidation not being borne by the trust assets. 216 The liquidator also relied upon Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424. There concerning a company in liquidation which was trustee of a trust, and also had other activities, Pullin J said at [94] "In my view, the whole of the costs of the liquidator of Rowena should be charged upon the trust assets because, as I have said, the trust creditors will have personal claims against Rowena … as well as claims as beneficiaries to the trust property. That being so, the general administration associated with winding up Rowena will concern creditors, and this includes trust creditors."

His Honour was not there purporting to state any new principle, merely to apply established principles to the facts before him. 217 The liquidator, consistently with his submission that he ought be entitled to charge all costs of the administration on the trust assets, has not presented evidence which quantifies the costs which would be properly chargeable against the trust assets in accordance with the principles I have referred to in this judgment. Because there is no legal principle which entitles the liquidator to have all his costs out of the trust assets, regardless of the individual circumstances, there is insufficient evidentiary basis for me to now make an order which will finally dispose of the liquidator's claims for remuneration. Orders can be made, on the usual basis, permitting the liquidator his costs of these proceedings from the trust assets. Any further allowance of remuneration, costs, charges and expenses which should be made prior to any distribution being made to the beneficiaries of the two trust accounts, would require further evidence. Orders

1. The Court directs that the First Applicant is justified in distributing the funds held in the trust accounts of the Second Applicant in the following order of priorities:

(a) First, to a maximum of $10,000 in discharge of the reasonable costs and expenses of QT Travel Pty Limited incurred in its participation in these proceedings (on an indemnity basis);

(b) Second, in payment of the First Applicant's costs and expenses in connection with these proceedings; (c) Next, in payment of such further remuneration, costs, charges and expenses of the First Applicant as the Court might subsequently approve; (d) Next, pari passu amongst all those individuals who:

(i) have made claims in response to the notification issued by the Liquidator pursuant to section 60 of the Trustee Act 1925 ; and

(ii) have produced evidence adjudged by the Liquidator to be corroborative of the existence of a proprietary claim against the trust account.

2. Grant liberty to the liquidator to make such further application as he might be advised concerning his own remuneration, costs charges and expenses. **********

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