Remedies Against Trustees: Proprietary Claims

Vocabulary and core legal principles for English SQE1 Law regarding proprietary claims and equitable tracing rules against trustees and fiduciaries.

Personal claims

Claims for monetary compensation brought against the wrongdoing trustee(s) which must be satisfied from their own property or funds.

Proprietary claims

Claims where the beneficiary seeks the return of specific property owned by the trust or property in the hands of the trustee that represents trust property.

Tracing rules

Rules used in equity to identify trust property that has changed form or survived through various transactions into new assets.

Dissipation

Occurs when trust property has been spent in a way that there is no longer any physical asset to trace into, such as the payment of credit card bills or spending money on a holiday.

Insolvency advantage

The benefit of a proprietary claim over a personal claim where trust property does not form part of a bankrupt trustee’s estate and can be recovered in priority to unsecured creditors.

Laches

The equitable doctrine that governs the time limits for proprietary claims, which are not subject to a statutory limitation period of $6$ years.

Clean substitution

A situation where trust property (e.g., money) is swapped for a new asset (e.g., a painting), allowing the beneficiary to either take the property or an equitable lien.

Equitable lien

A proprietary charge over an asset for the amount the trust has lost, providing security that allows the asset to be sold; typically chosen if the property has decreased in value.

Mixed asset (trust + trustee funds)

An asset purchased using a combination of the trustee’s own money and funds wrongfully drawn from the trust.

Re Hallett’s Estate (1880)

A tracing rule providing that when a trustee mixes trust money with their own in a bank account, the trustee is deemed to spend their own money first.

Re Oatway (1903)

A tracing rule providing that a beneficiary has a first charge on a mixed fund or any property purchased from it, effectively giving the beneficiary ‘first choice’ to satisfy their claim.

Roscoe v Winder (1915)

A rule stating that a trust’s proprietary claim is limited to the ‘lowest intermediate balance’ reached by a bank account before any non-trust money was later added.

Pari passu

The principle where beneficiaries of multiple innocent trusts share rateably in a mixed asset in the same proportion as their funds contributed to the purchase price.

Clayton’s Case (1816)

A tracing rule for withdrawals from a bank account containing multiple innocent trust funds based on the ‘First In, First Out’ ($FIFO$) principle.

Barlow Clowes v Vaughan (1992)

A case establishing that the $FIFO$ rule from Clayton’s Case can be departed from if it is impossible to apply, results in injustice, or is contrary to the parties’ intention.

Fiduciary relationship

A relationship (such as a company director and their company) that enables a principal to use equitable tracing rules to recover misappropriated property.