Equitable Remedies and Tracing Flashcards
What is the nature of equitable remedies?
- discretionary
- either personal or proprietary
What options do beneficiaries have when a trustee misapplies trust property?
Broadly:
- sue the trustee for breach of trust
- sue a third party who has assisted the breach of trust
- make a claim against the misapplied property or its traceable proceeds
- sue a third party who knowingly received the traceable proceeds of breach
What are the principal advantages of an equitable proprietary claims?
- it is not affected by the defendant’s bankruptcy or insolvency
- it enable beneficiaries to capture increases in the value of traceable proceeds
- does not depend on fault - it can be maintained against the defaulting trustee and against innocent recipients of the trust property or its traceable proceeds
What is following in relation to equitable proprietary claims?
Process of locating misapplied trust property - following the same asset as it moves from hand to hand
What is tracing in relation to equitable proprietary claims?
Process of identifying a new asset as the substitute for the old
What is claiming in relation to equitable proprietary claims?
Assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds
What conditions must be satisfied for the claimant to use equitable following, tracing and claiming (Re Diplock)?
The claimant had a ‘right of property recognised by equity’ in the asset which they seek to follow and/or trace’
AND
The asset was held by a person who was in a fiduciary relationship with the claimant
When will the Re Diplock conditions be satisfied?
- easily with express trusts
- trusts arising by operation of law
- broader than just trusts - executor and beneficiary relationship, company and company director relationship
What can beneficiaries do if they can follow and trace property?
They can assert a proprietary claim over it
What can a beneficiary assert a proprietary claim over?
- misapplied trust property
- assets purchased exclusively with misapplied trust money (or its traceable proceeds)
- assets purchased with a mixed fund
What four potential options can a beneficiary make in relation to a proprietary claim over misapplied trust property?
- can claim beneficial ownership of asset
- can claim beneficial ownership of share of asset
- can claim an equitable lien over the asset
- can make a claim of subrogation
What is the principal defence to an equitable proprietary claim?
That they are a purchaser of the legal interest who did not have notice of the trust
(bona fide purchaser for value without notice)
Entitled to take clean title to trust property and equitable proprietary claim will not succeed.
If a trustee misapplied £1,000 of trust money, and buys shares for £1,000, can a beneficiary trace the money?
Yes - can trace trust fund proceeds into shares - trust fund money was exchanged for shares
What happens with regards to tracing where there is a mixed fund (trust money and non-trust money) and that money is used to buy one single asset?
The trust fund money can be traced into that single asset
What is an innocent mixture regarding tracing rules?
A mixed fund comprising misapplied trust money and money from one or more innocent third parties
What is an wrongful mixture regarding tracing rules?
A mixed fund comprising misapplied trust money and the trustee’s own money
What is the basic rule in relation to withdrawals from a wrongful mixture?
Where proceeds are dissipated from wrongful mixture, then beneficiary can treat the dissipated money as being the trustees and any identifiable funds to the trust regardless of what order withdrawals are made
What does dissipated money mean?
Applying money in such a way that there is no traceable proceed
What is the cherry picking rule in relation to tracing and withdrawals from a wrongful mixture?
Where withdrawals from a wrongful mixture are used to acquire multiple assets into which a beneficiary could potentially trace:
- beneficiary can attribute the most profitable applications of the mixed fund to the trust money
(Can only do this for wrongful mixtures where just trust money and trustee’s money ie not where there is another innocent party)
What is the general rule in relation to withdrawals from an innocent mixture?
Withdrawals are attributed rateably to the contributors to the mixture
How does the general rule in relation to withdrawals from an innocent mixture change where the mixed amount is held in a current account?
Default rule in Clayton case applies
- it is the sum first paid in that is first drawn out (first in, first out)
When can the rule in Clayton’s case in relation to innocent mixtures in current accounts be disapplied?
Where it would be:
- contrary to the intentions of the parties who contributed to the mixture
- impracticable (ie too complex or expensive to apply)
- unfair
Where the rule in Clayton’s case is disapplied, what rules are to apply instead?
Either
- the pari passu ex post facto method
or
- the rolling charge method
The rolling charge method should be favoured over the ex post facto method but may not be where it is too complex or too expensive to apply
What is the pari passu ex post facto method?
Identify the amounts contributed to the account by each individual contributor attributing all the withdrawals from the account fractionally to all the contributors, regardless of the order in which the payments were made.
Involves single calculation after event
What is the rolling charge method?
Each individual withdrawal is attributed fractionally to the contributors to the account immediately before the withdrawal: the fraction attributed to any specific contributor being equivalent to their fractional contribution to the account immediately before withdrawal.
Dynamic - requires a different calculation every time new sum is credited
What two choices do beneficiaries have when making a proprietary claim for assets bought with unmixed funds?
- assert beneficial ownership over the asset
- make a personal claim against the trustee for breach of trust and enforce an equitable lien over the asset
When will it be more beneficial to assert beneficial ownership over the asset rather than equitable lien?
Where the asset has gone up in value
When it be more beneficial to make a personal claim against the trustee for breach of trust and enforce an equitable lien over the asset rather than assert beneficial ownership?
Where the asset has decreased in value
What two choices do beneficiaries have when making a proprietary claim for assets bought with wrongful mixtures?
- can claim a proportionate share of asset as a whole
- can enforce a lien upon it to secure personal claim against trustee for amount of misapplied property
What proprietary claim can a beneficiary bring over an asset which has been purchased with money from an innocent mixture?
Can only claim a proportionate share of the asset
(not a lien)
What is subrogation?
Where misapplied trust money is dissipated by payment of secured debt, beneficiaries can be ‘surrogated’ to the rights of the creditor
Does the beneficiary have any other options than proprietary claims?
Yes - can always make personal claim against trustee for loss
