Framjee Part 2: Tracing

In an earlier post, Framjee Part 1: The ‘Three Certainties’ in Practice, we discussed the practical application of the ‘three certainties’ requirement in the recent High Court case of Charity Commission for England and Wales v Framjee [2014] EWHC 2507 (Ch).

In this post, we will focus on another important aspect of the case, which concerns the law of tracing. Students of the law of tracing will no doubt be aware of the various techniques for distributing funds remaining in a bank account amongst its innocent contributors — the rule in Clayton’s Case, pari passu, and the rolling charge method. The judge in Framjee was faced with a choice between these techniques.

The Facts

As observed in the earlier post, the case concerned the Dove Trust, which established a website for charitable giving, www.charitygiving.co.uk, whereby donations could be made to a charity or charitable cause of a donor’s choice. Money paid in through the website was received by Dove Trust, who would then forward the donation to the charity named by the particular donor. While things ran smoothly for a number of years, eventually bad administration caught up with the Dove Trust. The Charity Commission, which regulates charities in England and Wales, appointed Mr. Framjee as interim manager on 6 June 2013. (An interim manager is appointed pursuant to the Charities Act 2011 where the Charity Commission considers that there has been misconduct or mismanagement in the administration of a charity. An interim manager temporarily runs the charity, to the exclusion of the charity’s existing trustees, with a view to putting things right).

The website continued to receive donations while Mr. Framjee investigated whether the website was sustainable. It was not; and the decision to shut down the website was eventually taken on 12 July 2013. On that date some £709,529 remained in the trust’s bank accounts, with 1,812 nominated charities being owed £1,680,231. Having found that the Dove Trust held all donations on trust for the nominated charities, the question arose as to how the remaining funds were to be distributed.

Distributing the Remaining Funds

Commercial1Henderson J observed that there are three techniques available for the distribution of remaining funds in a bank account amongst innocent contributors. First: the ‘first in, first out’ basis established by the rule in Clayton’s Case (1816) 1 Mer 572), whereby payment is made according to the order in which contributions were received. Secondly: the pari passu method, whereby the remaining fund is simply distributed to contributors according to the proportion of the amount contributed. Thirdly: the rolling charge method, whereby contributors receive a pari passu share which is calculated at every point in which a payment out of the fund, and subject to the ‘lowest intermediate balance’ rule.

Henderson J reaffirmed the orthodoxy that the rule in Clayton’s Case ‘is probably still the default rule’ ([49]), which however can easily be displaced. In any event, there was no suggestion by counsel that this ‘arbitrary’ method should be used. The question then arose as to whether the pari passu or the rolling charge method should be applied. Notably, despite observing that the rolling charge method has never been applied by an English court, Henderson J thought that it was open to him to adopt that method or some variant of it if it would produce a ‘fairer’ result.

The application of the rolling charge method has previously been considered in cases such as Barlow Clowes v Vaughan [1992] 4 All ER 22; Russell Cooke v Prentis [2002] EWHC 2227 (Ch); and Shalson v Russo [2003] EWHC 1637 (Ch). In these cases, the judges acknowledged this method to be the fairest and which produces the most just result; however, it had not been adopted because it was thought to be impracticable due to its complexity and expense. Perhaps for this reason, counsel in Framjee proposed a modified rolling charge method, by which the remaining funds were to be divided into two pools, the cut-off date being drawn at 6 June 2013. Each pool would then be distributed pari passu amongst those entitled to it. This suggestion was aimed at overcoming the issue of expense involved in gathering the ‘raw data’ in respect of the period before 6 June 2013 for the purposes of the ‘pure’ rolling charge method.

Nevertheless, Henderson J rejected the proposed modified rolling charge technique in favour of the pari passu method. ‘The most important point’, he said:

is the fact that the Website operated in precisely the same way, so far as donors were concerned, both before and after 6 July 2013. There was nothing to alert them to the fact that the Commission had appointed an interim manager, and the reasonable expectations of a donor who made a gift on 7 June would in my judgment have been the same as those of a donor who made a similar gift two days previously. ([60])

The factor of the parties’ intentions has previously been taken to be a relevant consideration as to whether the rule in Clayton’s Case should be disapplied. For instance, in Re Diplock [1948] Ch 465, 554, Lord Greene MR referred to it as ‘a rule of convenience based upon so-called presumed intention’; and in Barlow Clowes v Vaughan [1992] 4 All ER 22,the Court of Appeal held that money invested by investors do so as part of a ‘common fund’ and therefore the investors do not intend anything other than the sharing of profits or losses rateably. Henderson J’s analysis confirms that the parties’ intentions, as distinct from the factors of complexity and expense, is similarly a relevant factor to be considered when a court is faced with the choice between the pari passu and the rolling charge method.

Finally, it can also be observed that the openness of the judge to the rolling charge method would suggest that it may not be long before this technique is finally applied by an English judge.

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