Equitable Remedies and Tracing

Question 1

What is the nature of equitable remedies?

Answer 1

• discretionary
• either personal or proprietary

Question 2

What options do beneficiaries have when a trustee misapplies trust property?

Answer 2

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

Question 3

What are the principal advantages of an equitable proprietary claims?

Answer 3

• 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

Question 4

What is following in relation to equitable proprietary claims?

Answer 4

Process of locating misapplied trust property - following the same asset as it moves from hand to hand

Question 5

What is tracing in relation to equitable proprietary claims?

Answer 5

Process of identifying a new asset as the substitute for the old

Question 6

What is claiming in relation to equitable proprietary claims?

Answer 6

Assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds

Question 7

What conditions must be satisfied for the claimant to use equitable following, tracing and claiming (Re Diplock)?

Answer 7

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

Question 8

When will the Re Diplock conditions be satisfied?

Answer 8

• easily with express trusts
• trusts arising by operation of law
• broader than just trusts - executor and beneficiary relationship, company and company director relationship

Question 9

What can beneficiaries do if they can follow and trace property?

Answer 9

They can assert a proprietary claim over it

Question 10

What can a beneficiary assert a proprietary claim over?

Answer 10

• misapplied trust property
• assets purchased exclusively with misapplied trust money (or its traceable proceeds)
• assets purchased with a mixed fund

Question 11

What four potential options can a beneficiary make in relation to a proprietary claim over misapplied trust property?

Answer 11

• 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

Question 12

What is the principal defence to an equitable proprietary claim?

Answer 12

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.

Question 13

If a trustee misapplied £1,000 of trust money, and buys shares for £1,000, can a beneficiary trace the money?

Answer 13

Yes - can trace trust fund proceeds into shares - trust fund money was exchanged for shares

Question 14

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?

Answer 14

The trust fund money can be traced into that single asset

Question 15

What is an innocent mixture regarding tracing rules?

Answer 15

A mixed fund comprising misapplied trust money and money from one or more innocent third parties

Question 16

What is an wrongful mixture regarding tracing rules?

Answer 16

A mixed fund comprising misapplied trust money and the trustee’s own money

Question 17

What is the basic rule in relation to withdrawals from a wrongful mixture?

Answer 17

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

Question 18

What does dissipated money mean?

Answer 18

Applying money in such a way that there is no traceable proceed

Question 19

What is the cherry picking rule in relation to tracing and withdrawals from a wrongful mixture?

Answer 19

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)

Question 20

What is the general rule in relation to withdrawals from an innocent mixture?

Answer 20

Withdrawals are attributed rateably to the contributors to the mixture

Question 21

How does the general rule in relation to withdrawals from an innocent mixture change where the mixed amount is held in a current account?

Answer 21

Default rule in Clayton case applies

• it is the sum first paid in that is first drawn out (first in, first out)

Question 22

When can the rule in Clayton’s case in relation to innocent mixtures in current accounts be disapplied?

Answer 22

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

Question 23

Where the rule in Clayton’s case is disapplied, what rules are to apply instead?

Answer 23

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

Question 24

What is the pari passu ex post facto method?

Answer 24

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

Question 25

What is the rolling charge method?

Answer 25

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

Question 26

What two choices do beneficiaries have when making a proprietary claim for assets bought with unmixed funds?

Answer 26

• 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

Question 27

When will it be more beneficial to assert beneficial ownership over the asset rather than equitable lien?

Answer 27

Where the asset has gone up in value

Question 28

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?

Answer 28

Where the asset has decreased in value

Question 29

What two choices do beneficiaries have when making a proprietary claim for assets bought with wrongful mixtures?

Answer 29

• 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

Question 30

What proprietary claim can a beneficiary bring over an asset which has been purchased with money from an innocent mixture?

Answer 30

Can only claim a proportionate share of the asset

(not a lien)

Question 31

What is subrogation?

Answer 31

Where misapplied trust money is dissipated by payment of secured debt, beneficiaries can be ‘surrogated’ to the rights of the creditor

Question 32

Does the beneficiary have any other options than proprietary claims?

Answer 32

Yes - can always make personal claim against trustee for loss