The right to trace – is a breach of duty a necessary pre-condition?

In RnD Funding Pty Limited v Roncane Pty Limited [2023] FCAFC 28 (9 March 2023), the Full Court of the Federal Court has considered whether a breach of fiduciary duty in relation to an asset is a pre-condition to a claimant’s right to trace its interests into substitute property or its proceeds.

Derrington J (with Beach and Halley JJ agreeing) favoured the theory that it is the claimant’s equitable proprietary interest or property right, as opposed to the existence of a concomitant fiduciary duty, which underpins the entitlement to trace (at [100]).


The facts of the case were complex, but the relevant background was summarised at [5]-[21]. The appellant company had entered into a loan facility with another company under which it advanced a sum of money subject to security interests. Following default, the relevant security interest crystallised into a fixed charge over all of the company’s property, including the funds in any accounts controlled by the company. Under the security deed, following default the company was no longer entitled to deal with its assets, including the money in its account (at [17]).

Following default, the company disposed of money in one of its accounts to or for the benefit of the respondent (which was a company under the control of the same person who controlled the defaulting company) by way of the purchase of shares in another company in the respondent’s name. The matter proceeded on the basis the respondent did not receive the shares as a bona fide purchaser for value (at [20]). 

The appellant claimed it was entitled to trace its security interest in the funds held by the defaulting company into the shares purchased by the respondent. It further claimed it was entitled to an order that the shares be transferred to it.

What is required for the right to trace?

His Honour set out a detailed history of the competing theories concerning the precise pre-conditions to a right to trace misappropriated assets.


His Honour summarised his analysis of the authorities, stating that tracing claims generally require (at [49]):

(a) the party seeking to trace has held an original proprietary right or claim in respect of property or, possibly, was owed an obligation by another person who had control of property in which that party claims to have a right;

(b) there occurred an unauthorised disposition or dispositions of the original property; and

(c) the claimant seeks the application of the tracing rules to establish an entitlement to a proprietary interest in an asset identified as a substitute for the original property by establishing the tracing links between the original property and any substitutions for it.

His Honour noted two divergent approaches to the nature of the claimant’s equitable interest in property required for a claim to be traced into substitute property or proceeds (at [86]):

(a) On the one hand, that the party seeking to trace must have an equitable beneficial interest in property created by the existence of a trust or fiduciary duty owed to them.


(b) On the other hand, all that is required is a sufficient equitable interest in the property which has been misapplied, regardless of how it was created.

His Honour settled on the view that a sufficient equitable interest is all that is required to found a right to trace. An antecedent breach of fiduciary duty is not required. “However, if an equitable proprietary right or interest is present, it will usually follow that the party with legal title or possession is subject to a fiduciary or fiduciary-like relationship. That is not to say that such a duty must exist prior to any wrongful disposition of the assets, and it may arise at some later point in time” (at [106]).

His Honour observed (at [111]), “it is unsurprising that a need to invoke tracing in equity arises in relation to the conduct of errant trustees, executors or agents. Thus, it may simply be that the presence of an anterior fiduciary relationship is a regular cause of the need to invoke tracing principles, rather than a precondition for them.”

The question of whether lesser equitable interests such as an interest in the nature of equitable lien would attract an entitlement to invoke tracing in equity was not determined (at [113]). 

What is the scope of a chargee’s claim?

The appellant had submitted that the court should declare a constructive trust over the shares purchased for the respondent. However, such an order would, his Honour said (at [131]), have the effect of converting the appellant’s security interest into a beneficial interest in the title to the shares.

Where a claimant asserts a beneficial interest in misappropriated property, the claimant is entitled to the proportionate share in the value of the substitute property, including where the substitute property is of greater value than the original property (see Heperu Pty Ltd v Belle (2009) 76 NSWLR 230 at 266 [157]). However, in the case of a fixed charge over property (which charge gives a right to realise the property for the purpose of satisfying indebtedness) the claimant has a right against the substitute property limited to the amount of the debt, rather than a share of the substitute property (at [127]).


Accordingly, the Full Court made a declaration to the effect that the respondent held the shares subject to the appellant’s security interest for the repayment of the amount owed by the defaulting company (at [132]-[133], [136]).

James Phillips is a dispute resolution and litigation lawyer at Holding Redlich.

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