Remedies Against Trustees: Proprietary Claims Flashcards
What is the aim of a proprietary claim?
To assert a claim over property which a trustee has bought with trust money, so long as the beneficiaries can identify the asset represents trust property.
What needs to be used where a trustee has used some of their own money and some trust money to purchase a new asset?
The court will apply tracing rules to ascertain the equitable interests over the beneficiary according to the proportion of trust money used.
What does it mean to say that the trust property has been ‘dissipated’?
This means the trust property doesn’t exist because the trustee has not got a tangible asset in exchange for the trust property.
For instance, it could be said the trust property is dissipated if the trustee used the money to pay off their credit card bills.
Give the 3 situations where a proprietary claim is appropriate/ advantageous.
1) Where the trustee is insolvent and they still have trust property (or an asset which represents trust property) which the beneficiary could claim against. The beneficiaries would be prioritised with regards to that particular asset when trying to recover the money from the bankrupt trustee.
2) Trustee used property to buy something attentive to the beneficiary (eg shares which have now doubled in value). If the claim is successful those shares would then belong to the trust.
3) The trustee’s breach happened a long time ago personal claims are statute barred 6 years after date of breach. However proprietary claims are no subject to any statutory limitation period and a claim might remain available.
Explain what happens where the trustee still holds the trust property in its original form .
Proprietary claim will enable beneficiaries to recover the property and no tracing is required because it is still identifiable in its original form.
Explain what happens where the trustee has use trust property t purchase another asset with the sale proceeds.
Two options for beneficiaries. They can either:
1) Claim he substitute property (advisable if it has increased in value); or
2) Sue the trustee for compensation for the loss to the trust and take a changeover the property for the amount the trust has lost. Good option if property has decreased in value.
Explain the situation where there is a mixed asset comprising funds from the trust and funds from the trustee’s own account.
This is a mixed asset.
Beneficiaries have the following options:
1) Claim proportionate interest in the mixed asset. god option if the mixed asset has decreased in value.
2) Sue the trustee for compensation loss to the trust and take charge over the mixed asset for the amount the trust has lost. Good option where the mixed asset has decreased in value.
Explain the issues caused where the trustee takes money from the trust, adds it into their own bank account, and then makes various different purchases on assets but also things which cannot be traced (eg gambling).
Various tracing rules are used to determine what the trust property was used for.
This tries to determine how the trust money was used.
Explain the tracing rule 1 from Re Hallett.
This rule provides that the trustee is deemed to have spent their own money first, where they added trust money into their own bank account.
So if they sole 25k from a trust and added it into their own account with 10k in it, their own 10k is deemed to have been spent first.
The same principle applies even if the trustees own money is paid into the account after the money from the trust is.
When is the tracing rule in Re Hallett advantageous to use?
where there is a healthy balance on the trustee’s bank account.
However, it is not ideal where the first amount of money (which is deemed to be the money of the trustee) is used to buy an asset, and then the remainder (which is deemed to be the turns property) dissipates (eg is used to pay off the trustees credit card bills. Re Hallet would not be useful here.
Can the beneficiary take advantage of an increase in value of the act into which they are tracing?
Yes.
For example if it is traced the trust money was used to purchase one third of a property for 150k, but it subsequently increases in value to 180k, the beneficiary would be entitled to a third of the increased amount. they could therefore claim 60k (even though only 50k was initially used).
Explain the tracing rule number 2 from Re Oatway.
The beneficiary has first charge on the mixed fund (ie the amount in the account) and can therefore choose how best to satisfy their proprietary claim.
Explain the limitation on the tracing rules from Roscoe v Winder.
The trust’s interest cannot be traced beyond what is known as the ‘lowest intermediate balance’. This means the lowest balance to which the account sank before extra money was paid in.
Eg 40k trust money is stole ad added to 10k of trustees own money. Trustee then spends 48k on things which cannot be traced (eg dissipated such as credit card bills and gambling). this means there is only 2k left to be traced. If another 3k was then added in from a relative of the trustee, this would not be traceable as its a gift to the trustee from a family member and not available to be traced.
What is the process for tracing money where a trustee steals money from two separate trusts and adds them together and purchases an asset (eg shares)?
Different tracing rules apply.
The court will make a judgement which is completely fair to both Sts of beneivciares of the respective trusts.
therefore, the beneficiaries of each trust can trace their money against the value of the asset, in accordance with the proportion of the money stolen from their trust used to buy the asset.
eg 10k from T1 and 20k from T2 used to buy shares worth 30k. Shares then increase in value to 36k. As T1 was one third of the initial purchase price and T2 was the other two thirds, they will be entitled to one third and two thirds of the increased asset value respectively.
Explain the approach the courts take where money is stolen from more than one trust, and then mixed with the trustee’s own money.
Courts will:
1) Firstly apply the Re Hallett or Re Oatway rule (whichever pushes the most amount go trustee’s own money into dissipation as possible); and then
2) Apply Clayton’s case and Barlow Clowes to allocate any remaining assets between the two or more innocent trusts.
