The recent High Court decision of The Fish Man Ltd (In Liq) v Hadfield [2016] NZHC 1750 explored the limits of the equitable remedy of tracing – in the context in which misappropriated funds had been used to pay mortgage liabilities.

Mr Hadfield owned a business, The Fish Man Limited (The Fish Man), which raised and sold ornamental fish from his home where he lived with his wife.  The Fish Man fell behind in its PAYE and GST tax liabilities, but Hadfield continued to use revenue of the company to meet mortgage payments over his home.  The Fish Man was put into liquidation in 2010 and later obtained default judgment against Mr Hadfield.  Mr Hadfield was put into bankruptcy in 2013.  

The liquidator of The Fish Man argued that as Mr Hadfield had paid the mortgage of his home through misappropriated funds, The Fish Man had gained a proprietary interest in the property through the equitable remedy of tracing.

The High Court noted that tracing is a practical remedy of following money when it is converted into property.  In this instance, the small amount of money pursued by the liquidator could not be said, in any meaningful sense, to be the cost of acquiring the property.  The bulk of the sum would be paying the interest on the mortgage, so to prevent the relevant bank from exercising a power of sale.  Repayment of a debt will not normally be treated as the use of money to purchase an asset.

The Court, therefore, held that any attempt to turn the mortgage payments into a proprietary interest in the equity of the home was pushing tracing out of its natural confined scope and that The Fish Man had no proprietary interest in the property.

We understand that the decision is being appealed.

See Court decision here.