Legal principles: Mingling trust funds and onus

Mingling trust funds and onus (from [2018] NSWSC 1987)

19. The fiduciary obligations arising if a trustee mingles or mixes trust funds with non-trust funds were explained in Cook v Addison(1869) LR 7 Eq 466 (at 470):

It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole.

20. This was applied by Ungoed-Thomas J in Re Tilley’s Will Trusts; Burgin v Croad [1967] Ch 1179 who said (at 1183) (citations omitted):

The words in that passage “so as that they cannot be separated with perfect accuracy” are an essential part of the Vice-Chancellor’s proposition, and indeed of the principle of Lupton v White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust.

21. In Foskett v McKeown [2001] 1 AC 102; [2000] UKHL 29 Millett LJ said (at 133) (citations omitted):

The rule in equity is to the same effect, as Sir William Page Wood V-C observed in Frith v Cartland: “if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own”.

22. Australian courts have accepted these principles: Brady v Stapleton (1952) 88 CLR 322 at 336-9; [1952] HCA 62 (Dixon CJ and Fullagar J) and Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109-10; [1984] HCA 64 (Mason J).
23. In Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 Campbell JA (with Meagher and Barrett JJA agreeing) said (at [95]):

Because Mr Chincotta paid various sums of money not derived from Heperu into the Westpac accounts, Allsop P held at [112] that the funds in that account were a mixture of trust funds and personal funds of the effective defaulting fiduciary, Mr Chincotta. Trust money that passes through a mixed fund can be traced into an asset that is still in existence when a court considers the matter. This arises through application of the principle that a defaulting trustee who withdraws from a mixed fund and dissipates the withdrawal is presumed to have dissipated his own money. Thus, it was open to Heperu to trace the trust funds from the mixed fund into any asset that had been purchased from the mixed fund: Scott v Scott (1963) 109 CLR 649 at 664. Further, if a withdrawal from the mixed fund was used to discharge a mortgage over real estate, tracing into that real estate could be effected by reason of Heperu being subrogated to the proprietary right of the mortgagee whose mortgage was paid out: Boscawen v Bajwa [1996] 1 WLR 328 at 340-1; Heperu v Belle at [135].