Where an asset is simply taken, it is recoverable under the law of conversion and detinue. This protects the property rights of the owner. This is not restitution in the strict sense. The right to recover the asset holds good against all third parties, other than those who have a better title.
Where the asset passes under an apparent contract, which is void, or where the transferor has no title, it may be recovered from third parties, including wholly an innocent third parties who has paid for it. In other cases, where there is a defect in the contract, which makes it voidable, rather void, a third party who gives value before the contract is avoided, may obtain a good title.
Common law substitution
If a person wrongfully takes another’s property and exchanges it for something else, the owner of the first property does not acquire a direct property right in the exchanged asset, under the common law rules. Instead, he has a right to make a claim against the person concerned. The right at common law, to claim a substitute asset will not stand good as against an innocent third party. It is not have a claim to the substituted property itself.
If B makes a payment from A’s funds to C or transfers A’s assets to C, A is presumptively entitled to recover the monies or the asset, provided the C is not a bona fide purchaser. The claims for money had and received or substituted assets do not generally hold good against a good faith purchaser. If the holder or any of his predecessors have given value in exchange, the asset may not be recovered from them.
In a claim for substitution, it is necessary to identify the proceeds or the substitute asset. The asset must be one of which the claimant was wrongly deprived and the substituted asset or monies must be a direct or indirect exchange. There must not be mixing. The innocent recipient may rely on the defence of change of position, where he has acted to his detriment in reliance. To the extent that it has done so, it is not liable to make restitution.
The substitution remedy is supplemented by the equitable remedy of tracing. This is more flexible, but is more limited in some respects. Tracing allows for recovery where a property has been exchanged and turned into something else. Equitable tracing is a property claim, whereas the common law claims are personal claims based on having received the money. It is a proprietary claim to the substituted or traced asset, so that it is available even if the holder has become insolvent.
A person who has received assets or monies, other than as bona fide purchaser, may be liable to a claim for tracing by the true owner, when they represent the substitute of assets which belonged to the true owner. The limits of the principle are not entirely clear. The claim may be allowed where there is a definite asset retained by the third person and the claimant can maintain an equitable claim to the assets concerned.
There must be a direct connection between the asset held and the original property it represents. Equitable tracing may be asserted against an innocent third party. The claim to tracing will be lost not only to a bona fide purchaser of the legal title to the asset, but also the equitable title.
Where monies are lent, the lender has no property interest in them. In highly exceptional circumstances, a so called “Quistclose” trust may arise. This will only apply where monies are advanced for a definite purpose and are largely held. See the sections on security and lending, where the principle sometimes apply.
Tracing is available where the court holds that monies are held for a third party either under a resulting or constructive trust. See separate sections on equitable remedies. The principles of constructive trusts are flexible and their full extent have not been worked in full out by the courts.
Tracing is potentially available where the claimant can show some property or equitable interest in the assets. Indeed, the beneficiary of a trust or of and obligation owed by a fiduciary may enjoy greater rights to trace, than the legal owner. Misappropriated or wrongly diverted trust assets or assets held in a fiduciary capacity, are more likely to be the impressed with a constructive trust which continues to apply to their proceeds. Fiduciaries include company directors, agents and employees who owe fiduciary obligations arising from their position, in respect of assets.
The equitable right to trace persists, even though assets are mixed. In contrast, this would be a bar against the common law remedy of substitution.
In the context of bank accounts, it is presumed that the first drawings reduce the first sums deposited. There are exceptions to the principle. For example, where monies are invested in a general pool, where the investor know that they are mixed from the outset, each ranks equally.
Where a wrongdoer mixes his own assets with trust property, the presumption operated against his interests. If, for example, he invests mixed monies in a spread of shares which rise and fall in value, the innocent party person may claim against the assets which have risen in value. The claimant has a lien against the remaining parts of the mixed monies or the assets purchased with it. Where a trustee has mixed his own money with those of trust money, he cannot claim to have lost the trust money while leaving his own money.
The above principle also applies where a person pays money to which another is entitled, to another wrong person. The person entitled to the money may claim it as money had and received to his use. For example, a company receives money that are properly payable to a receiver after it goes into receivership, must account to the receiver. Equally, an administrator who receives and distributes money where there is in fact a will, must account to the true owner for it.