Equitable tracing and equitable remedies

Question 1

What is tracing?

Answer 1

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

Question 2

Who is a tracing claim available against?

Answer 2

• 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

Question 3

Why might the beneficiary choose to trace?

Answer 3

• 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

Question 4

What does tracing allow the claimant to do?

Answer 4

• 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

Question 5

When is the right to trace lost?

Answer 5

If the property no longer exists

Question 6

What are the requirements for tracing?

Answer 6

• 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

Question 7

What is an equitable proprietary interest?

Answer 7

It refers to the property owner’s legally enforceable right to the property which is enforceable against third parties

Question 8

Who has an equitable proprietary interest in the trust property?

Answer 8

The beneficiary of the trust

Question 9

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?

Answer 9

• they could sue and claim compensation for the loss of the artwork
• they could trace and claim the holiday cottage

Question 10

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?

Answer 10

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

Question 11

What happens if the property purchased with trust money decreases in value?

Answer 11

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

Question 12

When is tracing not allowed?

Answer 12

When it would result in unfairness to the defendant especially if the defendant is an innocent volunteer

Question 13

Does tracing have a limitation period?

Answer 13

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

Question 14

What are the rules when tracing into unmixed funds?

Answer 14

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

Question 15

What happens if the trustee has used trust money and their own money in a purchase?

Answer 15

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

Question 16

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?

Answer 16

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

Question 17

What happens if the trustee puts the money into their own bank account and it mixes with their money?

Answer 17

1. the trustee is presumed to spend their own money first
2. however if property is purchased the primary rule is beneficiaries have a right to claim any property purchases using a mixed fund
3. 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
4. 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

Question 18

What happens if mixed funds in a bank account came from two different trusts or a trust and an innocent volunteer?

Answer 18

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

Question 19

What are the defences against tracing?

Answer 19

• change of position
• property has been dissipated
• bona fide purchaser for value without notice
• doctrine of laches

Question 20

What is the defence of change of position?

Answer 20

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)

Question 21

What is the defence that property has been dissipated?

Answer 21

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

Question 22

What is the defence of a bona fide purchaser?

Answer 22

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

Question 23

What is the doctrine of laches?

Answer 23

When the claimant delays taking action to such an extent that it becomes inequitable to trace against the defendant

Question 24

What are the general principles that apply to the grant of equitable remedies?

Answer 24

• 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

Question 25

What is the remedy ‘specific performance’?

Answer 25

It is an order for the defendant to perform their contractual duties. The claimant needs to prove they have provided consideration before they can apply for an order of specific performance - it is only ordered when damages are considered inadequate

Question 26

What is an injunction?

Answer 26

It is an order for the defendant to stop, to act or to prevent the defendant committing a wrong. It is granted at the court’s discretion and if breached is contempt of court. Can be granted at any point. It is awarded when damages are inappropriate