Introduction

• proprietary claim by beneficiaries (equitable owners) to reclaim property misappropriated by trustee
• equitable proprietary actions can be brought against any fiduciary
• equitable tracing rules can aid in tracking what has happen to trust property
• if money has been dissipated (not represented by an asset) beneficiaries need to make personal claim for compensation

Common law & equitable tracing

• following: process of tracking the asset (when trust property remains in original form)
• tracing: if trust property not still in original form

  Foskett v McKeown [2001] 1 AC 102

  • tracing: is the process of identifying a new asset as the substitute for the old... the claimant claims the new asset because it was acquired in whole or in part with the original asset
• common law tracing: legal owner of property which has been stolen
• equitable tracing: used if beneficiaries(equitable owners) seek to recover trust property (available to those with equitable interest in property or owed fiduciary duties)
• common law tracing disadvantages

  Taylor v Plumer (1815) 3 M & S 562

  • common law tracing: not allow claimant trace property if mixed with other money (in account or purchase of new asset)

  Agip v Jackson [1992] All ER 451

  • common law can only follow physical assets & breaks down if money passed through clearing system (electronic transfers between different banks)
  • confirmed in Bank Tejarat v Hong Kong & Shanghai Banking [1995] 1 Lloyd's Rep 239

  Jones & Sons v Jones [1996] 4 All ER 721

  • if money transferred by cheque: common law tracing possible as cheque is physical asset which can be followed
  • seems to conflict with Agip v Jackson [1992]
• equitable tracing can apply even if retry mixed with other funds, transferred electronically or passed through bank clearing system

Equitable proprietary claims & tracing

• equitable tracing tool to help make proprietary claim

  Foskett v McKeown [2001] 1 AC 102

  • tracing: is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property..
• equitable tracing rules & presumptions apply to different types of transactions:
  clean substitution of trust property for another asset
  asset purchased with mixture of trust money & trustee's own funds
  trustee mixes trust money with own funds in bank account & makes withdrawals
• clean substitution: trustee has exchanged trust property for another asset, no issue with tracing trust property but need to consider best remedy

  Foskett v McKeown [2001] 1 AC 102

  • in clean substitution cases: beneficiary can assert beneficial ownership of proceeds or bring personal claim against trustee for breach of trust & enforce equitable lien or charge on the proceeds to secure restoration of the trust fund, whichever is more advantageous
• T takes £2 000 from trust for B & T purchases painting for £2 000
  if painting worth £1 000: B can sue T in personal action for (£2 000 + interest) & claim charge to force sale of painting & receive proceeds
  if painting worth £5 000: B claim painting in proprietary action & recover asset of £5 000
  if T bankrupt: proprietary claims to ownership of painting or charge, so priority over unsecured creditors
• equity allows claimant to trace mixed asset but issue arise what remedy available

  Foskett v McKeown [2001] 1 AC 102

  • if trustee buys property partly with his own money and partly with trust money, the beneficiary should have the option of taking a proportionate part of the new property or a lien upon it
• T buy house for £100 000 (deposit £10 000 using won money & balance £90 000 from trust)
  B could claim proportionate share of house (9/10)
  alternatively B could seek lien: secure personal claim for compensation equal to loss caused by breach of trust (£90 000 + interest) & B could force sale of house to recover sum owing from proceeds
  if increased in value: proportionate share
  if decreased in value: lien
• special rules apply where trust money is mixed with trustee's own funds in bank account & various withdrawals occur

  Re Hallett's Estate (1880) 13 Ch D 696

  Facts:

  • S mixed trust money with own bank account
  • S made various withdrawals from account & money dissipated

  Issue:

  • which money did withdrawals come from?

  Held:

  • S spent own money first & then balance remaining in account belonged to trusts
  • based on presumption S acted honestly in spending own money first
• question: how are withdrawals allocated if some used to buy assets & some dissipated, leaving no balance in account?

  Re Oatway [1903] 2 Ch 356

  • if withdrawal from mixed account has been invested & further withdrawals dissipated, trustee cannot use Re Hallett to claim investment purchased with own money & trust money dissipated
  • trustee must be debited with all sums which have been dissipated & trust money debited with any sums taken out & invested
  • the order of priority in which the various withdrawals and investments have been respectively made is wholly immaterial
• Re Hallett & Re Oatway presume against wrongdoer: if money dissipated as far as possible attributed to trustee's personal fund
• question: is money recoverable if trustee makes payments of own money into mixed account after withdrawals?

  Roscoe v Winder [1915] 1 Ch 62

  • lowest intermediate balance rule:
    beneficiaries can only recover trust property insofar as it still exists
    if trust money is withdrawn & dissipated, the trust money is spent
    future payments into mixed account cannot be claimed
    recoverable: the lowest balance in account after trust money was paid in
  • court will not imply intention to restore trust fund
• lowest intermediate balance rule inconsistent with presumption of honesty (Re Hallett) but consistent with principle tracing allows tracking of claimant's own property only
• question: what is recoverable if trust money traced to investment that has now increased in value?

  Re Tilley's WT [1967] Ch 1179

  • obiter: trust can recover property including any increase in value
  • approach confirmed in Foskett v McKeown [2001]