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Trustee mixes trust funds

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Lowe v Pascoe (No 4) [2012] NSWSC 1493. Gzell J.

244 In Brady v Stapleton (1952) 88 CLR 322, a soon to become bankrupt with intent to defraud his creditors transferred 32,280 fully paid shares in a company to A who already held 1,300 shares in that company.

All of the 33,580 shares were of the same denomination and carried the same rights. A knew that the transfer was made with intent to defraud. After sequestration, but before any proceedings were instituted by the trustee in bankruptcy, A transferred 17,000 of the shares to B who also had notice of the intention to defraud. 

245 It was held that the transfer from A to B included the 1,300 shares that could not be affected by any trust arising out of the fraudulent transfer. The trustee in bankruptcy was entitled to elect to have 32,280 shares transferred to him in lieu of any other available remedy.

246 At first instance the impossibility of identification of which of the shares were the subject of the trust led to a refusal to make the orders ultimately made by the High Court. Of this identification Dixon CJ and Fullagar J said at 336: 

"The view that impossibility of precise identification of trust shares precludes the making of an order for a transfer of shares seems really to amount to something like an inversion of the true position. In the present case its practical effect seems to be to place the burden of identification upon the wrong shoulders." 

247 In Frith v Cartland (1865) 2 Hem & M; 71 ER 525 at 526 Sir W Page Wood VC said: 

"If a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own." 

248 In Vyse v Foster (1872) LR 8 Ch App 309 at 333 James LJ said that a court gives full compensation for any loss or damage through failure of some equitable duty but it had no power of punishing anyone and the court never charged a trustee with more than he actually received or ought to have received. 

249 In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109-110 Mason J referred to these cases and to Brady. His Honour said: 

"The proposition which I have stated based on the observations of James LJ needs to be modified in order to take account of the situation where the fiduciary has so mixed an indeterminate profit with his own property as to render the identification of the gain impossible. There '... the whole will be treated as trust property, except so far as he may be able to distinguish what is his own': Brady v Stapleton, quoting Page Wood VC in Frith v Cartland.
The proposition may also need to be modified to take account of a profit acquired by a fraudulent fiduciary through a combination of trust property and his own property or efforts. It may well be that equity in such circumstances will not seek to apportion the gain." 

250 In Warman International Ltd v Dwyer (1995) 182 CLR 544 it was said that in assessing profits to which a plaintiff was entitled against an errant fiduciary, a distinction should be drawn between those cases in which a specific asset is acquired by the fiduciary and those in which a business is acquired and operated.

It was held that the party to whom the fiduciary duty was owed was entitled to an account of profits made by a new company in its first two years of operation less an appropriate allowance for expenses, skill, expertise, effort and resources contributed by the defendants. The court having said so much continued at 561-562: 

"It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant's breach of fiduciary duty and the profits attributable to those earned by the defendants' efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own." 

251 For the last proposition the court referred with approval to the above passages from Brady and Hospital Products.

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