BISHOPSGATE INVESTMENT MANAGEMENT LTD v HOMAN & Others [1994] EWCA Civ 33

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
(ON APPEAL FROM THE HIGH COURT OF JUSTICE)
(CHANCERY DIVISION)
(MR. JUSTICE VINELOTT)
[1994] EWCA Civ 33Case No Case No.: CHANI 94/0038/BVenue Royal Courts of Justice, Strand, London, W.C.2
Between
BISHOPSGATE INVESTMENT MANAGEMENT LTDAppellantsHOMAN & OthersRespondents
Before
Lord Justice DillonLord Justice LeggattLord Justice HenryMR. P. HESLOP QC and MR. J. BRISBY (instructed by Messrs.Stephenson Harwood, London) appeared on behalf of theAppellants.MR. L. KOSMIN QC (instructed by Messrs. Norton Rose, London)appeared on behalf of the Respondents.Date 12 July 1994
[1]DILLON L.J. :- This is an appeal, by leave of the Judge, by Bishopsgate Investment Management Ltd ("B.I.M.") against an Order of Vinelott J made on the 21st December 1993. B.I.M., which is now in liquidation, is the trustee of certain of the assets of various pensions schemes for employees of companies with which the late Robert Maxwell was associated. The respondents to the appeal, Mr Homan and three colleagues who are partners in Price Waterhouse & Company, are the Court-appointed Administrators of Maxwell Communication Corporation plc ("M.C.C."). The Judge's order was made on an application by the Administrators under the Insolvency Act 1986 for directions. M.C.C., which was known at an earlier stage as the British Printing Corporation Ltd, was a publicly quoted company and the most prominent of a large number of companies, for which it was the holding company. There is a second group of companies, which have been referred to as the Maxwell private sector companies; essentially they were companies the share capitals of which were beneficially owned, directly or indirectly, by Robert Maxwell and members of his family or trusts established by him. On the unexpected death of Robert Maxwell on the 5th November 1991, it was discovered that very large amounts of pension fund moneys of B.I.M. had been improperly paid, during his lifetime, directly or indirectly into various bank accounts of the private side companies and of M.C.C. with National Westminster Bank. At the time of each wrongful payment of B.I.M.'s pension fund moneys into that M.C.C's accounts those accounts were overdrawn, or later became overdrawn. It was also found that M.C.C. was hopelessly insolvent. Consequently on the 20th December 1991 the Administrators were appointed by the Companies Court in England. Also, because M.C.C. had substantial assets in the USA, on the 16th December 1991 M.C.C. was placed in Chapter XI protection under the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of New York. To simplify administration and avoid difficulties because of differences between the statutory provisions in the two jurisdictions, in July 1993 a Scheme of Arrangement was approved by the Companies Court under the Companies Act 1985 and a Plan for Reorganisation was approved by the U.S. Court under Chapter XI so that, in effect, the funds in both jurisdictions could be dealt with as a single fund. Naturally, therefore, the Administrators, who have realised a substantial amount of M.C.C.'s assets although the administration is far from complete, wanted to make an interim distribution among the creditors of M.C.C.. But the liquidators claimed that B.I.M. was entitled to an equitable charge, in priority to all other unsecured creditors of M.C.C., on all the assets of M.C.C. for the full amount of the pension moneys of B.I.M. wrongly paid to M.C.C. Accordingly the Administrators applied to the Companies Court for directions. Vinelott J approached the application on the basis that if the claims of B.I.M. were plainly not maintainable in law the Court ought to make a declaration to that effect, in order that an interim distribution could be made without regard to unfounded claims. But, if it was possible that on a further investigation of the facts there might be a claim, valid in law, by B.I.M. to an equitable charge on a particular asset, the proceeds of that asset ought not to be distributed until the particular facts had been investigated. The Judge declared by his Order that the Administrators were entitled to deal with specified notices of claim as if they do not give rise to any proprietary claims, and he declared also that B.I.M. was not entitled to any equitable charge over the assets of M.C.C. in respect of proprietary claims notified to the Administrators to the extent that such assets were acquired before any moneys or assets misappropriated from B.I.M. were paid or transferred to or so as to be under the control of M.C.C. and were not acquired in anticipation of or otherwise in connection with the misappropriation of such assets or moneys. In essence the Judge held that B.I.M. could only claim an equitable charge on any assets of M.C.C. in accordance with the recognised principles of equitable tracing and these principles do not permit tracing through an overdrawn bank account - whether an account which was already overdrawn at the time the relevant moneys were paid into it or an account which was then in credit, but subsequently became overdrawn by subsequent drawings. The Judge reserved, however, the position if it were shown that there was a connection between a particular misappropriation of B.I.M's moneys and the acquisition by M.C.C. of a particular asset. The Judge gave as an instance of such a case what he called "backward tracing" - where an asset was acquired by M.C.C. with moneys borrowed from an overdrawn or loan account and there was an inference that when the borrowing was incurred it was the intention that it should be repaid by misappropriations of B.I.M.'s moneys. Another possibility was that moneys misappropriated from B.I.M. were paid into an overdrawn account of M.C.C. in order to reduce the overdraft and so make finance available within the overdraft limits for M.C.C. to purchase some particular asset. By a respondent's notice by way of cross-appeal, the Administrators ask us to overrule these reservations of the Judge, and hold that even if the possible facts which the Judge envisages were clearly proved that could not in law give B.I.M. any equitable charge on the particular asset acquired. For my part I would not interfere at all with this aspect of the Judge's exercise of his discretion. In my judgment, if the connection he postulates between a particular misappropriation of B.I.M's money and the acquisition by M.C.C. of a particular asset is sufficiently clearly proved, it is at least arguable, depending on the facts, that there ought to be an equitable charge in favour of B.I.M. on the asset in question of M.C.C.. But the main claims of B.I.M. are put much more widely as claims to an equitable charge on all the assets of M.C.C. These claims are not founded on proving any particular intention of Robert Maxwell or others in charge of M.C.C. but on general principles which it is said that the Court ought to apply. They are founded primarily on certain observations of Lord Templeman in giving the judgment of the Privy Council in Space Investments v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1987] 1 WLR 1072 . In particular, in that case Lord Templeman said at 1074 C-D :- "In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries or a new trustee appointed in place of an insolvent bank trustee ... to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank.... that equitable charge secures for the beneficiaries and the trust priority over the claims of customers and all other unsecured creditors." What Lord Templeman there said was strictly obiter, in that on the facts the Privy Council held that the bank trustee was authorised by the trust instruments to deposit trust money with itself as banker and so there had been no misappropriation. The beneficiaries or their new trustee therefore could merely prove with the other general creditors of the insolvent bank trustee for a dividend in respect of the moneys so deposited. Vinelott J rejected the submissions of B.I.M. founded on Space Investments . He considered that Lord Templeman could not have intended to effect such a fundamental change to the well-understood limitations to equitable tracing; Lord Templeman was only considering the position of an insolvent bank which had been taking deposits and lending money. In the Notice of Appeal to this Court, B.I.M's first ground of appeal relies on Space Investments and it is said that the Judge erred in his interpretation of what Lord Templeman had said. There is a second, and alternative, ground of appeal to which I will refer later. The appeal was, for obvious reasons, expedited, and we heard full argument on the 7th and 8th March 1994. By the end of the argument, however, it was clear that there were complicating factors that precluded us from giving judgment on the appeal then. One of the other members of the Board in the Privy Council which decided Space Investments was Sir Robin Cooke, the President of the Court of Appeal in New Zealand. In a later case in New Zealand, Liggett v Kensington [1993] 1 NZLR 257 , which was concerned with deposits of gold coins and bullion, Sir Robin Cooke, as one of the majority in the Court of Appeal in New Zealand, treated the statements by-Lord Templeman in Space Investments which I have quoted as authoritative general statements of the relevant law to be given wide application. He treated the governing distinction as being between trust beneficiaries, who do not expect to take any risk of the insolvency of their trustee, and lenders and others in commerce who do take the risk of insolvency of those with whom they deal. See at page 274 . We learned in the course of the argument before us in March, that an appeal against the decision of the Court of Appeal in Liggett v Kensington had been argued before the Privy Council, including Lord Templeman, before Christmas 1993, but the decision of the Privy Council on that appeal was still awaited. Since that decision was likely to be given within a relatively short time, and since the details of any interim distribution by the Administrators have yet to be approved by the U.S. Court, it became the obvious course that we should not give our judgments on this appeal until after the decision of the Privy Council was available. In the event that decision was only given on the 25th May 1994, immediately before the Whit vacation, and it was not practicable to reassemble this division of this Court and hear further argument until the 23rd June. We have, however, had very helpful skeleton arguments and oral argument of counsel on the 23rd June, in relation to the decision of the Privy Council in Liggett v Kensington . It is now reported as Re. Goldcorp Exchange Ltd. [1994] 3 WLR 199. That decision reversed the majority decision of the New Zealand Court of Appeal. As I read the judgment of the Privy Council in Liggett v Kensington delivered by Lord Mustill, it makes it clear that Lord Templeman's observations in Space Investments were not concerned at all with the situation we have in the present case where trust moneys have been paid into an overdrawn bank account, or an account which has become overdrawn. Lord Mustill says in the clearest terms at page "Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd v Imperial Bank of Commerce Trust Co (Bahamas) Ltd (1986) 1WLR 1072 , on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the monies said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist; see, for example, In re Diplock (1948) Ch 465 . The observations of the Board in Space Investments were concerned with a mixed, not a non-existent, fund." Thus the wide interpretation of those observations put forward by Sir Robin Cooke, which is the basis of the first ground of appeal in the present case, is rejected. Instead the decision of the Court of Appeal in Re Diplock is endorsed; there it was said at page 521 :- "The equitable remedies pre-suppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself." Also endorsed, in my judgment, in the decision of the Board delivered by Lord Mustill is the long-standing first instance decision in James Roscoe (Bolton) Ltd v Winder [1915] 1CH 62 , which Mr Heslop Q.C. for B.I.M., in his submissions in March, invited us to overrule. That was a decision that, in tracing trust moneys into the bank account of a trustee in accordance with Re Hallett's Estate 13 Ch D 696 , tracing was only possible to such an amount of the balance ultimately standing to the credit of the trustee as did not exceed the lowest balance of the account during the intervening period. Thus as is said in the headnote to the report "payments into a general account cannot, without proof of express intention, be appropriated to the replacement of trust money which has been improperly mixed with that account and drawn out". That reflects the statement by Sargent J at page 69 that :- ".... it is impossible to attribute to him" - i.e. the account holder - "that by the mere payment into the account of further moneys, which to a large extent he subsequently used for purposes of his own, he intended to clothe those moneys with a trust in favour of the plaintiffs." Mr Heslop Q.C., for B.I.M., refers, however, to later passages in the opinion of Lord Mustill. Firstly at the foot of page 29 Lord Mustill states that the law relating to the creation and tracing of equitable proprietary interests is still in a state of development. He refers to two recent decisions - A.G. for Hong Kong v Reid [1994] AC 324 and Lord Napier and Ettrick v Hunter [1993] AC 713 - on facts not particularly relevant to the present case as instances where equitable proprietary interests have been recognised in circumstances which might previously have been regarded merely as circumstances for common law relief. Mr Heslop also refers to the fact that the claims of certain claimants in Liggett v Kensington referred to as " the Walker & Hall claimants" were rejected without further investigation of the law, on the ground that the Walker & Hall claimants were in no different position from any other claimants, and so it would have been inequitable to impose a lien in favour of the Walker & Hall claimants. Mr Heslop submits that the beneficiaries under the pension schemes of which B.I.M. is trustee are in a different position from the other creditors, who are mainly banks, of B.I.M. He does not, of course adopt the simple populist approach that pensioners, like widows and orphans, are "goodies" while banks, like usurers, are "baddies" and so the Court should use its powers to ensure that the goodies are paid in full ahead of the baddies. But he does say that the beneficiaries under the pension schemes never undertook the risk that their pension funds would be misappropriated and paid into the overdrawn bank account of an insolvent company, whereas all the banks which lent money to M.C.C. took their chance, as a commercial risk, on M.C.C.'s solvency. Mr Heslop therefore relies on the second ground in the Notice of Appeal, whereby B.I.M. claims (as it has been explained to us) to be entitled to an equitable charge as security for its claims against M.C.C.(i) over any moneys standing to the credit at the time of the appointment of the Administrators of M.C.C. of any banking account maintained by M.C.C. into which any moneys of B.I.M., or the proceeds of any assets of B.I.M. misappropriated from it were paid and(ii) over any assets acquired out of any such bank account, whether or not in credit as at the date such assets were acquired. So far as (i) is concerned, the point is that the National Westminster Bank account into which the misappropriated B.I.M. trust moneys were paid happened to be in credit when the Administrators were appointed. B.I.M. therefore claims a lien on that credit balance in the National Westminster Bank account for the amount of the misappropriated trust moneys. It is difficult to suppose, however, in the circumstances of Robert Maxwell's last days - and I know no evidence - that Robert Maxwell intended to make good the misappropriation of the B.I.M. pension moneys by the cryptic expedient of arranging to put M.C.C's. account with National Westminster Bank into credit - but without repaying the credit balance this created to B.I.M. But in the absence of clear evidence of intention to make good the depredations on B.I.M. it is not possible to assume that the credit balance has been clothed with a trust in favour of B.I.M. and its beneficiaries. See James (Roscoe) Bolton Ltd v Winder as cited above. As to (ii), this seems to be going back to the original wide interpretation of what Lord Templeman said in Space Investments and applying it to an overdrawn account because the misappropriated moneys that went into the account were trust moneys and thus different from other moneys that may have gone into that account. But the moneys in Space Investments were also trust moneys, and so, if the argument (ii) is valid in the present case, it would also have been valid, as a matter of law, in Space Investments . But that was rejected in Liggett v Kensington because equitable tracing, though devised for the protection of trust moneys misapplied, cannot be pursued through an overdrawn and therefore non-existent fund. Acceptance of argument (ii) would, in my judgment, require the rejection of Re Diplock , which is binding on us, and of Lord Mustill's explanation of Lord Templeman's statement in Space Investments given at page 24 of the decision in Liggett v Kensington . It is not open to us to say that because the moneys were trust moneys the fact that they were paid into an overdrawn account or have otherwise been dissipated presents no difficulty to raising an equitable charge on assets of M.C.C. for their amount in favour of B.I.M. The difficulty Lord Mustill referred to is not displaced. Accordingly I would reject both grounds of appeal, and dismiss both the appeal and the cross-appeal. On consideration, I do not regard it as appropriate to give any further directions to the Judge. LEGGATT L.J. :- In Space Investments v Canadian Imperial Bank [1986] 1 WLR 1072 the bank trustee made authorised deposits with itself as banker. As it was entitled to do, it used deposited money for its own purposes. On distribution of the assets in the winding up of the bank trustee the creditors ranked equally with the other secured creditors. Since no money was misappropriated the comments in the judgment of the Board about the right of beneficiaries following misappropriation to be paid in priority to the customers and other unsecured creditors were obiter dicta. But all that was said related specifically to deposits by a bank trustee with itself. The passage cited from Sir George Jessel's judgment in In re Hallett's estate (1880) 13 Ch D 696 at page 719 took the form of a quotation from Vice Chancellor Wood in Frith v Cartland (1865) 2 Hem. & M. 417 in which the second principle ( as explained by the Master of the Rolls) was "that the trust property comes first", while the first had been, "If [a trustee] destroys a trust fund by dissipating it altogether, there remains nothing to be the subject of the trust." The corollary of that is, as this court asserted in Re Diplock [1948] 1 Ch. 465, that it is only possible to trace in equity money which has continued existence, actual or notional. That was why in James Roscoe Ltd v Winder [1915] 1 Ch. 162 where trust funds had been mixed with private moneys in a bank account and the credit balance reduced at one point to E25.18.0d before being replenished, Sargent J. held that the beneficiary's charge extended only to that sum. As Buckley L.J. said in Borden v Scottish Timber [1981] Ch. 25 at page 46F:
".... it is a fundamental feature of the doctrine of tracing that the property to be traced can be identified at every stage of its journey through life."
For the same reason there can be no equitable remedy against an asset acquired before misappropriation of money takes place, since ex hypothesi it cannot be followed into something which existed and so had been acquired before the money was received and therefore without its aid. The concept of a "composite transaction" is in my judgment fallacious. What is envisaged is (a) the purchase of an asset by means of an overdraft, that is, a loan from a bank, and (b) the discharge of the loan by means of misappropriated trust money. The judge thought that the money could be regarded as having been used to acquire the asset. His conclusion at page 35/10 was that – "It is sufficient to say that proof that trust monies were paid into an overdrawn account of the defaulting trustee may not always be sufficient to bar a claim to an equitable charge." I see the force of Mr Kosmin's submission that if an asset were used as security for an overdraft which was then discharged by means of misappropriated money, the beneficiary might obtain priority by subrogation. But there can ordinarily be no tracing into an asset which is already in the hands of the defaulting trustee when the misappropriation occurs. In Liggett v Kensington [1993] 1 NZLR 257 Cooke P. applied the principle which he derived from Space Investments that those who do not take a risk of insolvency are entitled to an equitable charge over all the assets of the trustee, giving them priority over those who are to be regarded as having taken such a risk. That decision is authority for no wider proposition than that where a bank trustee wrongly deposits money with itself, the trustee can trace into all the bank's credit balances. Consistently with Mr Kosmin's submissions on this appeal, Lord Mustill, delivering the judgment of the Board in Liggett v Kensington (25th May 1994), stated (at page 24 of the transcript) that their Lordships found it difficult to understand how it would enable the claimants in that case to "overcome the difficulty that the monies said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist." Lord Mustill emphasised that the observations of the Board were concerned with a mixed, not a non-existent, fund. He also cited with approval the case of James Roscoe Ltd v Winder (supra) as conventionally exemplifying the principles of tracing. I therefore consider that the judge came to the right conclusion, though I do not accept that it is possible to trace through an overdrawn bank account or to trace misappropriated money into an asset bought before the money was received by the purchaser. I agree that the appeal should be dismissed. HENRY L.J.:- I agree with both judgments. LORD JUSTICE DILLON: The judgments of the Court in this case have been handed down. As appears therefrom the appeal is dismissed. ( Appeal dismissed with costs. Leave to appeal refused ). DILLON L.J. :- This is an appeal, by leave of the Judge, by Bishopsgate Investment Management Ltd ("B.I.M.") against an Order of Vinelott J made on the 21st December 1993. B.I.M., which is now in liquidation, is the trustee of certain of the assets of various pensions schemes for employees of companies with which the late Robert Maxwell was associated. The respondents to the appeal, Mr Homan and three colleagues who are partners in Price Waterhouse & Company, are the Court-appointed Administrators of Maxwell Communication Corporation plc ("M.C.C."). The Judge's order was made on an application by the Administrators under the Insolvency Act 1986 for directions. M.C.C., which was known at an earlier stage as the British Printing Corporation Ltd, was a publicly quoted company and the most prominent of a large number of companies, for which it was the holding company. There is a second group of companies, which have been referred to as the Maxwell private sector companies; essentially they were companies the share capitals of which were beneficially owned, directly or indirectly, by Robert Maxwell and members of his family or trusts established by him.[2]On the unexpected death of Robert Maxwell on the 5th November 1991, it was discovered that very large amounts of pension fund moneys of B.I.M. had been improperly paid, during his lifetime, directly or indirectly into various bank accounts of the private side companies and of M.C.C. with National Westminster Bank. At the time of each wrongful payment of B.I.M.'s pension fund moneys into that M.C.C's accounts those accounts were overdrawn, or later became overdrawn. It was also found that M.C.C. was hopelessly insolvent. Consequently on the 20th December 1991 the Administrators were appointed by the Companies Court in England. Also, because M.C.C. had substantial assets in the USA, on the 16th December 1991 M.C.C. was placed in Chapter XI protection under the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of New York.[3]To simplify administration and avoid difficulties because of differences between the statutory provisions in the two jurisdictions, in July 1993 a Scheme of Arrangement was approved by the Companies Court under the Companies Act 1985 and a Plan for Reorganisation was approved by the U.S. Court under Chapter XI so that, in effect, the funds in both jurisdictions could be dealt with as a single fund.[4]Naturally, therefore, the Administrators, who have realised a substantial amount of M.C.C.'s assets although the administration is far from complete, wanted to make an interim distribution among the creditors of M.C.C.. But the liquidators claimed that B.I.M. was entitled to an equitable charge, in priority to all other unsecured creditors of M.C.C., on all the assets of M.C.C. for the full amount of the pension moneys of B.I.M. wrongly paid to M.C.C. Accordingly the Administrators applied to the Companies Court for directions.[5]Vinelott J approached the application on the basis that if the claims of B.I.M. were plainly not maintainable in law the Court ought to make a declaration to that effect, in order that an interim distribution could be made without regard to unfounded claims. But, if it was possible that on a further investigation of the facts there might be a claim, valid in law, by B.I.M. to an equitable charge on a particular asset, the proceeds of that asset ought not to be distributed until the particular facts had been investigated.[6]The Judge declared by his Order that the Administrators were entitled to deal with specified notices of claim as if they do not give rise to any proprietary claims, and he declared also that B.I.M. was not entitled to any equitable charge over the assets of M.C.C. in respect of proprietary claims notified to the Administrators to the extent that such assets were acquired before any moneys or assets misappropriated from B.I.M. were paid or transferred to or so as to be under the control of M.C.C. and were not acquired in anticipation of or otherwise in connection with the misappropriation of such assets or moneys. In essence the Judge held that B.I.M. could only claim an equitable charge on any assets of M.C.C. in accordance with the recognised principles of equitable tracing and these principles do not permit tracing through an overdrawn bank account - whether an account which was already overdrawn at the time the relevant moneys were paid into it or an account which was then in credit, but subsequently became overdrawn by subsequent drawings.[7]The Judge reserved, however, the position if it were shown that there was a connection between a particular misappropriation of B.I.M's moneys and the acquisition by M.C.C. of a particular asset. The Judge gave as an instance of such a case what he called "backward tracing" - where an asset was acquired by M.C.C. with moneys borrowed from an overdrawn or loan account and there was an inference that when the borrowing was incurred it was the intention that it should be repaid by misappropriations of B.I.M.'s moneys. Another possibility was that moneys misappropriated from B.I.M. were paid into an overdrawn account of M.C.C. in order to reduce the overdraft and so make finance available within the overdraft limits for M.C.C. to purchase some particular asset.[8]By a respondent's notice by way of cross-appeal, the Administrators ask us to overrule these reservations of the Judge, and hold that even if the possible facts which the Judge envisages were clearly proved that could not in law give B.I.M. any equitable charge on the particular asset acquired. For my part I would not interfere at all with this aspect of the Judge's exercise of his discretion. In my judgment, if the connection he postulates between a particular misappropriation of B.I.M's money and the acquisition by M.C.C. of a particular asset is sufficiently clearly proved, it is at least arguable, depending on the facts, that there ought to be an equitable charge in favour of B.I.M. on the asset in question of M.C.C..[9]But the main claims of B.I.M. are put much more widely as claims to an equitable charge on all the assets of M.C.C. These claims are not founded on proving any particular intention of Robert Maxwell or others in charge of M.C.C. but on general principles which it is said that the Court ought to apply. They are founded primarily on certain observations of Lord Templeman in giving the judgment of the Privy Council in Space Investments v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1987] 1 WLR 1072 . In particular, in that case Lord Templeman said at 1074 C-D :- "In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries or a new trustee appointed in place of an insolvent bank trustee ... to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank.... that equitable charge secures for the beneficiaries and the trust priority over the claims of customers and all other unsecured creditors."[10]What Lord Templeman there said was strictly obiter, in that on the facts the Privy Council held that the bank trustee was authorised by the trust instruments to deposit trust money with itself as banker and so there had been no misappropriation. The beneficiaries or their new trustee therefore could merely prove with the other general creditors of the insolvent bank trustee for a dividend in respect of the moneys so deposited.[11]Vinelott J rejected the submissions of B.I.M. founded on Space Investments . He considered that Lord Templeman could not have intended to effect such a fundamental change to the well-understood limitations to equitable tracing; Lord Templeman was only considering the position of an insolvent bank which had been taking deposits and lending money.[12]In the Notice of Appeal to this Court, B.I.M's first ground of appeal relies on Space Investments and it is said that the Judge erred in his interpretation of what Lord Templeman had said. There is a second, and alternative, ground of appeal to which I will refer later.[13]The appeal was, for obvious reasons, expedited, and we heard full argument on the 7th and 8th March 1994. By the end of the argument, however, it was clear that there were complicating factors that precluded us from giving judgment on the appeal then.[14]One of the other members of the Board in the Privy Council which decided Space Investments was Sir Robin Cooke, the President of the Court of Appeal in New Zealand. In a later case in New Zealand, Liggett v Kensington [1993] 1 NZLR 257 , which was concerned with deposits of gold coins and bullion, Sir Robin Cooke, as one of the majority in the Court of Appeal in New Zealand, treated the statements by-Lord Templeman in Space Investments which I have quoted as authoritative general statements of the relevant law to be given wide application. He treated the governing distinction as being between trust beneficiaries, who do not expect to take any risk of the insolvency of their trustee, and lenders and others in commerce who do take the risk of insolvency of those with whom they deal. See at page 274 .[15]We learned in the course of the argument before us in March, that an appeal against the decision of the Court of Appeal in Liggett v Kensington had been argued before the Privy Council, including Lord Templeman, before Christmas 1993, but the decision of the Privy Council on that appeal was still awaited. Since that decision was likely to be given within a relatively short time, and since the details of any interim distribution by the Administrators have yet to be approved by the U.S. Court, it became the obvious course that we should not give our judgments on this appeal until after the decision of the Privy Council was available.[16]In the event that decision was only given on the 25th May 1994, immediately before the Whit vacation, and it was not practicable to reassemble this division of this Court and hear further argument until the 23rd June. We have, however, had very helpful skeleton arguments and oral argument of counsel on the 23rd June, in relation to the decision of the Privy Council in Liggett v Kensington . It is now reported as Re. Goldcorp Exchange Ltd. [1994] 3 WLR 199. That decision reversed the majority decision of the New Zealand Court of Appeal.[17]As I read the judgment of the Privy Council in Liggett v Kensington delivered by Lord Mustill, it makes it clear that Lord Templeman's observations in Space Investments were not concerned at all with the situation we have in the present case where trust moneys have been paid into an overdrawn bank account, or an account which has become overdrawn. Lord Mustill says in the clearest terms at page "Their Lordships should, however, say that they find it difficult to understand how the judgment of the Board in Space Investments Ltd v Imperial Bank of Commerce Trust Co (Bahamas) Ltd (1986) 1WLR 1072 , on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the monies said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist; see, for example, In re Diplock (1948) Ch 465 . The observations of the Board in Space Investments were concerned with a mixed, not a non-existent, fund."[19]Thus the wide interpretation of those observations put forward by Sir Robin Cooke, which is the basis of the first ground of appeal in the present case, is rejected. Instead the decision of the Court of Appeal in Re Diplock is endorsed; there it was said at page 521 :- "The equitable remedies pre-suppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself." Also endorsed, in my judgment, in the decision of the Board delivered by Lord Mustill is the long-standing first instance decision in James Roscoe (Bolton) Ltd v Winder [1915] 1CH 62 , which Mr Heslop Q.C. for B.I.M., in his submissions in March, invited us to overrule. That was a decision that, in tracing trust moneys into the bank account of a trustee in accordance with Re Hallett's Estate 13 Ch D 696 , tracing was only possible to such an amount of the balance ultimately standing to the credit of the trustee as did not exceed the lowest balance of the account during the intervening period. Thus as is said in the headnote to the report "payments into a general account cannot, without proof of express intention, be appropriated to the replacement of trust money which has been improperly mixed with that account and drawn out". That reflects the statement by Sargent J at page 69 that :- ".... it is impossible to attribute to him" - i.e. the account holder - "that by the mere payment into the account of further moneys, which to a large extent he subsequently used for purposes of his own, he intended to clothe those moneys with a trust in favour of the plaintiffs."[20]Mr Heslop Q.C., for B.I.M., refers, however, to later passages in the opinion of Lord Mustill. Firstly at the foot of page 29 Lord Mustill states that the law relating to the creation and tracing of equitable proprietary interests is still in a state of development. He refers to two recent decisions - A.G. for Hong Kong v Reid [1994] AC 324 and Lord Napier and Ettrick v Hunter [1993] AC 713 - on facts not particularly relevant to the present case as instances where equitable proprietary interests have been recognised in circumstances which might previously have been regarded merely as circumstances for common law relief.[22]Mr Heslop also refers to the fact that the claims of certain claimants in Liggett v Kensington referred to as " the Walker & Hall claimants" were rejected without further investigation of the law, on the ground that the Walker & Hall claimants were in no different position from any other claimants, and so it would have been inequitable to impose a lien in favour of the Walker & Hall claimants. Mr Heslop submits that the beneficiaries under the pension schemes of which B.I.M. is trustee are in a different position from the other creditors, who are mainly banks, of B.I.M. He does not, of course adopt the simple populist approach that pensioners, like widows and orphans, are "goodies" while banks, like usurers, are "baddies" and so the Court should use its powers to ensure that the goodies are paid in full ahead of the baddies. But he does say that the beneficiaries under the pension schemes never undertook the risk that their pension funds would be misappropriated and paid into the overdrawn bank account of an insolvent company, whereas all the banks which lent money to M.C.C. took their chance, as a commercial risk, on M.C.C.'s solvency. Mr Heslop therefore relies on the second ground in the Notice of Appeal, whereby B.I.M. claims (as it has been explained to us) to be entitled to an equitable charge as security for its claims against M.C.C.(i) over any moneys standing to the credit at the time of the appointment of the Administrators of M.C.C. of any banking account maintained by M.C.C. into which any moneys of B.I.M., or the proceeds of any assets of B.I.M. misappropriated from it were paid and(ii) over any assets acquired out of any such bank account, whether or not in credit as at the date such assets were acquired.[23]So far as (i) is concerned, the point is that the National Westminster Bank account into which the misappropriated B.I.M. trust moneys were paid happened to be in credit when the Administrators were appointed. B.I.M. therefore claims a lien on that credit balance in the National Westminster Bank account for the amount of the misappropriated trust moneys. It is difficult to suppose, however, in the circumstances of Robert Maxwell's last days - and I know no evidence - that Robert Maxwell intended to make good the misappropriation of the B.I.M. pension moneys by the cryptic expedient of arranging to put M.C.C's. account with National Westminster Bank into credit - but without repaying the credit balance this created to B.I.M.[24]But in the absence of clear evidence of intention to make good the depredations on B.I.M. it is not possible to assume that the credit balance has been clothed with a trust in favour of B.I.M. and its beneficiaries. See James (Roscoe) Bolton Ltd v Winder as cited above.[25]As to (ii), this seems to be going back to the original wide interpretation of what Lord Templeman said in Space Investments and applying it to an overdrawn account because the misappropriated moneys that went into the account were trust moneys and thus different from other moneys that may have gone into that account. But the moneys in Space Investments were also trust moneys, and so, if the argument (ii) is valid in the present case, it would also have been valid, as a matter of law, in Space Investments . But that was rejected in Liggett v Kensington because equitable tracing, though devised for the protection of trust moneys misapplied, cannot be pursued through an overdrawn and therefore non-existent fund. Acceptance of argument (ii) would, in my judgment, require the rejection of Re Diplock , which is binding on us, and of Lord Mustill's explanation of Lord Templeman's statement in Space Investments given at page 24 of the decision in Liggett v Kensington .[26]It is not open to us to say that because the moneys were trust moneys the fact that they were paid into an overdrawn account or have otherwise been dissipated presents no difficulty to raising an equitable charge on assets of M.C.C. for their amount in favour of B.I.M. The difficulty Lord Mustill referred to is not displaced.[27]Accordingly I would reject both grounds of appeal, and dismiss both the appeal and the cross-appeal.[28]On consideration, I do not regard it as appropriate to give any further directions to the Judge.[29]LEGGATT L.J. :- In Space Investments v Canadian Imperial Bank [1986] 1 WLR 1072 the bank trustee made authorised deposits with itself as banker. As it was entitled to do, it used deposited money for its own purposes. On distribution of the assets in the winding up of the bank trustee the creditors ranked equally with the other secured creditors. Since no money was misappropriated the comments in the judgment of the Board about the right of beneficiaries following misappropriation to be paid in priority to the customers and other unsecured creditors were obiter dicta. But all that was said related specifically to deposits by a bank trustee with itself. The passage cited from Sir George Jessel's judgment in In re Hallett's estate (1880) 13 Ch D 696 at page 719 took the form of a quotation from Vice Chancellor Wood in Frith v Cartland (1865) 2 Hem. & M. 417 in which the second principle ( as explained by the Master of the Rolls) was "that the trust property comes first", while the first had been, "If [a trustee] destroys a trust fund by dissipating it altogether, there remains nothing to be the subject of the trust." The corollary of that is, as this court asserted in Re Diplock [1948] 1 Ch. 465, that it is only possible to trace in equity money which has continued existence, actual or notional. That was why in James Roscoe Ltd v Winder [1915] 1 Ch. 162 where trust funds had been mixed with private moneys in a bank account and the credit balance reduced at one point to E25.18.0d before being replenished, Sargent J. held that the beneficiary's charge extended only to that sum. As Buckley L.J. said in Borden v Scottish Timber [1981] Ch. 25 at page 46F:
".... it is a fundamental feature of the doctrine of tracing that the property to be traced can be identified at every stage of its journey through life."
[30]For the same reason there can be no equitable remedy against an asset acquired before misappropriation of money takes place, since ex hypothesi it cannot be followed into something which existed and so had been acquired before the money was received and therefore without its aid. The concept of a "composite transaction" is in my judgment fallacious. What is envisaged is(a) the purchase of an asset by means of an overdraft, that is, a loan from a bank, and(b) the discharge of the loan by means of misappropriated trust money. The judge thought that the money could be regarded as having been used to acquire the asset. His conclusion at page 35/10 was that – "It is sufficient to say that proof that trust monies were paid into an overdrawn account of the defaulting trustee may not always be sufficient to bar a claim to an equitable charge." I see the force of Mr Kosmin's submission that if an asset were used as security for an overdraft which was then discharged by means of misappropriated money, the beneficiary might obtain priority by subrogation. But there can ordinarily be no tracing into an asset which is already in the hands of the defaulting trustee when the misappropriation occurs.[31]In Liggett v Kensington [1993] 1 NZLR 257 Cooke P. applied the principle which he derived from Space Investments that those who do not take a risk of insolvency are entitled to an equitable charge over all the assets of the trustee, giving them priority over those who are to be regarded as having taken such a risk. That decision is authority for no wider proposition than that where a bank trustee wrongly deposits money with itself, the trustee can trace into all the bank's credit balances.[32]Consistently with Mr Kosmin's submissions on this appeal, Lord Mustill, delivering the judgment of the Board in Liggett v Kensington (25th May 1994), stated (at page 24 of the transcript) that their Lordships found it difficult to understand how it would enable the claimants in that case to "overcome the difficulty that the monies said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist." Lord Mustill emphasised that the observations of the Board were concerned with a mixed, not a non-existent, fund. He also cited with approval the case of James Roscoe Ltd v Winder (supra) as conventionally exemplifying the principles of tracing.[33]I therefore consider that the judge came to the right conclusion, though I do not accept that it is possible to trace through an overdrawn bank account or to trace misappropriated money into an asset bought before the money was received by the purchaser. I agree that the appeal should be dismissed.[34]HENRY L.J.:- I agree with both judgments.

LORD JUSTICE DILLON: The judgments of the Court in this case have been handed down. As appears therefrom the appeal is dismissed. ( Appeal dismissed with costs. Leave to appeal refused ).

Cited in 1 later judgment