In this article, the authors examine developments in the field of equitable tracing and subrogation. The focus is on the disputed ability of a claimant (eg a wronged beneficiary) to trace misappropriated funds that have been used to pay down debt (‘backwards tracing’). The Privy Council recently considered this issue in the context of a complex money-laundering scheme, and the New Zealand High Court and Court of Appeal have considered it in the somewhat more prosaic context of mortgage repayments made by directors of closely-held companies for their personal benefit. In the authors’ opinion, the New Zealand courts have settled on the correct answer: repayment of a secured loan using misappropriated funds, on its own, should not entitle a claimant to trace backwards into the underlying asset. Instead, subrogation is more likely to provide the appropriate remedy. However, where there is sufficient ‘coordination’ (or a ‘causal and transactional link’) between the incurring of the debt and the use of trust funds to discharge it, the authors cautiously endorse the approach of the Privy Council in The Federal Republic of Brazil v Durant International Corporation.
Andrew S Butler and Nathaniel L Walker, New Zealand developments in equitable tracing and subrogation: overuse and underuse, Trusts and Trustees, https://doi.org/10.1093/tandt/tty139. Published: 13 August 2018.