Remedies (Proprietary Claims) Flashcards
What is the purpose of a proprietary claim and, in overview, how do they work?
1) Proprietary claims have the aim of trying to recover trust property
2) If the trust property exists in original form, trust can recover it and bring it back under their control
3) If the trustee sells the asset and buys something else, trust can assert a proprietary claim over the new asset, if they can identify that it represents trust property
- To determine if the replacement asset belongs to the trust or trustee, equity uses tracing rules to trace the beneficiaries’ equitable interests into different forms of property
- If the trustee has sold the asset and spent the money on a holiday for example, there’s no point in bring a proprietary claim
What are some of the advantages that proprietary claims have over personal claims?
Can be used where trustee is bankrupt
- If proprietary claim is asserted, trust can take property in advance of any claims which might exist in bankruptcy
No statutory limitation periods, unlike 6-year period for personal claim
Can get an attractive asset at an increased value potentially (stolen money to buy shares which have increased in value)
Proprietary claims can be brought in other fiduciary relationships too
There are numerous possible variations on proprietary claims, based on what the trustee has done with the asset.
Firstly, how does a proprietary claim work where the trustee has dissipated the trust money?
This would occur if they have spent the trust money on a holiday for themselves for instance
If this happens, no proprietary claim is possible
How does a proprietary claim work where the trustee has the original trust property?
Proprietary claim will let beneficiaries recover the trust property
No tracing required as property retains original form
How does a proprietary claim work where the trustee has sold the trust property and purchased another asset?
Tracing will allow beneficiaries to identify the asset as trust property and claim it in a proprietary action
- This is referred to as a clean substitution – one asset for another
Two options:
1) Substitute will be attractive if the asset value has increased, as this increased value belongs to the trust – can take the substitute asset
2) Trust could also assert a lien over the substitute property for the amount the trust has lost – better if property has decreased in value
- They can sell asset for some value and seek a personal claim for the outstanding balance
How does a proprietary claim work where the trustee has purchased an asset with their own money and money from the trust?
This is a mixed asset
Tracing will allow the beneficiaries to identify trust property in the asset and they can either claim:
1) A lien over the asset (for the amount the trust has lost); or
- Better option if property has decreased in value + combine with personal claim for remainder
2) A proportionate share of the asset
- More attractive where there is an increase in value
- If the trust contributed two thirds to purchase, they get two thirds of new value back
How does a proprietary claim work where the trustee has paid the trust money into their bank account which contained the trustee’s own funds and has made withdrawals; one withdrawal was dissipated, the other was used to buy company shares?
This is withdrawals from a mixed bank account
Trust can choose which tracing rule provides best chance of recovery:
1) Re Hallett; or
2) Re Oatway
What is the Re Hallett tracing rule for withdrawals from a mixed bank account?
1) Primary tracing rule
- Presumes that trustee would have spent their own money first
- Most useful where trustee has a healthy, positive bank balance remaining
2) Example:
- £10k in account; £25k from trust
- £8k on holiday, £10k on shares, £7k in account
- £8k in shares can have a lien asserted over it and the £7k belongs to trust
- Could also assert a proportionate share if shares increased in value
What is the Re Oatway tracing rule for withdrawals from a mixed bank account?
Assert a first charge in favour of the trust over the trustees’ bank account and any property purchased from that trust
- Allows trust to satisfy its claim against the most attractive items of property purchased from the trustees’ bank account
- Trust could assert a lien or get a proportionate share here too
What is the Roscoe v Winder limitation when considering tracing rules and withdrawals from a mixed bank account?
If trustee spends almost everything, but then pays more into their account later, this later amount cannot be retrieved
- The trustees can only get the lowest balance to which the account sank before extra money was paid in
How does a proprietary claim work where the trustee has mixed money from two trusts (Trust A and Trust B) and uses the mixed fund to buy an asset?
Beneficiaries of each trust will share proportionately to the contribution
- If £10k is taken from A and £20k from B, B will get two thirds of value of asset, regardless of increase or decrease in value
How does a proprietary claim work where the trustee has wrongly mixed money from two or more trust funds, before making various withdrawals?
Here, the trustee has mixed trust property from two innocent parties (trust A and trust B)
Equity must balance competing claims of individual trust funds
There are 2 tracing rules for when innocent trust money is taken from multiple trusts:
- 1) Clayton’s Case
- 2) Barlow Clowes
What is the tracing rule from Clayton’s Case?
Provides first money in, is matched against the first money out
- Whichever trust was stolen from first, their money will get applied against whichever withdrawal was made first from the trustee’s bank account
- Can result in injustice, if the first withdrawal was a holiday for instance
What is the tracing rule from Barlow Clowes?
Case decided that courts can depart from Clayton’s Case where:
- 1) This rule was impossible to apply (ordering payments cannot be done accurately); or
- 2) Applying it would result in injustice; or
- 3) Applying it would be contrary to the parties’ intention
If they depart, each trust fund will take a proportionate share to the original amounts that were taken
How does a proprietary claim work where the trustee has taken two trust funds’ money and mixed with them with trustee’s own money, before making various withdrawals, including dissipations?
Apply Re Hallett and Re Oatway rules first to push trustee’s own money into dissipation
Apply Clayton’s Case and Barlow Clowes to allocate remaining assets between Trust A and Trust B
Give an example scenario of how the tracing rules work where there are withdrawals from a mixed bank account where multiple trust funds money was deposited
A takes £20k from B fund and £30k from C fund into their account, which has £10k
1) A spends:
- £10k on debts, £30k on new kitchen, £10k on new artwork, £10k on holiday (in that order)
2) Deemed to spend own money first, so that takes out the debts
3) £20k from B fund is allocated as a lien on kitchen (first in, first out)
3) £30k from C fund is allocated: £10k on kitchen, £10k on artwork and they will lose £10k on the dissipation (holiday)
