What’s equitable tracing?

If you spend plenty of time around insolvency professionals like I do, you tend to hear the phrase “equitable tracing” (“ET”) thrown around a bit.

It is a simple, yet easily forgotten, concept, and can serve an important purpose – like issues around: #Voidables, #PMSIproceeds or commercial loss.

Imagine you gave Joe $50k to start-up a new venture.

Joe is lacking morality and instead uses that $50k to pay off his mortgage.

ET could come to the rescue.

It allows you to identify the new asset ($50k share in the house) from the old asset ($50k loan), notwithstanding a mixing of funds or assets.

If you can trace these funds, then you could claim a constructive trust (meaning you own an interest in the house), etc.

ET WILL NOT apply if the funds are in an overdraft or loan account.

This is regularly forgotten.

Yesterday, I wrote a post about a case where the Court ‘superimposed a s588FF remedy’, subject to the Plaintiff’s right to equitably trace the funds in question.

Because the funds were paid into a loan/liability account, the Court could not trace funds that did not continue in existence, actual or notional, or be identifiable at every stage.

Insolvency practitioners: if a creditor claims a right to PMSI proceeds, don’t forget these limitations on ET.

#SVVoidables

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