Tracing – proprietary remedy to recover trust property

Purpose

Beneficiaries can “follow” trust property, or its value, into the hands of anyone to whom it has wrongfully passed.  This will be useful if the trustee has become insolvent and it is not possible to fully recover misappropriated trust money from him in a personal action.

Example

Simon as a trustee puts trust money in his own account with which he buys shares.  He transfers the shares to Caroline. Caroline sells 75% of them.  She gives half the money to Tony and spends the rest on a holiday. The 25% remaining shares increase in value and Caroline transfers them back to Simon who sells them and buys a camper van in which he intends to travel the world.

The trust money, whilst in Simon’s account, may have earned interest.  The shares may have changed in value and interest or dividends may have been paid out.  The camper van may have depreciated in value.  Nevertheless, the money, or its value, will be traceable to all third parties

Limitations

Traced assets must still be in an identifiable form.

Examples

Example 1

 A trustee misappropriates £2000 and deposits it into a new bank account.  This can be traced to his bank so long as it is not mixed with any other money or property.

Example 2

If the £2000 is used to buy shares, the shares can be traced.  They represent the original cash.  The property still exists in another form.

Example 3

Trustee pays £2000 into one bank which transfers the cash to another.  The property, in this case, can also be traced.  

Tracing under law of equity

Here, the action will be against the property as opposed to the defendant personally.

Advantages:

  • Beneficiaries can trace against trustees even into mixed funds;
  • Personal insolvency of a trustee is irrelevant;
  • Beneficiaries can claim an increase in value of their property;
  • In a proprietary claim, interest runs from the date of receipt as opposed to the date of judgment for a personal claim;
  • No limitation period which means that the case for tracing can proceed any time after the appropriation of the trust property.

Following conditions must be satisfied:

  • There must be a Fiduciary relationship, for example, beneficiary/trustee, and solicitor/client principal/agent.
  • The property must be in traceable form

Examples

Dissipation

If trust property of £15,000 is wrongfully paid over to a third party who uses it towards purchasing a house, tracing is clearly available.  It will be available in equity even if the £15,000 is mixed with the recipients own money.  But if the £15,000 was dissipated, there will be nothing to trace,

Unmixed funds in a bank account

 If £2000 of trust money is paid by a trustee into a new bank account, it can be traced.

Assets purchased with unmixed funds

Beneficiaries may recover the original asset or its value and trace it through to any other party except against a person who may have purchased the trust property legitimately.  This is particularly useful if the asset has increased in value.

Alternatively, especially if it has fallen in value, Beneficiaries can bring a personal action against the trustee for breach of trust.  

Mixed funds in a bank account: trustee’s own money and beneficiary’s money

Equitable tracing allows the tracer to follow and identify trust money into a mixed bank account:

  • Tracing must not produce an inequitable result

In the case of legitimate purchases for money without notice, there is no tracing possible and tracing will produce an unjust result.

In this case the of Volunteer (who has not paid any money) with notice, tracing will always be possible and trust property can be recovered.

In the case of a volunteer without notice, this may occur where a trustee or executor distributes property to the wrong person.  The general rule is that they have to return the trust property and tracing is allowed.

In the case where the recipient’s circumstances have changed so much that it is impossible for any recovery of the trust property, there can be no tracing. For example, trust property given to charity who have spent every penny.

 Subrogation is a remedy to reverse a defendant’s unjust enrichment. It is based on unconscionability.  The idea is that one person stands in the shoes of another and asserts that other’s rights. It is commonly applied in insurance law. 

Disclaimer

While every effort has been made to ensure the accuracy of the information provided in this article, it does not constitute legal advice and cannot be relied upon as such. Each legal case and issue may have unique facts and circumstances, as a result legalally does not accept any responsibility for liabilities arising as a result of reliance upon the information provided. For further help and guidance, you can always rely on and seek advice from our experienced lawyers.

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