Remedies against trustees - proprietary claims

Question 1

If a trustee uses trust money to purchase something in their own name, how can beneficiaries assert a proprietary claim against the new asset?

Answer 1

If they can identify that the new asset represents trust property - i.e. tracing

Question 2

What is dissipation in relation to tracing?

Answer 2

Trustee has spent trust property in such a way that there is no longer any physical asset to trace into, e.g. payment of credit card bills / a holiday

Question 3

In what 3 events would a proprietary claim maybe be appropriate or advantageous?

Answer 3

1. The trustee is insolvent
2. Trustee has used trust property to buy themselves something that the beneficiary considers attractive
3. Trustee’s wrongdoings happened some time ago (therefore outside the 6 year limitation)

Question 4

What constitutes “clean substitution” in tracing?

Answer 4

Where the trustee has sold trust property and purchased another asset with the sale proceeds

Question 5

In the event of clean substitution, what are the beneficiaries entitled to

Answer 5

1. Take the substitute property (beneficial if it has increased in value)
2. Sue trustee for compensation for the loss to the trust and take a charge (“equitable lien”) over property for amount trust has lost (beneficial where decreased in value)

Question 6

What is the function of an equitable lien?

Answer 6

It provides security that at least the value of the substitution property (when less than the original amount take from the trust) will be paid should the trustee not have sufficient funds to satisfy the personal claim

Question 7

What is a “mixed asset”?

Answer 7

An asset bought by a trustee using partly their own money and partly funds wrongly drawn from the trust

Question 8

In the event of a mixed asset, what options does the beneficiary have?

Answer 8

1. Claiming a proportionate interest in the mixed asset (take this option if mixed asset has increased in value), or
2. Suing trustee for compensation for the loss to the trust and take equitable lien over mixed asset for amount trust has lost (take this option if mixed asset has decreased in value)

Question 9

In what event would you consider using either Re Hallett or Re Oatway?

Answer 9

Where the trustee has paid money from the trust into their own bank account, mixed that money with their own money, and then made various withdrawals from the bank account

Question 10

What is the presumption from Re Hallett?

Answer 10

The trustee is deemed to spend their own money first (regardless of what order their money and trust money has been paid into the account)

Question 11

When would it not be beneficial for a beneficiary to use Re Hallett?

Answer 11

There is no money remaining in the account / low balance, and the later payments (i.e. those using trust property) have dissipated

Question 12

What is provided for in the rule in Re Oatway?

Answer 12

The beneficiary has a first charge on the mixed fund (ie the amount sitting in the trustee’s bank account) or any property that is purchased from that fund - i.e. the beneficiary gets first choice so can generally choose how best to satisfy their proprietary claim

Question 13

Under both Re Hallett and Re Oatway, if the asset purchased partly with trust money increases in value, can the beneficiary benefit from that increase in value?

Answer 13

Yes

Question 14

What is the limitation under Roscoe v Winder?

Answer 14

A trust’s interests cannot be traced beyond the “lowest intermediate balance”, i.e. lowest balance to which the account sank before extra (non-trust) money was paid in

Question 15

What is the concept of “pari passu”?

Answer 15

When trust money has been taken by one trustee from more than one trust - the beneficiaries will share the mixed asset rateably in the same proportion as their funds contributed to the purchase price

Question 16

In what event would you consider using the tracing rules from either Clayton’s Case or Barlow Clowes v Vaughan?

Answer 16

A trustee transfers money from one trust and money from another trust into
their own bank account and then makes various withdrawals from that bank account

Question 17

What is the tracing rule from Clayton’s Case?

Answer 17

The first money paid in is the first money paid out

Question 18

What did the Court of Appeal indicate in Barlow Clowes v Vaughan regarding the application of Clayton’s Case?

Answer 18

That the first in first out rule can be departed from where:

It is impossible to apply, or
Would result in injustice, or
Application would be contrary to parties’ intention

Question 19

If the court depart from the general rule in Clayton’s Case, what would the end result most likely be?

Answer 19

Each investor / trust takes a rateable share in any remaining asset

Question 20

What steps should be taken in the situation where a trustee takes money from two innocent trust funds and mixes it with their own money, before making various withdrawals?

Answer 20

1. Apply Re Hallett and Re Oatway with the aim of pushing as much of the trustee’s own money into dissipation
2. Then apply rules from Clayton’s Case and Barlow Clowes v Vaughan to allocate remaining assets between the innocent trusts