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bare trust, Cases, liquidation, trust, Trustees

Fleshing out bare trusts

A bare trust arises where property is held by a person (the trustee) only for the purposes to hold until transferred in accordance with the beneficiary’s directions.

Bare trusts can be a commercial convenience, but can also effect a remedy in circumstances when property might otherwise be lost due to the fungible nature of the property in question.  Priest v Ross Asset Management Limited (In Liquidation) explores the tracing remedies that a bare trust can afford so as to remove some property from the grip of the liquidator in circumstances where the return to “investors” has been estimated at 3 cents in the dollar.

The background of the case arose from the Ponzi scheme effected by Ross Asset Management Limited (In Liquidation) (RAM) and Dagger Nominees Limited (Dagger), which acted as a nominee / custodian to hold client investments.  For many years RAM and Dagger provided spectacular returns for investors.  However, ultimately, it was discovered that the returns were illusory and the investment had been into what was revealed as a Ponzi type scheme.    The Financial Markets Authority was involved and liquidators were appointed.

Duncan and Nora Priest (the Priests) subsequently argued that their investment in RAM (the Priest Holdings) were held on bare trust for them and that as a consequence the Priest Holdings did not form part of the pool of assets that the liquidators would distribute amongst all of the investors (the Other Investors), but rather could only be returned to the Priests.

The liquidators disagreed arguing that the Priest Holdings formed part of the pool of assets that would be distributed amongst all investors.

If the Liquidators’ argument prevails, the Priest Holdings would be distributed pro rata amongst all the investors.  If not the Priest Holdings will be returned to the Priests.

The basis upon which the Priests separated themselves from the Other Investors was that the Priests, through Mr Priest (himself a professional sharebroker), directed (and often actually made the sales reporting back to RAM) the purchase of all shares providing valuable consideration for the same and there were no fictitious profits involved.  On this argument the Priests remain the equitable owners of the shares purchased through Dagger and RAM as bare trustees; and that Nessock, to whom the bulk of the Priest Holdings were transferred when Mr Priest became concerned about RAM, also held the shares as a bare trustee.

This argument thus postulates that the Priests (with the exception of one unauthorised sale) were not subject to the fraud perpetrated by RAM as RAM / Dagger did not own any of the Priest Holdings beneficially, the Priests remained the beneficial owners of the Priest Holdings.  The Priests were essentially using RAM to ensure privacy of their own dealings and so that acquisitions could be made where Mr Priest did not have appropriate connections.

The liquidators’ argument is that all the funds are held in a mixed pool of trust funds and assets.

[Ed. note – by way of further background – all funds invested were held on trust and clear identified breaches of trust arose.  What needs to be considered is whether the Priest Holdings were held on a bare trust, such that the Priests could direct that the shares be returned to them; or under more conventional trust terms, whereby the Priests formed part of the pool of disgruntled beneficiaries looking to the inadequate remedies available in the circumstances for breach of trust].

The Priest decision considers the law of tracing and equitable remedies at some length in the context of the liquidators’ position and while addressing the difficulties that fungible assets such as money and shares present.  Some general points (the decision runs to 61 pages – but is well worth the read for some considered background):

  • equity will allow tracing where a trustee or fiduciary has misapplied funds (Re Hallett’s Estate)
  • the rule in Clayton’s Case (first in first out rule) becomes part of the rules of tracing.  If the application of the rule in Clayton’s Case means that the claimed balance no longer represents a particular beneficiary’s monies, there is no property in the bank account that the beneficiaries can trace into
  • there are exceptions to the rule in Clayton’s Case where mixed funds are involvedSee Barlow Clowes
    • where it is impractical on the facts of the case
    • where the application would do injustice to innocent contributors

The liquidators argued there should be an exception to the rule in Clayton’s Case. However, the difficulty for the court was that this involved a competition between the Priests and the Other Investors relating to shares, not monies in a bank account.

Based on considerable analysis of the decided cases the court forms the view that the Other investors did not acquire proprietary rights in the Priest Holdings when these were acquired by RAM or Dagger.  RAM and Dagger did not use the Other Investor’s money to acquire title for their own benefit.  Bare title was acquired for the Priests as beneficial owners.  Significantly – there was no other intention at the time. As the Priests paid for the Priest Holdings they are not innocent volunteers  – the Priests are bona fide purchasers for value.  See [143].

As the pool of assets is shares not a bank account the rule in Clayton’s Case does not apply.

Importantly there is no need to trace when a title is held as a bare trustee – essentially the title is what it is.

As noted at [145] “… the Liquidators’ argument that the Priests cannot assert equitable title to the Priest Holdings, because they cannot prove that their monies were used when RAM/Dagger acquired its shares, is, with respect, without foundation. No case suggests that acquiring equitable title by means of a bare trust, or indeed any title, requires the claimant to be able to trace in that way. Perhaps most importantly, Re Diplock and Foskett v McKeown held that a successful tracing exercise is a necessary pre-condition to the establishment of equitable proprietary rights. But tracing does not establish the claim. Although put somewhat differently, the following submission for the Priests captures my assessment of the Liquidators’ arguments thus far:

In particular, the Liquidators’ submissions incorrectly assume that the displacement of the rule in Clayton’s Case (FIFO) in favour of pari passu distribution is an example of collective tracing. That is wrong. Once again, the Liquidators are conflating references to pari passu sharing in the context of the equitable tracing rules on the one hand with pari passu distribution as a result of a pragmatic position when tracing is not possible.

The Priests’ position is summarised relatively concisely  in para [149] to [152}:

[149] As the Liquidators recognise, in all other instances the Priest Holdings represent shares held and allocated to the Priests, or shares (those subject to the Nessock Transaction) which were so held and allocated or shares which were clearly purchased at the instigation of Mr Priest using RAM or Dagger as the Priests’ bare trustee and, in all cases, for which as between RAM and Dagger and the Priests, the Priests have paid the purchase price.

[150] Clayton’s Case tracing is not a requirement for the acquisition of legal or equitable title where, in the name of a bare trustee, a beneficiary acquires assets. Legal title vests in the bare trustee and beneficial title vests in the beneficiary at the time the assets are acquired. In my view, this is not a situation that requires the beneficiary to be able to show that their funds can be traced into the trust asset. It is also not a situation where the creation of the trust depends upon the intention of the bare trustee as notional settlor once the assets are purchased. Until the moment of acquisition the bare trustee has nothing to settle. At the moment of acquisition, that equitable title vests in the beneficiary, that is the person who nominated (the nominator) the bare trustee (the nominee) to acquire the property and to take legal title only. The legal (in a fused sense) effect of such a transaction is that at the time the assets are acquired the beneficiary acquires beneficial title. The bare trustee never has anything more than legal title. If a bare trustee is a settlor, as a matter of trust law she is one with a particular, and unusual, character.

[151] There can be no suggestion that when the Priest Holdings were initially acquired by RAM or Dagger, they were acquired on any basis other than that the legal title would vest in them, and beneficial title would vest in the Priests. Nor, by my assessment, can the Priest Holdings be seen as being part of a mixed fund of the type the courts have recognised, generally consisting of monies in a bank account.

[152] The shares acquired by Mr Priest in the name of RAM or Dagger were recorded accurately in the RID as allocated to the Priests. They were not allocated erroneously to any other investor. Even where the books of RAM and Dagger ceased to be correctly maintained, there was a de facto allocation to the Priests as the Priest Holdings were never erroneously allocated to any other investor. Moreover, as a result of the Nessock Transaction, the Nessock Shares were, prior to the liquidation of RAM and Dagger, transferred to a new bare custodian. This occurred in pursuance of the Priests absolute entitlement, as beneficiaries of a bare trust, to direct that transfer.

The Other Investors could not trace into the Priest Holdings in the absence, of any recognised “collective” right to trace; and therefore cannot on that basis establish a proprietary right in the Priest Holdings.

The court then after considering the relevant authorities (see [159] to [169]) concludes:

[170] Applying that approach here, the value of the Priest Holdings is to be seen as properly representing the value provided by the Priests. In terms of the arrangement that existed between the Priests and Mr Ross, the Priests paid the full purchase price of the Priest Holdings. To the extent that it might be argued the Other Investors temporarily funded the purchase of the Priest Holdings, the value of that contribution was restored to the trust funds of the Other Investors when the Priests discharged their debt to RAM/Dagger. Thus, the Other Investors cannot establish coordination between the depletion of their trust monies and the acquisition of shares in the Priest Holdings. Their money was used by Mr Ross as part of the Ponzi scheme, it was not coordinated with the purchases of the Priest Holdings in the same manner in which the Priests funds were.

[171] The Other Investors will, quite fairly, say they provided value to Mr Ross when they established their accounts with him. That is, of course, why Mr Ross’ Ponzi scheme represents for many of them such a significant loss. But their relationship, through Mr Ross, with RAM and Dagger was essentially a different one. Mr Ross had a power, at his discretion, albeit in some cases within investment guidelines or ratios, to use cash they had deposited with him to buy shares on their behalf and/or to sell shares and purchase new ones. It was that authority that Mr Ross abused in the context of the Ponzi scheme. That is not the case for the Priests. Mr Ross had no prima facie entitlement whatsoever to deal in the Priest Holdings. Nor, other than as regards the Diligent Fraud, did he do so.

[172] It is my conclusion, therefore, that the Other Investors cannot establish an ability to trace. This is neither supported by the authorities on which they rely, nor justified by an application of the fundamental principles involved.

The end result was that, “as regards the Priest Holdings, Mr Priest had, as was his entitlement, directed the transfer of those shares to a new bare trustee, Nessock, and the Other Investors have no proprietary claim to those shares. As regards the balance of Priest Holdings, Mr and Mrs Priest were the equitable owners, RAM/Dagger were bare trustees and, again, the Other Investors have no claim to those shares.”

The case raises complex issues as to fungibility and tracing and, as is always the case in such matters, turns on its own facts.

A considered and useful judgment that explores the authorities in a considered fashion.


  • Priest v Ross Asset Management Limited (In Liquidation) [2016] NZHC 1803
  • Fisk v McIntosh [2015] NZHC 1403
  • Re Hallett’s Estate (1880) 13 Ch D 696; [1874 -80] All ER Rep 793
  • Devaynes v Noble Clayton’s Case [1814 – 23] All ER Rep 1
  • Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 (CA)
  • Agricultural Credit Corporation of Saskatchewan v Pettyjohn (1991) 79 DLR (4th) 22 (Sask CA).


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