TRACING Flashcards
What are the advantages of tracing?
- It is not affected by the defendant’s bankruptcy or insolvency.
- It enables beneficiaries to capture increases in the value of traceable proceeds.
- It does not depend on fault: it can be maintained against the defaulting trustee and against innocent recipients of the trust property or its traceable proceeds.
What is following in tracing terms?
- It is the process for locating misapplied trust property.
- the process of ‘following the same asset as it moves from hand to hand’(Foskett)
What is tracing?
- the process of ‘identifying a new asset as the substitute for the old’(Foskett)
- Generally, one asset is the traceable proceed of another if there is ‘a series of direct substitutions’ between them:Relfo Ltd (in liquidation) v Varsani
What is claiming in tracing terms?
- the assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds (Foskett)
What conditions must be satisfied to use the equitable following, tracing and claiming rules?
Re Diplock criteria:
- The claimant had a ‘right of property recognised by equity’ in the asset which they seek to follow and/or trace
- The asset was held by a person who was in a fiduciary relationship with the claimant
What are the two types of mixed funds?
- A mixed fund comprising misapplied trust money and the trustee’s own money (‘a wrongful mixture’)
- A mixed fund comprising misapplied trust money and money derived from one or more innocent third parties (‘an innocent mixture’)
What is a defence to an equitable proprietary (tracing) claim?
Bona fide purchaser for value without notice
- person had no notice of the trust
What are the potential options that a trustee has when an asset has been identified?
- The beneficiary claims beneficial ownership of the asset itself: where the asset is acquired exclusively with the traceable proceeds of the breach.
- The beneficiary claims a share of the asset
- The beneficiary claims an equitable lien over the asset: Generally a beneficiary will want to do this where the asset has decreased in value, meaning that claiming the asset would result in a loss. It effectively turns their personal claim for breach of trust into a secured claim.
- Subrogation: This is a claim that can be made where misapplied trust funds (or their traceable proceeds) are used to pay off a debt. It allows the beneficiary to step into the shoes of the creditor, treating the beneficiary as if they had loaned the money.
What are the 3 tracing rules in connection with wrongful mixtures?
- TheHallettmodel
- TheOatwaymodel
- TheShalsonmodel
What is the Hallett model/ rule?
Trustee spent his own funds first not the trust fund “cannot be heard to say that he took away the trust money when he had a right to take away his own money”
What is the Oatway model/ rule?
If there is a choice between a traceable asset and a dissipation, the trustee should be treated as protecting the trust funds and dissipating their own.
What is the Shalson model/ rule?
Cherry picking can be used when there are multiple assets which the beneficiary could potentially trace into (most profitable application)
- cannot be used if it would prejudicially affect third parties
What is the general rule applying to withdrawals from an innocent mixture (not bank account)?
- must be attributed rateably to the contributors to the mixture
- does not apply for innocent mixtures in a current bank account
What is the general rule applying to withdrawals from an innocent mixture in a current bank account?
Clayton’s case - first in, first out rule
When will Clayton’s case ‘first in, first out’ rule be disapplied?
- contrary to the intentions of the parties who contributed to the mixture;
- impracticable (ie too complex or expensive to apply); or
- unfair
