Tracing

Question 1

What is tracing?

Answer 1

Beneficiaries have an equitable proprietary right in trust property; therefore, where it is misapplied, they have a personal claim for breach of trust against the trustees but also a proprietary claim against the asset / proceeds.

Question 2

What are the two types of mixtures?

Answer 2

1. Wrongful mixtures = where the property or proceeds are mixed with the trustee’s own property.
2. Innocent mixtures = where the property or proceeds are mixed with the property of innocent 3rd parties (e.g beneficiaries of another trust or a bona fide purchaser).

Question 3

What are the tracing rules in respect of wrongful mixtures?

Answer 3

Trustee always treated as dissipating their own assets first (e.g cash in own bank + proceeds from sale of trust asset).

Can cherry pick and trace into the most profitable use except where this would prejudice a bona fide purchaser (e.g trustee bankrupt).

Question 4

What are the tracing rules in respect of innocent mixtures?

Answer 4

Clayton’s Case: money first transferred into account is repaid first. This rule is almost always disapplied on the basis of unfairness.

Instead, each withdrawal will be attributed in proportion to the contribution from each trust.

Question 5

What is the result of tracing?

Answer 5

The beneficiary must follow and trace the property. They can then assert an equitable proprietary interest in the property and the person holding it must restore it to the trust fund unless they are a bona fide purchaser for value without notice.

Question 6

Which proprietary claims can a beneficiary make?

Answer 6

1. Beneficial ownership of the asset = only where fund was not mixed.
2. Proportionate share in asset = where asset acquired with mixed fund / used to improve trustee’s own property.
3. Subrogation = where misapplied trust property used to repay debt, beneficiary becomes creditor.
4. Equitable lien = where asset acquired with either mixed or unmixed fund. Useful where asset has decreased in value. Become secured creditor.

For equity’s darling, can claim sale proceeds but once these are dissipated, no claim.

Question 7

What personal claim can the beneficiary make for misapplication?

Answer 7

1. against trustee for breach of trust
2. against knowing / reckless recipient of misapplied trust property.

Question 8

When will personal claim against recipient succeed?

Answer 8

1. Beneficial receipt of asset or its proceeds (incl money into bank when in overdraft, but not credit).
2. Knowledge that property is misapplied trust property / proceeds
   * actual knowledge
   * wilfully shutting eyes to obvious
   * wilfully and recklessly failing to make enquiries that honest + reasonable man would make
   * circumstances which would indicate facts to honest + reasonable man or put him on enquiry.