Meaning
Equitable process allows a claimant to identify and claim the value of their original assets in whatever new form they have been converted. This activity, known as tracing proceeds, is essential when a buyer has sold unpaid goods that were subject to a retention of title clause. It shifts the seller’s claim from the physical inventory to the resulting cash or bank account.
Value Follow
Transactions are analyzed to connect the initial asset with the current fund or property. When tracing proceeds, the claimant must prove that the money received from the sub-sale is directly linked to their specific materials. This becomes difficult when funds are mixed with general business revenues.
Insolvency Shield
Secured claims are maintained against the cash balance of the insolvent debtor, preventing the funds from being distributed to general creditors. By successfully tracing proceeds, the supplier can remove the cash from the debtor’s estate. This ensures full payment rather than a small dividend.
Mixing Limitations
Rules of equity are applied to determine ownership when the proceeds are combined with other cash in a single account. The courts use specific allocation rules to trace payments out of mixed accounts. This protects the claimant’s portion of the remaining balance.
