The judgment of Mr. Justice Foxton in Serious Fraud Office v. Hotel Portfolio II UK Ltd., [2021] EWHC 1273 (Comm), released today, contains the most through discussion I have seen in a judgment of ‘backwards tracing’ (tracing through the payment of a debt). A claimant is making a constructive trust claim in a liquidation, and this was an application to dismiss that claim as it related to traceable proceeds. For the purposes of the application it was assumed that there was indeed a trust claim over some profits said to have been acquired in violation of the rule against unauthorized profits, and the issue was whether backwards tracing could be deployed.

The discussion of this is at [22]-[48] and the judge concludes that the general rule is that backwards tracing is not permitted, but that this is subject to ‘certain narrow (but, for all that, soft-edged and overlapping) exceptions where a strict insistence on chronological sequence would fail to reflect the substance of the position.’ He set out four exceptions in [46] as established by authorities. As in other contexts, the question may turn into whether the exceptions have swallowed up the rule. At least, exception (iv) could potentially have a very wide scope: ‘conventional bilateral exchange transactions where the respective transfers are not simultaneous’.

Lionel