Is a fiduciary relationship a precondition to the right to trace? The Full Court of the Federal Court says ‘no’

RnD Funding Pty Ltd v Roncane Pty Ltd [2023] FCAFC 28

This case note reviews a decision of the Full Court of the Federal Court on the question of whether or not a person seeking to trace money or property must first establish the existence of a fiduciary relationship. In analysing the divergent views evident in a number of cases, the Court unanimously held that a fiduciary relationship is not a precondition.

The facts

RnD Funding Pty Ltd (RnD), a commercial lender, lent money to Australian Tailings Group Pty Ltd (ATG), a mining company controlled by John Hillam. ATG and a number of other companies controlled by Mr Hillam granted security, including over any money in the several companies’ bank accounts, for repayment of the loan. It was a feature of the loan that a ‘revolving security’ which existed, when crystallised in prescribed circumstances, was to become a fixed charge; if ATG defaulted, neither ATG nor any of the other companies providing security could use or deal with any of their assets and, so far as the assets included bank accounts, the money in such accounts was to be paid to RnD.

ATG defaulted in respect of a $320,000 repayment under the loan. However, rather than arranging the transfer of the funds in ATG’s account to RnD, Mr Hillam caused $520,000 to be transferred to the account of Prop Fest Pty Ltd, another company that he controlled. This money was then used to purchase shares in Goldus Pty Ltd (Goldus), which shares were transferred to the name of Roncane Pty Ltd (Roncane), another company in Mr Hillam’s control.

RnD, by counterclaim in a proceeding commenced by Goldus, argued that it was entitled to trace its security interest over the money in ATG’s account to the Goldus shares. RnD sought a declaration that it was entitled to ownership of the shares in specie and an order that the shares be transferred to it. Crucially to the issues raised in the appeal which was to follow, RnD had not relied upon deprivation of property following a breach of fiduciary duty as the basis for its tracing claim.

At trial

Addressing RnD’s counterclaim, the primary judge considered two issues. The first issue was whether the provisions of the loan agreement had in fact been enlivened by ATG’s default such that RnD had obtained a fixed charge over ATG’s assets, including money in the particular account it held. The second issue was, if those provisions did come into operation, whether RnD had a proprietary interest in the money in ATG’s account which could be traced into the Goldus shares which Roncane had acquired.

On the first issue, the judge held that RnD had obtained a fixed charge over the money in ATG’s account following ATG’s default and that the money in ATG’s account ultimately had been used to purchase the Goldus shares in Roncane’s name (and also that Roncane was not a bona fide purchaser, or borrower, for value).

However, on the second issue, the primary judge held that RnD had not established a proprietary foundation in the funds in ATG’s account so as to entitle it to a tracing claim. The judge held that “there appears to be no Australian decision that has embraced a complete departure from the requirement that there must be a fiduciary relationship before tracing can apply on the basis of an equitable foundation”: Goldus Pty Ltd (Subject to a Deed of Company Arrangement) v Cummins (No 4) [2021] FCA 1095, [290]. This second issue laid the groundwork for RnD’s appeal.

On appeal

Derrington J, with Beach and Halley JJ agreeing, delivered the Full Court’s judgment. In allowing the appeal and in granting declaratory relief in RnD’s favour, his Honour articulated the crux of the matter, for an entitlement to equitable tracing, as being “whether there exists any precondition of the presence of a fiduciary duty from which the original interest in property arose”: [47].

Before embarking on a detailed analysis of authorities relating to the principles of tracing, his Honour stated that “‘[t]racing’ is an imprecise term which is not capable of exact legal definition”([50]) and that “[a]lthough the respective concepts of the nature of the interest or right giving rise to the ability to trace and the tracing links are separate, the latter is necessarily derivative upon the former” ([51]). His Honour also noted at [54] that tracing is “a tool which is used to vindicate or enforce proprietary rights” and is “an evidential process” but “does not provide a remedy”.

Was the existence of a fiduciary relationship a precondition to the right to trace?

Turning to an analysis of the requirements for a traceable proprietary right, his Honour addressed the issue of whether a pre-existing fiduciary relationship was necessary to found such a right. His Honour then analysed a number of decisions which illustrated ‘two divergent approaches’ ([86]): some which saw a fiduciary relationship as a precondition to the right to trace, and some which supported the view that a sufficient equitable proprietary interest was all that was required.

Among the authorities which Derrington J discussed was In re Diplock [1948] Ch 465, an English Court of Appeal decision. At [63], his Honour held that In re Diplock stood for the proposition that “the equitable interest in respect of property, derived from an original fiduciary duty, generated a right to trace which persisted, even where the property or its proceeds had passed to a third party, such as a volunteer who may have mixed funds they had received” and that “[t]his enlarged scope of the right to trace tends to indicate that it does not necessarily rely upon the duties and obligations of only a trustee or fiduciary”. His Honour considered that such an approach “accords dominance to ownership rights and is founded on the proposition that tracing is merely attendant to the rights, or one of the rights, which a party acquires when they obtain an interest in property”: [96].

His Honour considered, overall, that the body of cases represented a “broadening of the scope” of the right to trace but cautioned that “a coherent taxonomical assessment of the existing authorities remains somewhat elusive”: [104].

His Honour also identified a difference in the approaches taken in the United Kingdom and in Australia. The former, he held, appeared to stand for the proposition that “the claimant must have had the benefit of being owed fiduciary duties of a nature which include a single-minded duty of loyalty owed to them at the time of the unauthorised disposition of their property”: [105].  In Australia, on the other hand, courts generally have taken the approach that such an element of single-minded loyalty need not exist and that “the right to trace will also arise where a party has control or stewardship of another’s assets in circumstances where they are subject to quasi-trustee obligations to the owner in relation to the manner in which they might deal with the assets”: [106].

In preferring a broader approach to an entitlement to tracing— that is, without the precondition of a fiduciary relationship — Derrington J noted that “[t]o a degree, the relief consequent upon application of the tracing rules suggests that it is the existence of an equitable right of property (which includes an equitable proprietary interest) rather than any fiduciary duty which is necessary for the right to trace”: [108]. In justifying that view — what Derrington J termed the “proprietary interest based approach” ([96]) — his Honour noted three things (at [108]):

  • First, tracing depends on the existence of ‘links’ to demonstrate a continuing interest in property and that where such links are no longer identifiable, the application of the tracing rules ceases.
  • Second, “the rules [of tracing] are not concerned with the rectification of a wrong but with identifying what remains of the property of which the claimant was deprived or of its value”.
  • Third, the establishment of an equitable charge over property in the hands of a third person does not amount to a security interest for the amount received by the third person, but instead is a proprietary interest equivalent to the proportion to which the claimant’s property or the proceeds thereof was used to acquire the property held by the third person.

His Honour listed (at [109]) the types of situation where courts have recognised a right to trace — including those which involve beneficiaries under fixed trusts, persons with a proprietary interest in property arising upon breach of a fiduciary duty, owners of stolen money or property, and beneficiaries of purchase-money resulting trusts. His Honour (at [110]) then noted that such categories “tend to negate any requirement for an initial equitable proprietary interest derived from a fiduciary duty” and that, instead, “it is the nature of the equitable interest as being one relating to property which is the genesis of the right to invoke tracing”. His Honour (at [111]) then acknowledged the “almost ubiquitous presence” of a fiduciary relationship in cases where tracing had been permitted, but stressed that this did not signify such a factor as being a precondition to tracing.

Turning finally in his Honour’s analysis to what should be the nature of the equitable interest necessary to invoke a right to tracing, Derrington J considered (at [113]) that such a question “need not be finally determined” and that the authorities suggested that a claimant should possess, at least, an interest under an equitable charge or equitable mortgage and that “where the equitable right involves a power of disposal, being to sell either directly or through an order of the court, and an entitlement to the proceeds, the strength of the interest necessarily justifies recourse to tracing to assist in its enforcement”.

Applying the principles to RnD’s claim

Derrington J found that RnD possessed an equitable interest in the money ultimately used to purchase the Goldus shares by way of a charge which arose on the operation of the terms of the loan agreement following ATG’s default, and that because it was “a proprietary right or right in respect of property capable of being enforced by a court in equity as a result of which RnD would be entitled to the benefit of the property […] it had the necessary characteristics to attract a right in equity to trace the funds were they to be misapplied”: [114]. That being the case, his Honour held that RnD was entitled to a declaration that Roncane held the Goldus shares subject to RnD’s security interest.

For the purposes of the scope of RnD’s claim over the Goldus shares, and the commensurate scope of declaratory relief, his Honour noted that RnD’s security interest “entitled it to a fixed charge over the chose in action in the ATG account and the right to realise it for the purpose of satisfying the indebtedness under the facilities” ([130], emphasis in original) and that it had the same security interest in the shares. Derrington J rejected a submission that any declaration should be as to a constructive trust over the Goldus shares since this would have the effect, his Honour noted, of “converting RnD’s security interest into a beneficial interest in the title to the shares”: [131]. Instead, his Honour declared that Roncane held the shares subject to RnD’s security interest. Finally, his Honour held that the security interest for the shares should be limited to the amount for which ATG had been in default under the loan agreement.


Unless the High Court rules otherwise, the decision in RnD Funding Pty Ltd v Roncane Pty Ltd has settled the law in Australia regarding the role of a fiduciary relationship in the right to invoke equitable tracing. While not a precondition to equitable tracing, given the frequency with which fiduciary relationships tend to feature in cases where the right to tracing is invoked, they may continue to be an important, even if no longer a necessary, thing to bear in mind when dealing with such a claim.

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