What is tracing?
The process whereby beneficiaries who have lost trust assets due to fraud, misappropriation, or mistake by a trustee can recover this property or identify a substitute property purchased using trust funds and claim it
Who is a tracing claim available against?
- a trustee
- a constructive trustee who received trusts property knowing it to be in breach of trust
- an innocent volunteer who is in possession of trust property
Why might the beneficiary choose to trace?
- if the trustee is bankrupt - personal claim pointless so tracing gives priority over other creditors by claiming the property as their own
- if the trustee cannot be found - trust property may be in the possession of another who is not personally liable
- if the defendant is an innocent volunteer - the claimant has no personal claim but tracing available
- if tracing is more profitable - the property may have increased in value
What does tracing allow the claimant to do?
- have a charge over the asset - can sell it and claim the proceeds
- claim a constructive trust over the asset so it entitles the claimant to an equitable proprietary interest in the asset and take advantage of any increase of value
When is the right to trace lost?
If the property no longer exists
What are the requirements for tracing?
- there must be a fiduciary relationship
- the claimant must have an equitable proprietary interest in the property
- the property must be traceable
- tracing must not produce an inequitable result
- there must be no unreasonable delay
What is an equitable proprietary interest?
It refers to the property owner’s legally enforceable right to the property which is enforceable against third parties
Who has an equitable proprietary interest in the trust property?
The beneficiary of the trust
A trustee sold a valuable piece of artwork belonging to the trust and used the proceeds to buy a holiday cottage. What are the remedies available to the beneficiaries?
- they could sue and claim compensation for the loss of the artwork
- they could trace and claim the holiday cottage
Kim uses client’s money (£20k) to pay part of a premium on a life insurance policy worth £1m. Kim pays the first 3 instalments using their own money and the final 2 instalments using the client money. Kim then dies. Are the clients able to trace to claim the life insurance money?
Yes, the court held that the clients had a proprietary right to receive 40% of the insurance pay out - so more advantageous for the clients to trace
What happens if the property purchased with trust money decreases in value?
The claimants will have to accept the loss but beneficiaries can take personal action against the trustee where their actions have resulted in a loss to the trust
When is tracing not allowed?
When it would result in unfairness to the defendant especially if the defendant is an innocent volunteer
Does tracing have a limitation period?
No as it is an equitable remedy but the doctrine of laches applies so there cannot be an undue delay in the claimant asserting their rights
What are the rules when tracing into unmixed funds?
If the trust asset is separate and not mixed, the asset can be reclaimed so it would be locating the asset rather than tracing
If the asset has been sold and the sale proceeds not mixed they can be claimed, or if proceeds were used to buy property the claimant can trace and claim it.
If the purchaser purchased the asset knowing of the trustee’s fraudulent behaviour the claimants can follow the asset itself and claim it
What happens if the trustee has used trust money and their own money in a purchase?
The beneficiaries have first claim over any property purchased and the onus is on the trustee to prove that part of the mixed funds belongs to them - if they can the funds will be divided proportionally
What happens if the trustee mixes the funds of two trusts or has transferred the money to an innocent volunteer who has mixed it with their own?
The two funds have a pro rata claim in the mixed funds or any property purchased with it so they share the profits or the losses proportionally
What happens if the trustee puts the money into their own bank account and it mixes with their money?
- the trustee is presumed to spend their own money first
- however if property is purchased the primary rule is beneficiaries have a right to claim any property purchases using a mixed fund
- the trust claim is limited to the account’s lowest balance after the trust money has been paid in so there can be no tracing into an overdrawn account if the overdraft exceeds the amount paid in
- if the trustee uses trust money to discharge a loan the beneficiaries’ right to trace is lost as the property not directly bought with the trust money
What happens if mixed funds in a bank account came from two different trusts or a trust and an innocent volunteer?
First in, first out rule applies so if £1000 of Sam’s money paid in, then £2000 of John’s money also paid in and then the trustee spends £500 this will be seen to be Sam’s money being spent
What are the defences against tracing?
- change of position
- property has been dissipated
- bona fide purchaser for value without notice
- doctrine of laches
What is the defence of change of position?
Available to innocent volunteers who have received trust property and on faith of that suffered a change to their personal circumstances (used it to renovate their kitchen etc)
What is the defence that property has been dissipated?
The right to trace is lost if the money has dissipated. If the trustee used the money to pay for a cruise the right to trace is lost as the property no longer traceable - beneficiaries would have to take personal action against the trustee
What is the defence of a bona fide purchaser?
Tracing not available if the property is in the hands of a person who bought the property in good faith and who had no knowledge that the property belongs to the trust
What is the doctrine of laches?
When the claimant delays taking action to such an extent that it becomes inequitable to trace against the defendant
What are the general principles that apply to the grant of equitable remedies?
- they are discretionary
- clean hands maxim applies
- court will not grant an equitable remedy unless they are sure it can be carried out
- an equitable remedy is granted where an award of damages is inadequate or inappropriate
- the court does have the power to award damages and or in substitution for an injunction or specific performance
