Remedies against third parties: recipient and accessory liab...

Learning Outcomes

This article outlines the principles governing claims against innocent volunteers who receive trust property transferred in breach of trust. It explains the remedies available to beneficiaries, focusing on proprietary claims and the process of equitable tracing. For the SQE1 assessment, you will need to understand the distinction between personal and proprietary claims, the rules for tracing trust property into the hands of an innocent volunteer (including into mixed funds), and the potential defences available to such volunteers. This knowledge will enable you to identify and apply the relevant legal rules to SQE1-style single best answer questions.

In addition, you should be clear on how equitable tracing operates where trust property has changed form, when the right to trace is lost due to dissipation or inequity, how the first-in, first-out presumption can be displaced in mixed accounts, and the specific limits on personal claims against volunteers. You should also recognise when beneficiaries can assert subrogation to a discharged secured debt, how improvements to a volunteer’s pre-owned property are treated, and when proprietary claims defeat general creditors such as in insolvency.

SQE1 Syllabus

For SQE1, you are required to understand the remedies available against third parties who receive trust property, including innocent volunteers, and to distinguish between personal and proprietary claims and apply the rules of equitable tracing, with a focus on the following syllabus points:

• The definition of an innocent volunteer.
• The distinction between personal and proprietary remedies against third parties.
• The requirements and limitations of equitable tracing.
• The specific tracing rules applicable when trust property is mixed with an innocent volunteer's property.
• The potential defences available to an innocent volunteer, such as change of position and bona fide purchaser for value without notice.
• The principles established in key cases concerning claims against innocent volunteers, although specific case names are not usually required unless they define a core principle.
• The application of rateable sharing in mixed asset purchases by an innocent volunteer and the inapplicability of an equitable lien in such cases.
• The rules governing withdrawals from mixed bank accounts, including the rule in Clayton’s Case (FIFO), the lowest intermediate balance principle, and when proportionate sharing may be preferred.
• The Re Diplock limitations on tracing into improvements to a volunteer’s own pre-existing property and the limited personal claim in wrongful estate distributions after other remedies are exhausted.
• The effect of transfer to a bona fide purchaser for value without notice, including the ability to trace into proceeds.
• The role of subrogation where trust funds discharge a secured debt and the mortgage can be revived on the same terms for the beneficiaries.
• The application of equitable defences such as laches to claims grounded in equity.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. True or False: An innocent volunteer who receives trust property in breach of trust is personally liable to compensate the beneficiaries for the value received.
2. Which equitable remedy allows beneficiaries to assert ownership rights over property that represents misappropriated trust assets? a) Equitable compensation b) Account of profits c) Proprietary claim via tracing d) Injunction
3. An innocent volunteer receives £10,000 of trust money and mixes it with £5,000 of their own money in a bank account. They then spend £6,000 from the account on living expenses. Which tracing rule traditionally applies to determine whose money was spent? a) Re Hallett's Estate (trustee spends own money first) b) Re Oatway (beneficiary has first charge) c) Clayton's Case (first in, first out) d) Proportionate sharing
4. What defence might be available to an innocent volunteer who spent trust money received in good faith on home improvements, making it inequitable to force a sale?

Introduction

When trust property is misapplied by a trustee in breach of trust, it may end up in the hands of a third party. If that third party provided consideration and had no notice of the breach, they are generally protected as a bona fide purchaser for value. However, if the recipient gave no consideration (a volunteer) and was unaware of the breach (innocent), the beneficiaries may still have remedies against them, primarily through proprietary claims facilitated by equitable tracing. This article focuses specifically on claims against these innocent volunteers.

Understanding the position of innocent volunteers is essential because equity seeks to balance the protection of beneficiaries' interests with fairness towards recipients who were not party to the original wrongdoing. Proprietary remedies allow beneficiaries to reclaim specific property or its identifiable substitutes, which can be more advantageous than personal claims, especially where a recipient is insolvent. However, equitable tracing is not limitless: the property must remain identifiable and the remedy must not lead to an inequitable result, particularly in the case of blameless recipients.

Nature of Claims Against Innocent Volunteers

An innocent volunteer is a person who receives trust property (or its traceable proceeds) without giving consideration (value) and without knowledge of the breach of trust that led to the transfer.

Key Term: Innocent Volunteer
A third party who receives trust property transferred in breach of trust, without providing consideration and without knowledge or notice of the breach.

Equity does not generally impose personal liability on an innocent volunteer simply for receiving the property. Unlike a recipient with knowledge (a 'knowing recipient'), the innocent volunteer's conscience is not considered affected at the point of receipt. Therefore, a personal claim to compensate the trust fund for the value received, akin to that against a defaulting trustee or a knowing recipient, is typically unavailable against an innocent volunteer whose position has not changed after becoming aware of the trust claim (subject to the limited exception established in Re Diplock for claims against recipients of assets wrongly distributed from a deceased's estate).

The primary remedy available to beneficiaries against an innocent volunteer is a proprietary claim to recover the specific trust property or its traceable proceeds.

Key Term: Proprietary Claim
A claim asserting rights over specific property, allowing the claimant to recover the property itself or its traceable substitute, rather than seeking monetary compensation from the defendant personally.

A proprietary claim has significant advantages, especially if the innocent volunteer becomes bankrupt, as the claimed property does not form part of the volunteer's assets available to general creditors.

In some circumstances, the legal position of a volunteer can shift. If a volunteer later learns the property is trust property and nonetheless deals with it inconsistently with the beneficiaries’ rights (for instance, disposing of it for their own benefit), equity may treat the volunteer as a constructive trustee for the period after knowledge, potentially opening a personal claim for knowing receipt. However, the focus in exams and practice is the initial status of the innocent volunteer and proprietary claims achievable through equitable tracing.

Equitable Tracing Against Innocent Volunteers

To bring a proprietary claim, beneficiaries must be able to identify the trust property or its proceeds in the hands of the innocent volunteer. This process of identification is known as equitable tracing.

Key Term: Equitable Tracing
The process by which equity allows beneficiaries to identify and follow trust property as it changes hands or form, even when mixed with other property.

Requirements for Equitable Tracing

For equitable tracing to be available against any recipient (including an innocent volunteer), certain prerequisites must generally be met:

1. Fiduciary relationship: There must have been an initial fiduciary relationship (e.g., between the trustee and beneficiaries). This relationship does not need to exist between the claimant and the defendant against whom tracing is sought.
2. Equitable proprietary interest: The claimant (beneficiary) must have an equitable proprietary interest in the property being traced.
3. Identifiable property: The property (or its substitute) must still exist and be identifiable, even if mixed with other property. Tracing is not possible if the property has been dissipated (e.g., spent on general living expenses, a holiday, or unsecured debts) without leaving any traceable product.
4. No inequitable result: Equitable remedies may be refused if enforcement would be inequitable. This principle is particularly relevant where the recipient is an innocent volunteer, for example in attempts to trace into improvements to a volunteer’s pre-owned home.
5. No unreasonable delay: Although statutory limitation does not typically bar proprietary equitable claims, undue delay may prompt the equitable defence of laches and defeat relief if prejudice would result.

Key Term: Dissipation
The spending of funds on items that leave no identifiable asset or product (e.g., living expenses, holidays, payment of unsecured debts), rendering tracing into those sums impossible.

Tracing Rules Involving Innocent Volunteers

When trust property is mixed with the innocent volunteer's own property, specific tracing rules apply, reflecting the fact that the recipient is blameless. These rules differ from those applied against a wrongdoing trustee ('everything is presumed against a wrongdoer').

Mixed Asset Purchases

If an innocent volunteer uses trust funds mixed with their own money to purchase an asset (e.g., a car, shares), the beneficiaries and the innocent volunteer share ownership of the asset rateably (proportionately) according to their contributions.

Key Term: Rateable Sharing (Pari Passu)
A method of distribution where claimants share property or its value in proportion to their original contributions or claims.

This means both parties share any increase or decrease in the asset's value proportionately. Unlike claims against a wrongdoing trustee, the beneficiary cannot elect to take a charge (lien) over the asset to recover the full amount of the trust money if the asset has decreased in value.

Worked Example 1.1

An innocent volunteer, V, receives £10,000 of trust money mistakenly transferred by a trustee. V adds £5,000 of their own savings and buys shares for £15,000. The shares are now worth £18,000. What proprietary claim do the beneficiaries have?

Answer:
The beneficiaries and V share the asset rateably. The trust contributed £10,000 (two-thirds) and V contributed £5,000 (one-third). The shares are now worth £18,000. The beneficiaries can claim a two-thirds share, which is £12,000. V is entitled to the remaining one-third (£6,000).

Worked Example 1.2

Using the facts from Worked Example 1.1, assume the shares are now worth only £9,000. What proprietary claim do the beneficiaries have?

Answer:
The beneficiaries and V still share the asset rateably. The beneficiaries can claim two-thirds of the current value (£6,000). V is entitled to the remaining one-third (£3,000). The beneficiaries cannot claim a charge for the full £10,000 originally misapplied; they share the loss proportionately with the innocent volunteer.

Withdrawals from a Mixed Bank Account

If an innocent volunteer mixes trust money with their own funds in a bank account, the traditional rule for determining whose money is withdrawn first is the rule in Clayton's Case (1816), commonly known as 'first in, first out' (FIFO). This rule applies primarily to current accounts.

Key Term: Rule in Clayton's Case (FIFO)
A tracing rule applicable to mixed funds in active bank accounts, presuming that money withdrawn is the money that was first deposited.

Worked Example 1.3

An innocent volunteer, V, has £2,000 in their bank account. On Monday, £4,000 of trust money is mistakenly paid in. On Tuesday, V deposits a further £1,000 of their own money. On Wednesday, V withdraws £5,000 and spends it on untraceable living expenses. What is the proprietary claim of the beneficiaries against the remaining balance?

Answer:
Applying Clayton's Case (FIFO):

• Initial balance: £2,000 (V's) + £4,000 (Trust) + £1,000 (V's) = £7,000 total.
• Withdrawal of £5,000: The first £2,000 withdrawn is deemed to be V's original money. The next £3,000 withdrawn is deemed to be from the trust money paid in on Monday.
• Remaining balance: £2,000. This consists of £1,000 of the trust money (from Monday) and £1,000 of V's money (from Tuesday).
• The beneficiaries can trace £1,000 into the remaining balance.

However, the courts have recognised that the FIFO rule can operate arbitrarily and may lead to injustice. In Barlow Clowes International Ltd v Vaughan, the Court of Appeal indicated that FIFO should not be applied if it is impractical, contrary to the parties' intentions, or unjust. In such cases, particularly where funds from multiple innocent parties are mixed, the court may prefer a proportionate sharing approach, where the remaining funds (or assets purchased) are shared rateably according to the contributions made.

Key Term: Lowest Intermediate Balance
A principle limiting a claimant’s tracing claim through a bank account to the lowest balance the account reached after the trust money was paid in, reflecting that later top-ups do not replenish the claimant’s proprietary interest.

The lowest intermediate balance rule operates alongside FIFO. Even where withdrawals are allocated using FIFO, the proprietary claim through the account cannot exceed the lowest balance the account fell to after the trust funds were added. This protects recipients from claims to artificially replenished funds and is consistent with the requirement that tracing identifies property that truly represents the claimant’s asset.

Worked Example 1.4

V’s account balance is £1,000. On Day 1, £9,000 of trust money is credited. On Day 2, V withdraws £8,000 for living expenses. On Day 3, V deposits £5,000 of salary. On Day 4, the balance stands at £7,000. What is the maximum amount the beneficiaries can claim through the account?

Answer:
The account’s lowest intermediate balance after the trust money was paid in was £2,000 (Day 2: £10,000 initial total minus £8,000 withdrawals). The beneficiaries’ claim through the bank account is capped at £2,000, even though the later deposit raised the balance to £7,000. Funds introduced after depletion do not restore the beneficiaries’ proprietary interest.

In mixed accounts involving several innocent contributors, Clayton’s Case may be considered unsuitable. The court may instead divide the remaining balance proportionately, reflecting each contributor’s share at relevant times. This ensures fairness between blameless claimants.

Worked Example 1.5

A trustee mistakenly pays £20,000 from Trust A and £10,000 from Trust B into V’s current account (initially empty). V makes multiple withdrawals for living expenses totalling £18,000, then buys a laptop for £3,000 and finally leaves £9,000 in the account. Both Trust A and Trust B are innocent parties. How is the remaining balance allocated?

Answer:
Applying proportionate sharing to avoid injustice between innocent parties:

• Total paid in: £30,000. Trust A contributed two-thirds; Trust B contributed one-third.
• Remaining account balance: £9,000 is shared two-thirds (£6,000) to Trust A and one-third (£3,000) to Trust B.
• The £3,000 laptop can be claimed rateably in the same proportions if Clayton’s Case would unfairly allocate the withdrawal to one trust. A proportionate approach provides a fairer outcome among the innocent contributors.

Additional tracing pathways relevant to volunteers

Sometimes recipients use trust funds to discharge secured debts rather than buy assets.

Key Term: Subrogation
An equitable remedy allowing the claimant to step into the shoes of a secured creditor whose debt was discharged with the claimant’s funds, reviving the security on the same terms to protect the claimant’s proprietary interest.

Where trust money used by a volunteer discharges a mortgage over the volunteer’s property, beneficiaries may revive the mortgage by subrogation, becoming mortgagee to the extent of the trust money used. This avoids inequity that could arise from denying recovery merely because funds were applied to a secured liability rather than buying a new asset.

Worked Example 1.6

V innocently receives £25,000 of trust money and uses it to pay down £25,000 of their home mortgage. Can the beneficiaries trace their proprietary interest?

Answer:
Yes. The beneficiaries can be subrogated to the lender’s security for £25,000, reviving the discharged mortgage on the same terms to the extent of the payment. This gives the beneficiaries a proprietary security interest, rather than forcing a sale of the property.

Backwards tracing and coordinated schemes

Traditional tracing requires chronological causation: trust money must be used to acquire the asset. Backwards tracing (claiming into an asset acquired before trust money arrived) is generally unavailable unless the court is satisfied that the transactions formed part of a coordinated scheme designed to defeat tracing.

Key Term: Backwards Tracing
Tracing into property acquired before trust money was received, usually impermissible unless the acquisitions and payments form a coordinated scheme.

Key Term: Coordinated Scheme Exception
An exception allowing backwards tracing where the steps are part of a coordinated plan, so that the later application of trust funds is connected to and intended to repay or finance the earlier acquisition.

The coordinated scheme exception is most often engaged where wrongdoing trustees or recipients orchestrate movements of funds through accounts. It is less likely to be relevant to an innocent volunteer, but might apply if the volunteer’s receipt and use of funds were integrated into a broader scheme managed by the wrongdoer. In practice, proprietary claims against innocent volunteers focus on clean substitutions, mixed assets with rateable sharing, mixed accounts (FIFO displaced when unjust), subrogation to discharged securities, and losses due to dissipation.

Exam Warning

For SQE1 purposes, be aware of both the traditional Clayton's Case (FIFO) rule and the possibility of the court applying a proportionate sharing solution, especially where FIFO would lead to an unfair result between innocent parties. Also be prepared to recognise lowest intermediate balance limitations, the subrogation route when secured debts are discharged, and the restricted availability of backwards tracing absent a coordinated scheme.

Defences Available to Innocent Volunteers

Even if beneficiaries can trace trust property into the hands of an innocent volunteer, the volunteer may have defences that defeat the proprietary claim.

Bona Fide Purchaser for Value Without Notice

This defence is fundamental. If a person acquires legal title to property for value (not as a gift) in good faith, without actual, constructive, or imputed notice of any prior equitable interest (like that of the beneficiaries), they take the property free from that interest. This defence provides finality to commercial transactions. An innocent volunteer, by definition, has not given value, so this defence is not available to them. However, if the innocent volunteer subsequently sells the property to a bona fide purchaser for value without notice, the beneficiaries' right to trace into the original property is lost (though they may be able to trace into the sale proceeds received by the volunteer).

Key Term: Bona Fide Purchaser for Value Without Notice
A person who acquires legal title for value, in good faith, without notice of prior equitable interests. They take free of those interests and defeat proprietary claims to the specific property.

Worked Example 1.7

V receives trust money and uses it to buy a painting, later selling it to P, a purchaser who pays market value and has no notice of the trust. Can the beneficiaries recover the painting from P?

Answer:
No. P is a bona fide purchaser for value without notice and takes free of the beneficiaries’ equitable interest in the painting. The beneficiaries may attempt to trace into the sale proceeds in V’s hands, subject to mixing and dissipation.

Change of Position

This defence, established in Lipkin Gorman v Karpnale Ltd, may protect an innocent recipient (including a volunteer) who has changed their position in good faith in reliance on the receipt, such that it would be inequitable in all the circumstances to require them to make restitution.

Key Term: Change of Position
A defence available to an innocent recipient of misdirected funds where they have, in good faith, irreversibly changed their circumstances in reliance on the receipt, making full restitution inequitable.

Requirements for the Defence

• Good faith: The recipient must have acted honestly and without knowledge of the claimant's rights when changing their position.
• Change of position: The recipient must have altered their position. Ordinary living expenses that would have been incurred anyway are unlikely to suffice. Examples include significant capital expenditures, irreversible commitments, or donations that would not have been made but for the receipt.
• Reliance: The change must have been made in reliance on the receipt.
• Inequitable: It must be unfair or unjust to require the recipient to make full restitution. The defence can be partial, reducing rather than defeating liability.

This defence is fact-sensitive. It typically fails if the recipient had notice of the claimant’s rights, acted in bad faith, or retains identifiable property representing the funds received. If property remains identifiable, proprietary claims usually proceed regardless of change of position, as returning the property may be more equitable than monetary repayment.

Application to Innocent Volunteers

An innocent volunteer might use trust money received to make a large charitable donation they would not otherwise have made, or undertake significant, non-value-enhancing home renovations. In such cases, forcing them to repay the trust might be deemed inequitable. The defence can be partial, excusing repayment to the extent of irrecoverable reliance losses while allowing tracing into identifiable assets not covered by the change.

Worked Example 1.8

V innocently receives £12,000 and donates £10,000 to charity, keeping £2,000 in her account. The beneficiaries seek restitution of the full £12,000.

Answer:
V may raise change of position to resist repayment of the £10,000 donation if made in good faith reliance on the receipt, as recovering this sum would be inequitable. The beneficiaries can still trace £2,000 in the account, subject to any mixing rules and lowest intermediate balance.

The Re Diplock Issue

A specific problem arises when an innocent volunteer uses trust money to improve their own pre-existing property (e.g., building an extension on their house). In Re Diplock, the Court of Appeal held that tracing was generally not possible in such cases because:

• The improvements might not actually increase the property's value.
• Even if value increased, forcing a sale of the innocent volunteer's home to satisfy the beneficiaries' claim would be inequitable.

This specific application of the inequitability principle often prevents beneficiaries from tracing into improvements made by innocent volunteers using trust funds, although the original money might still be recoverable if the change of position defence does not fully apply. The Re Diplock personal claim against wrongful recipients of estate assets is exceptional: it is available in the context of wrongful distributions from estates, and typically only after remedies against the personal representatives have been exhausted.

Worked Example 1.9

V innocently receives £15,000 from a wrongly distributed estate and spends £15,000 on a new kitchen in her home. The beneficiaries seek to assert a proprietary claim against the house.

Answer:
A proprietary claim into the home improvements will generally fail under Re Diplock principles due to inequity in forcing sale of an innocent volunteer’s home. Depending on the estate context, beneficiaries might pursue a limited personal Re Diplock claim, but only after exhausting claims against the personal representatives, and subject to any change of position defence.

Dissipation

Tracing is impossible if the trust property or its proceeds no longer exist in identifiable form. If an innocent volunteer spends the trust money on general living expenses, a holiday, or discharges an unsecured debt, the property is dissipated, and the proprietary claim fails. Where such funds are used to pay secured debts, subrogation may still revive a security interest for the beneficiaries.

Worked Example 1.10

V receives £8,000 and pays off credit card debts (£5,000) and takes a holiday (£3,000). Can the beneficiaries trace into these expenditures?

Answer:
No. Both paying unsecured debts and spending on a holiday are dissipation; there is no identifiable asset or product, so tracing fails. The beneficiaries cannot assert a proprietary claim to these sums.

Additional Applications and Nuances

While the focus is proprietary recovery, claimants should consider contextual rules that can affect outcomes.

• Clean substitution: If the volunteer uses trust money to buy an identifiable asset outright (without mixing), the beneficiaries may claim the asset directly, subject to bona fide purchaser rules on subsequent transfers.
• Proceeds and substitute assets: Claimants can trace into proceeds of sale and then into assets bought with those proceeds, applying rateable sharing if mixed with the volunteer’s funds.
• Insolvency of the volunteer: Proprietary claims can give priority over general creditors because the claimed property or its traceable substitute is not part of the bankrupt’s estate. Change of position does not convert proprietary claims into personal claims; it may reduce repayment obligations where restitution is sought, but cannot defeat a valid proprietary claim to specific, identifiable property still in the recipient’s hands.
• Delay and laches: If beneficiaries unreasonably delay bringing proprietary claims and the volunteer suffers prejudice (e.g., loss of evidence), the court may refuse equitable relief.

Worked Example 1.11

V receives £7,000 and uses £7,000 to buy a gold watch. The beneficiaries discover the transfer two years later. V still owns the watch. V claims change of position.

Answer:
Change of position will not defeat a proprietary claim to the watch. The beneficiaries can recover the watch as a clean substitution of trust funds, subject to any intervening sale to a bona fide purchaser for value without notice.

Interaction with mixed assets purchased by volunteers

Rateable sharing applies to both increases and decreases in value. If the asset is sold and proceeds mixed, claimants trace into the proceeds proportionately. If proceeds fund sequential purchases, tracing follows assets into successive substitutes, subject to dissipation and inequity constraints.

Worked Example 1.12

V mixes £9,000 trust money with £6,000 of personal funds to buy a used car for £15,000. Later, V sells the car for £12,000 and mixes the £12,000 sale proceeds with £3,000 of salary to buy a motorbike for £15,000. How do beneficiaries trace?

Answer:
The beneficiaries have a two-thirds proprietary interest in the car and, upon sale, two-thirds of the £12,000 proceeds (£8,000). When the proceeds are mixed with £3,000 salary to buy the motorbike, beneficiaries take a two-thirds rateable share in the resulting asset: two-thirds of £15,000 equals £10,000. If the motorbike is now worth £9,000, beneficiaries’ claim is two-thirds (£6,000); if it has increased to £18,000, beneficiaries’ claim is two-thirds (£12,000).

Estate Distribution Context and Re Diplock Personal Claim

Where personal representatives distribute estate assets wrongly, beneficiaries of the estate have rights to recover misapplied assets. Typically, beneficiaries trace and recover from the personal representatives and any recipients who are not bona fide purchasers. The exceptional Re Diplock personal claim allows recovery from wrongful recipients of estate assets who are innocent volunteers, but generally only after it is shown that recovery from the personal representatives is impossible or inadequate. Even there, change of position and inequity (including the improvements principle) may limit recovery. This estate-specific personal claim does not extend generally to trust misapplications outside the administration of estates.

Consolidating Bank Account Rules for Volunteers

• FIFO presumptions can be displaced if unjust, with courts preferring proportionate sharing solutions.
• Lowest intermediate balance caps recovery through accounts, preventing claimants from asserting interests in funds introduced after dissipation.
• Where secured debts are paid, subrogation supports proprietary recovery; where unsecured debts are paid, funds are dissipated.
• Backwards tracing is rare against volunteers and generally requires a coordinated scheme; standard chronological tracing suffices in most volunteer scenarios.

Worked Example 1.13

V’s account is overdrawn by £2,000. V receives a mistaken £5,000 trust transfer, reducing the overdraft to £0 and creating a £3,000 positive balance. V then withdraws £2,000 for living expenses. What can the beneficiaries claim?

Answer:
The beneficiaries can trace into the extinguishment of the overdraft only if a coordinated scheme justifies backwards tracing; ordinarily, using trust funds to reduce an overdraft does not produce a traceable asset. They can claim the £1,000 remaining in the account (lowest intermediate balance analysis: from +£3,000 positive balance to +£1,000 after withdrawal) and will ordinarily fail to trace into the overdraft reduction absent special facts.

Practical Recovery Sequence

When faced with misapplied trust money in the hands of an innocent volunteer:

• Identify any clean substitutions: recover the asset itself.
• If mixed asset purchase: calculate rateable shares and claim proportionately.
• If mixed bank account: assess FIFO, consider displacement and proportionate sharing, and apply lowest intermediate balance.
• Consider subrogation where secured debts were discharged.
• Assess dissipation: exclude sums spent on living expenses or unsecured debts.
• Evaluate change of position and its partial effect.
• Consider whether the property has been transferred to a bona fide purchaser for value without notice, in which case trace into proceeds in the volunteer’s hands.
• Where an estate is involved, consider Re Diplock in last resort after claims against personal representatives.

Key Point Checklist

This article has covered the following key knowledge points:

• An innocent volunteer receives trust property without giving value or having notice of the breach of trust.
• Beneficiaries generally cannot bring personal claims against innocent volunteers but can pursue proprietary claims via equitable tracing.
• Equitable tracing requires a fiduciary relationship, an equitable proprietary interest, identifiable property, no inequitable result, and no unreasonable delay.
• Specific tracing rules apply when trust property is mixed with an innocent volunteer's property:
  • Mixed assets are shared rateably (proportionately), with beneficiaries sharing increases and decreases in value.
  • Mixed bank accounts traditionally follow Clayton's Case (FIFO), but courts may apply proportionate sharing if FIFO is unjust.
  • The lowest intermediate balance rule caps recovery through bank accounts to the lowest balance after trust funds were paid in.
  • Backwards tracing is generally unavailable unless a coordinated scheme links payments and acquisitions; this is uncommon in volunteer cases.
• Subrogation allows beneficiaries to revive a discharged secured debt (e.g., a mortgage) paid with trust funds and assert a security on the same terms.
• Tracing is impossible where funds have been dissipated (e.g., living expenses, holidays, or paying unsecured debts).
• The defence of bona fide purchaser for value without notice is not available to volunteers but will defeat proprietary claims against subsequent purchasers; beneficiaries may still trace into sale proceeds held by the volunteer.
• The defence of change of position may protect an innocent volunteer if they have altered their position in good faith reliance on the receipt, making restitution inequitable; the defence can be partial.
• Tracing into improvements made by an innocent volunteer to their own pre-existing property is generally not permitted (Re Diplock), due to inequity in forcing sale.
• In wrongful estate distributions, beneficiaries may have a limited personal claim against innocent recipients (Re Diplock), typically only after exhausting remedies against personal representatives.

Key Terms and Concepts

• Innocent Volunteer
• Proprietary Claim
• Equitable Tracing
• Rateable Sharing (Pari Passu)
• Rule in Clayton's Case (FIFO)
• Change of Position
• Lowest Intermediate Balance
• Backwards Tracing
• Coordinated Scheme Exception
• Bona Fide Purchaser for Value Without Notice
• Subrogation
• Dissipation