Gardner Leader

Lost or recoverable? - Tracing Your Assets

Chris Felton, Partner in the Dispute Resolution Team at Gardner Leader Solicitors, examines how wronged businesses often overlook the possibility of recovering losses by tracing the proceeds of its misappropriated assets in equity.

Why would I need to know about Tracing?

There’s no question, times are tight for businesses and no one will thank yet another litigation lawyer pointing out the obvious when what you need to know is how to preserve your assets and cash flow rather than head into expensive legal wrangles.

When a business has a claim for losses it has suffered and those losses are substantial, it is more acutely felt when the business can quite clearly establish that its claim is a strong one, but the wrong-doer has “played the system” and dissipated away monies or assets making recovery difficult.

So what is Tracing and how does it work?

Tracing is the process by which a court can effectively decide that assets (or the proceeds of sale of such assets) are held on “constructive trust” by the wrong-doer or some other party into whose hands they ultimately pass for the benefit of the wronged party.  Provided certain criteria are met, it may well be possible for a business to claw back its losses either in full or in part.

Within the tracing process, claimants demonstrate what has happened to their property (which can include cash, confidential information, chattels or real property as well as shares). They identify the proceeds of that property and the persons who have handled or received it, and justify their claim that those proceeds can be properly regarded as representing their property.  In such cases, the court will consider it is equitable (fair) to recover those funds.

That seems fairly straightforward. Are there any catches?

The ability to rely on tracing depends upon there being a pre-existing trust or a fiduciary relationship.  A fiduciary is someone who has undertaken to act for or on behalf of another in a particular manner which gives rise to a relationship of trust and confidence.

So who can be classed as a fiduciary?

This is not clearly defined, but the courts have found the following classes are included; company directors (including a shadow director); a signatory on the bank account of another; a security guard; business partners; solicitors; accountants; probably investment bankers; brokers; pension and fund managers; Lloyds Members; employees.  It is a large group and it will increase.

So how does the process normally arise?

A classic example is where a director of a company has wrongly misappropriated shareholders’ funds and uses those funds to purchase other assets in his own name.  If this can be established then it may be possible for the shareholders, or creditors (often via an administrator/liquidator) to assert his beneficial ownership of the substitute asset; or to bring a claim against the director for breach of trust and enforce an equitable lien or charge on the proceeds of the asset so as to satisfy the claim.

What if the substitute asset is worth more than the original claim?

The law says that the delinquent director cannot keep any profit resulting from his misappropriation. In such a case, if the substitute assets are worth more, the shareholders/creditors will assert their beneficial ownership and obtain the profit themselves.

In addition, if the original asset has been substituted into say a mixed fund, the shareholders/creditors will generally be entitled to trace the proceeds ratably.

In summary this is a very practical, hard-hitting remedy which can reach far into the pockets and bank accounts of delinquent fiduciaries.

Should you require any further information on asset recovery, please contact Chris Felton on 01635 508080, or e-mail c.felton@gardner-leader.co.uk

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