## Facts

- The case involved Paul Davies Pty Ltd (plaintiff) seeking to recover misappropriated funds from Davies (defendant), who had received the funds in breach of fiduciary duty.
- The dispute centered on tracing funds that had been mixed with other assets, complicating their identification and recovery.
- The plaintiff needed to establish the existence of a fiduciary relationship with the defendant and a corresponding breach of duty resulting in misapplication of funds.
- The case applied and built upon principles from earlier authorities, including Re Hallett’s Estate and Re Diplock, relevant to tracing and mixed funds.
- Remedies considered included constructive trusts and equitable liens to restore the plaintiff’s position.

## Issues

1. Whether the plaintiff could trace misappropriated funds into the hands of the defendant where the funds had been mixed with other assets.
2. Whether a fiduciary relationship existed between the plaintiff and defendant, and whether this relationship was breached.
3. What equitable remedies are available for recovery of misapplied or mixed funds in the context of a breach of fiduciary duty.
4. How the tracing rules in equity compare to the common law approach in cases involving complex financial transactions and mixed funds.

## Decision

- The court held that tracing claims could succeed where a fiduciary relationship and breach were established.
- It was determined that equitable tracing is applicable even with mixed funds, provided a sufficient connection between the original funds and the resultant assets could be shown.
- Available remedies in equity included the imposition of constructive trusts and equitable liens to ensure recovery and restore the rightful owner’s position.
- The court emphasized equity’s greater flexibility over common law in allowing recovery of misapplied assets, especially in commercial and trust disputes.

## Legal Principles

- Tracing in equity permits following misapplied assets through mixed funds if a fiduciary relationship and breach are present.
- The “lowest intermediate balance rule,” forming the basis of Re Hallett’s Estate, was applied, allowing the preservation of trust funds in mixed accounts.
- Constructive trusts and equitable liens are key remedies to protect plaintiffs in tracing claims.
- Equity’s approach to tracing provides more effective remedies than common law, which is constrained by the requirement of identifying specific assets.
- The distinction between equitable and common law tracing is critical, particularly in financial transactions involving breaches of fiduciary obligations.

## Conclusion

Paul Davies Pty Ltd v Davies [1983] NSWLR 440 remains a seminal case clarifying the technical requirements for equitable tracing, the significance of fiduciary duties, and the court’s broad powers to restore misapplied funds. The decision illustrates the advantages of equitable remedies in complex financial disputes and continues to influence the recovery of assets in circumstances involving breaches of trust and fiduciary duty.