Clayton\'S CASE RULE PDF

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Equitable tracing when the fund was mixed with more than one party's funds....

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Mixing More Than One Trust – Clayton’s Rule Sometimes, the condition may become worse when there is more than one trust has been mixed and used by the trustee. In such situation, the court would need to determine how to distribute the remaining asset to the beneficiaries of different trusts. But before that, the court would need to figure out from which trust the trustee has taken out the money and used together with his. The first case to be referred to is Devaynes v Noble,1 or better known as the Clayton’s case, which had laid down the first-in-first-out rule. In this case, the surviving partners in a banking firm, ignoring the death of one partner, the deceased, continued to trade without any difference made. The bank went into liquidation not long after. The issue arose when the creditor, Mr Clayton credited more money into his account whilst the surviving partners paid more than the initial amount deposited prior to the death of the deceased to him. The court held that Mr Clayton is not entitled to deceased’s estate as the payment made by the surviving partners after the death of the deceased, discharged the liability of the partner to Mr Clayton. Generally, we can understand this Clayton’s rule in a way that first withdrawal from the bank account, should belong to the money of the first credited trust fund. Hence, the remaining money in the bank shall belong to the subsequent trust fund which was credited afterwards. For instance, RM500 of Trust A was credited into the account, followed by RM500 from Trust B. When RM500 has been withdrawn and spent by the trustee, there should be a presumption that such withdrawal is the money belongs to the Trust A. The remaining RM500 would be fully paid back to Trust B thereof. Even though this rule has been made the general principle when the account in question is a current account, and there is more than one trust being credited into the trustee’s account, it faces lots of critiques. At most, it was argued that this rule shall not apply when it may lead to injustice. This comment can be found in Russell-Cooke Trust Co v Parentis (No1).2 A solicitor was appointed to run an investment scheme with more than one contributor. The money received were kept in one “Prentis no.2 client account” and the money will be loaned to borrower by way of charge at an interest rate. It was submitted that the solicitor operated the money without the consent of the contributors. When the interest had become due, the money was 1 (1816) 35 ER 781 2 [2002] EWHC 2227 (Ch)

credited into another account, “Prentis no.3 client account” which was to be used to pay the contributors the sums due to them under the plan. Somehow, troubles encountered when number of irregularities were found and there were shortfalls in both income and capital to pay those individual contributors. The Law Society intervened and struck off the solicitor from the list of solicitors of the court and he was now incapable to act as the trustee. Another custodian trustee was appointed to control the assets and the main issue was the distribution of property in Prentis no.2 client account. When the court was considering how to distribute the money in the account, it had reaffirmed that the ruling in Clayton’s case is binding, but up to distinguishment different cases. Finally, the court upheld the approach used in Barlow’s case, where it was submitted with evidences, that there was no intention of using the fund in the account in sequence, but in a way that it was a common capital pool. With the proof of counter intention, the court is empowered to distinguish the case, hence not applying Clayton’s rule. The court held that there was a shared misfortune, and the fund would be shared rateably. The principle of not to apply the Clayton’s rule was firstly laid down 3 in Barlow Clowes International Ltd v Vaughan,4 as long as there is slight counterweight, also known as counter intention might be presumed were found. In this case, Barlow Clowes took money from and held the money on trust for the customers, promising investment with healthy profit. But actually, most of the money was taken by the owners of the company and owed the investor over 115 million. The investors sought to trace the assets. The issue before the court was to determine whether the Clayton’s rule applied. The court at last did not used the approach in Clayton’s case, on the ground that it is not a individual deposits put into bank account, but all of them were mixed into a common fund. Moreover, the court commented that Clayton’s rule, being the basic rule, may be distinguished by cases and it is impractical in the sense that in many cases, the investors are too many to trace the sequence of the money credited and withdrawn. In fact, there were 11,000 investors in this case. The court also commented that by applying the Clayton rule, it would be “in contrary to the express or inferred or presumed intention of the investors”, as the investments were meant to be paid into a common pool instead of individually. Hence, the court took the pari passu solution.

3 Panesar Sukhninder, 'Collective Investment Schemes, Breach Of Trust And Distribution Of Funds | EQUELLA' (Curve.coventry.ac.uk, 2004) accessed 10 February 2021. 4 [1992] 4 All ER 22

Another noteworthy point is that the court had suggested a second solution, which is known as rolling charge or North American solution. This solution suggests that the trustee should treat credits to and withdrawal from a bank account made according to the proportions of the money in the account. Somehow, this would be too complicated as well when the involving parties are too many. Since then, the application of the Clayton’s rule has become merely a prima facie principle in cases involving more than on trust in the tracing process. The court is at its discretion to determine whether the principle is applicable in the fact of present cases. This approach has been widely used and followed in cases such as those in which there are fraudulent acts in raising money for investment scheme, 5 shortfall in trust fund where a charitable website raised moneys for various charities6 as well as when the fraudulent party mixed the money collected from public in the bank account. 7 In all these cases, the court found it impractical to apply Clayton’s rule as it would be too arbitrary to the investors and impracticable to determine the order of payment in and out.

5 National Crime Agency v Robb [2014] EWHC 4384 (ch) 6 Charity Commission for England and Wales v Framjee & Ors. [2014] EWHC 2507 (Ch) 7 Commerzbank AG v IMB Morgan plc [2004] EWHC 2771 (Ch)...