Tracing into a mixed bank account: the lowest intermediate balance rule
Victor Mensah, a trustee, had £5,000 of his own money in his personal bank account. In breach of trust he paid in £20,000 of trust money, making a balance of £25,000. He then spent £22,000 from the account on a holiday and living expenses, leaving £3,000. A month later he paid £10,000 of his own salary into the account, bringing the balance to £13,000. He did not intend the salary payment to replace the trust money. Victor is now bankrupt and the beneficiaries wish to make a proprietary claim to the money in the account.
What is the maximum amount the beneficiaries can claim from the account by tracing?
Choose one answer to see the reasoning.
Worked answer
Correct answer C: £3,000, because the trust money traceable in the account cannot exceed its lowest intermediate balance.
THE RULE TO REMEMBER
A claimant tracing into a mixed account can claim no more than the lowest balance the account reached after the trust money went in, absent an intention to replace it (Roscoe v Winder).
Tracing into a mixed bank account: the lowest intermediate balance rule
Tracing in equity follows property through a mixed fund, but it cannot go further than the trust money actually surviving. In Federal Republic of Brazil v Durant the Privy Council explained that if the money in an account has dwindled from £1,000 to £1, only the remaining £1 is capable of being substituted by something else, because the rest has ceased to exist. That explains the lowest intermediate balance rule in James Roscoe (Bolton) Ltd v Winder, whose correctness the Board did not doubt. When Victor spent £22,000, the balance fell to £3,000. Whichever money is treated as spent first, no more than £3,000 of trust money can have survived in the account. His later payment of his own £10,000 salary is not treated as replacing the trust money, because he had no intention to repay the trust and there was no coordinated transaction linking it to the misappropriation. The beneficiaries' proprietary claim to the account is therefore capped at £3,000. Any shortfall is a personal claim in Victor's bankruptcy.
Why A is wrong: Most of the £20,000 was dissipated; tracing cannot reach money that no longer exists.
Why B is wrong: Later deposits of the trustee's own money are not presumed to replace trust money.
Why D is wrong: The £10,000 was Victor's own money, paid in with no intention to repay the trust.
Why E is wrong: Equity can trace into a mixed account; mixing alone does not end the right to trace.
A little more practice done.
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