What is the appropriate method of distribution to competing trust beneficiaries whose funds have been mixed? This short article considers this question following the decision in Hannan v Zindilis  VSC 723.
What is the appropriate method of distribution to competing trust beneficiaries whose funds have been mixed? This question arose in Hannan v Zindilis  VSC 723 (‘Hannan‘). Hannan concerned an application by an appointed manager of a law practice for advice or a direction from the Supreme Court of Victoria on how mixed trust funds ought to be distributed between competing innocent beneficiaries. The beneficiaries had funds held by the law practice on trust. The law practice’s trust account was deficient, and at the time of the application it was not possible to pay each beneficiary in full.
McMillan J in Hannan (at -) considered some of the approaches traditionally applied by the courts in answering the problem of how mixed trust funds should be allocated. My summary of five of these approaches is below:
- The rule in Clayton’s Case. Under this rule, payments out of an account are treated as having been made from the earliest payments that were made into the account: the ‘first in, first out’ rule.
- The lowest intermediate balance rule. This rule provides that tracing through a mixed fund cannot occur for any sum that exceeds the lowest intermediate balance in the fund during the interval between the original contribution and the time when a claim with respect to that contribution is being made against the fund.
- The North American model. On this approach, withdrawals from the fund are allocated in the same proportions as the different beneficiaries bear to each other at the moment before the withdrawal is made.
- Pro rata distribution according to the presumed intention in Clayton’s Case. On this approach, the balance remaining in the mixed fund is distributed among the beneficiaries pro rata in proportion with the contribution of each beneficiary.
- Rateable or pari passu distributions. On this approach, the beneficiaries of the trust or trusts are each entitled to an equitable charge or lien on the whole of the remaining unused common fund.
Save for de minimis amounts that the appointed manager proposed be paid to certain beneficiaries in full, McMillan J (at -) ultimately advised or directed that the pari passu approach was appropriate in the circumstances.
Trustees (or their successors) finding themselves in similar circumstances should carefully consider the appropriate method of distributing funds from a mixed trust account. The applicable principles depend on the precise circumstances of the claim. By way of example, it has been said that the application of the rule in Clayton’s Case has no application in Australia as between beneficiaries (such as those in Hannan) whose property has been mixed by a trustee. Although the pari passu method of distribution has commonly been applied in Australian cases between competing beneficiaries, it might not be the most appropriate method in all cases. By way of example, if complete electronic banking records are available, application of the North American model might be straightforward and more appropriate than the imprecise pari passu approach. In all cases, trustees should consider obtaining advice to avoid adverse personal consequences.