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

Learning Outcomes

This article outlines the circumstances in which third parties may incur liability in equity for breaches of trust, focusing on knowing receipt, dishonest assistance, and intermeddling as a trustee de son tort. It explains how personal and proprietary claims operate against recipients and accessories, and how the choice of remedy affects priority in insolvency and the measure of recovery. It examines the equitable tracing process used to locate misapplied trust assets, including tracing into mixed funds, substituted assets, and bank accounts, and distinguishes following from tracing. It details the main tracing presumptions and rules (Re Hallett, Re Oatway, the lowest intermediate balance rule, Clayton’s Case, and pari passu sharing), together with the exceptional possibility of backwards tracing in coordinated schemes. It reviews the position of innocent volunteers and bona fide purchasers, highlighting when proprietary claims, constructive trusts, or equitable liens are available and how value changes are allocated. It also analyzes key defences—bona fide purchase, change of position, dissipation, and inequitable result—and shows how these principles are applied in SQE1-style problem questions involving misappropriated trust assets and third-party liability.

SQE1 Syllabus

For SQE1, you are required to understand the different ways third parties can become liable in equity when a breach of trust occurs, and how beneficiaries can recover misappropriated trust property, with a focus on the following syllabus points:

• The distinction between personal and proprietary claims against third parties.
• The requirements for establishing liability for knowing receipt (recipient liability).
• The requirements for establishing liability for dishonest assistance (accessory liability).
• The principles and rules of equitable tracing, including tracing into mixed funds.
• Defences available against equitable tracing claims.
• The position of innocent volunteers versus wrongdoing recipients, and how this affects the remedy (proportionate share versus equitable lien).
• The rule in Clayton’s Case and circumstances in which it is displaced by pari passu sharing (for example, in savings or pooled investment accounts).
• Bank account tracing presumptions (Re Hallett, Re Oatway), the lowest intermediate balance rule, and limits on backwards tracing with the coordinated scheme exception.
• Intermeddling and trustee de son tort liability.
• Priority effects of proprietary claims in insolvency and the limits of time bars and laches for equitable claims.

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. Which of the following is a necessary element for establishing liability for knowing receipt?
   1. The third party must have acted dishonestly.
   2. The third party must have received trust property for their own benefit.
   3. The third party must have provided consideration for the property.
   4. The trustee must have acted fraudulently.
2. What is the standard required to establish dishonesty for accessory liability?
   1. Subjective dishonesty based on the third party's own moral code.
   2. Objective dishonesty based on the standards of reasonable and honest people.
   3. Negligence in failing to inquire about the trustee's actions.
   4. Proof of intention to cause loss to the trust.
3. Which equitable tracing rule presumes that a trustee spends their own money first from a mixed bank account containing trust funds and their personal funds?
   1. The rule in Clayton's Case.
   2. The rule in Re Oatway.
   3. The rule in Re Hallett's Estate.
   4. The lowest intermediate balance rule.

Introduction

When a trustee commits a breach of trust, the beneficiaries primarily have personal remedies against the trustee to compensate for any loss. However, if the trustee is insolvent or cannot be found, these remedies may be ineffective. Equity provides further recourse by allowing beneficiaries to pursue claims against third parties who have become involved in the breach, either by receiving trust property or by assisting the trustee. Beneficiaries may also be able to assert a proprietary claim to recover the trust property itself, or its traceable substitute, even if it is in the hands of a third party. This article explores these remedies against third parties.

Equitable proprietary claims are particularly powerful because they attach to specific assets and confer priority over unsecured creditors if the defendant is insolvent. They are enabled by tracing rules that identify trust property in changed forms. Personal claims—such as for knowing receipt or dishonest assistance—target the third party’s liability to make good loss up to the value received or caused, but do not deliver priority in insolvency. In practice, beneficiaries often consider both avenues and select a route (or combination of routes) that maximises recovery, bearing in mind the defendant’s solvency and the nature and location of traceable assets.

Key Term: Tracing
The process of identifying trust property as it changes hands or form. It is not a remedy itself, but a mechanism enabling a proprietary claim to be made against the identified property or its substitute.

Key Term: Following
The process of following the same asset as it moves from person to person. By contrast, tracing identifies value as it changes form from one asset into another.

Liability of Third Parties

Third parties (strangers to the trust) can become liable in equity if they intermeddle in trust affairs, receive trust property knowing it was transferred in breach of trust, or dishonestly assist a trustee in committing a breach. Such liability often takes the form of the third party being treated as a constructive trustee for the limited purpose of equitable remedies. Not all involvement gives rise to liability; a bona fide purchaser for value of the legal estate without notice takes free of equitable interests and cannot be made liable in equity.

A further route to liability is intermeddling: a person who assumes to act as trustee without appointment (a trustee de son tort) is accountable as a trustee for loss caused by their unauthorised actions. This can arise where someone collects trust income or disposes of trust assets without authority, even if they did not personally receive the assets for their own benefit.

Key Term: Trustee de son tort
A person who, without appointment, intermeddles in trust affairs and thereby incurs trustee-like liability for losses caused.

Knowing Receipt (Recipient Liability)

A third party may be personally liable to the beneficiaries if they receive trust property transferred in breach of trust, provided certain conditions are met. This liability is often termed 'knowing receipt'.

The key elements are:

1. A disposal of trust assets in breach of trust or fiduciary duty.
2. The beneficial receipt by the third party of assets traceable to the breach.
3. Knowledge on the part of the third party that the assets received are traceable to a breach, making it unconscionable for them to retain the benefit.

The level of knowledge required was clarified in BCCI v Akindele [2001] Ch 437, where the Court of Appeal held that the test is whether the recipient's state of knowledge is such as to make it unconscionable for them to retain the benefit of the receipt. This encompasses actual knowledge, wilfully shutting one's eyes to the obvious, and wilfully and recklessly failing to make inquiries that an honest and reasonable person would make. It may also include knowledge of circumstances that would indicate the facts to, or put on inquiry, an honest and reasonable person. Suspicion confined to general unease is insufficient; the focus is on awareness of facts that would alert an honest person to the improper character of the transfer.

It is essential that the recipient has received the property for their own benefit. An agent or intermediary who received property solely to pass it on, without any beneficial interest, may not be liable in knowing receipt, though they could be liable in dishonest assistance if they knowingly facilitated the breach.

Key Term: Knowing Receipt
Liability imposed on a third party who receives trust property transferred in breach of trust with sufficient knowledge that the transfer was improper, making retention unconscionable.

Key Term: Bona Fide Purchaser For Value Without Notice
A person who acquires legal title to property for valuable consideration in good faith and without notice (actual, constructive, or imputed) of any pre-existing equitable interests. They take the property free from such interests and cannot be made liable in equity.

Worked Example 1.1

A trustee fraudulently transfers £50,000 from the trust fund to his friend, Fiona. Fiona is told the money is a 'gift' from a successful business deal. However, Fiona knows the trustee has recently faced financial difficulties and has complained about his trustee duties. Fiona uses the money to buy shares. The beneficiaries discover the breach. Can they claim against Fiona?

Answer:
Fiona may be liable for knowing receipt. Although she did not have actual knowledge, the circumstances (trustee's financial difficulties, unusual large 'gift') might have put an honest and reasonable person on inquiry. Her knowledge could be deemed sufficient to make retaining the benefit unconscionable under the Akindele test. The beneficiaries could bring a personal claim against Fiona for £50,000 or potentially a proprietary claim against the shares (see Tracing below).

Dishonest Assistance (Accessory Liability)

A third party who does not actually receive trust property can still be personally liable if they dishonestly assist a trustee or fiduciary in committing a breach of trust.

The core requirements are:

1. Existence of a trust or fiduciary duty.
2. A breach of that trust or duty by the trustee/fiduciary (though the trustee need not act dishonestly).
3. Assistance by the third party in the breach.
4. Dishonesty on the part of the third party assistant.

The test for dishonesty is objective. As established in Royal Brunei Airlines v Tan [1995] 2 AC 378 and confirmed in Barlow Clowes v Eurotrust [2005] UKPC 37, the court asks whether the third party's conduct was dishonest by the standards of ordinary, decent people, given their actual knowledge and attributes at the time. The third party's subjective view of their own honesty is irrelevant. Assistance is usually a positive act, but in context it can include passive conduct—for example, deliberately failing to act despite awareness that the trustee is about to commit a breach—where this silence is part of the facilitation of the breach.

Key Term: Dishonest Assistance
Liability imposed on a third party who does not receive trust property but dishonestly aids or procures a breach of trust committed by a trustee or fiduciary.

Worked Example 1.2

An accountant prepares false invoices for a trustee, knowing this will help the trustee misappropriate trust funds for personal use. The accountant does not receive any of the funds but is paid their usual fee. Are they liable?

Answer:
The accountant is likely liable for dishonest assistance. There was a breach of trust (misappropriation), the accountant assisted by creating false invoices, and preparing false documents knowingly to facilitate misappropriation would likely be considered dishonest by objective standards. The accountant is personally liable to compensate the trust for the loss caused by the breach they assisted.

Equitable Proprietary Claims and Tracing

Where trust property has been misapplied, beneficiaries may seek to recover the property itself or its substitute through a proprietary claim. This is distinct from a personal claim against the trustee or third party for compensation. Proprietary claims are particularly valuable if the defendant is insolvent, as the beneficiary can claim the specific asset in priority to general creditors. Proprietary claims can be framed either by asserting a constructive trust over the substitute asset (taking the increase in value) or by asserting a charge (equitable lien) for the amount misapplied (useful where value has fallen).

Key Term: Equitable Lien
A security interest over property securing repayment of a specific sum (e.g., misapplied trust money). If the secured amount is not repaid, the property can be sold to satisfy the lien. Unlike a constructive trust, a lien does not entitle the claimant to benefit from increases in the property's value.

Tracing allows beneficiaries to follow trust property into the hands of trustees or third parties (except bona fide purchasers for value without notice) and into different forms (e.g., money used to buy shares). In practice, tracing is often an enabling step: claimants identify the substitute and then elect the remedy—constructive trust or equitable lien—most advantageous on the facts.

Key Term: Innocent Volunteer
A recipient of trust property who has not provided consideration and has no notice of the trust or breach. They are not personally liable in equity for mere receipt, but may be subject to proprietary claims via tracing to return the property or its traceable product.

Prerequisites for Equitable Tracing

Two main conditions must usually be met to trace in equity:

1. Fiduciary Relationship: There must have been an initial fiduciary relationship (e.g., trustee-beneficiary). This relationship does not need to exist between the claimant and the defendant against whom tracing is sought.
2. Traceable Property: The property must remain identifiable, whether in its original form, as a substitute asset, or as part of a mixed fund. If the property has been dissipated (e.g., spent on a holiday, used to pay off an unsecured debt), tracing is generally not possible.

Key Term: Fiduciary Relationship
A relationship where one party (the fiduciary, e.g., a trustee) owes special duties of loyalty and utmost good faith to another (the principal or beneficiary).

Beneficiaries must also have an equitable proprietary interest in the property, which they do in relation to trust assets. Equity also insists that granting relief would not produce an inequitable result—particularly relevant where the defendant is an innocent volunteer.

In mistaken payments, the proprietary route depends on conscience. For example, constructive trusts are generally recognised once the recipient's conscience is affected—often when the recipient learns that the money is trust property or was paid by mistake. Before that point, personal unjust enrichment claims and the defence of change of position may be relevant.

Tracing Rules

Different rules apply depending on whether the trust property remains separate or has been mixed with other property. Distinguishing between following the same asset and tracing into substitutes is critical. Where assets have been mixed (for example, in a personal bank account), equity applies presumptions designed to protect beneficiaries against wrongdoing trustees but will share fairly between innocent parties.

Clean Substitution

If a trustee uses trust money solely to purchase a new asset (e.g., shares) in their own name, the beneficiaries can choose either to take the new asset itself (including any increase in value) or to take an equitable charge (lien) over the asset to secure their personal claim for the amount misappropriated (useful if the asset has decreased in value). Where the substitute has increased significantly (as in life insurance proceeds funded in part by trust money), beneficiaries may claim a proportionate share reflecting their contribution.

Key Term: Clean Substitution
Where trust property is exchanged for another asset without being mixed with other funds. The beneficiaries can claim the substitute asset, and may take the increase or secure the amount misapplied by an equitable lien.

Mixed Funds (Trustee's Own Money + Trust Money)

If a trustee mixes trust money with their own personal money in a bank account or uses a mixed fund to buy an asset:

• Presumption against the Wrongdoer: Equity presumes everything against the wrongdoing trustee.
• Re Hallett's Estate Rule: The trustee is presumed to spend their own money first from a mixed bank account. Any remaining balance is presumed to be trust money. This helps beneficiaries claim the leftover balance where withdrawals have dissipated the trustee’s own funds first.
• Re Oatway Rule: If the Re Hallett presumption would prevent the beneficiary tracing into a valuable asset purchased from the account (because the trustee's money would be deemed used first), the beneficiary can instead claim a first charge over the asset purchased with the mixed funds or the remaining balance. Essentially, the beneficiary gets the first choice to trace into the most advantageous asset so the wrongdoer does not benefit from the presumption.
• Lowest Intermediate Balance Rule: The beneficiary's claim against a mixed bank account is limited to the lowest balance the account reached after the trust money was paid in and before any subsequent deposits of the trustee's own money. Later deposits by the trustee are not automatically treated as replacing trust money unless intended as such (Roscoe v Winder). If the account was overdrawn, tracing cannot proceed into a negative balance; the property has ceased to exist in an identifiable form.

In some cases, beneficiaries have sought to trace value backwards through sequences of transactions (for example, loan funds used to acquire an asset later repaid with trust money). Traditionally, equity has refused backwards tracing because funds cannot be traced into assets acquired before the trust money was paid in. However, where the court is satisfied that the withdrawals and repayments formed part of a coordinated scheme designed to defeat tracing claims, it may allow recovery notwithstanding the chronology. This coordinated scheme exception is rare and highly fact-specific.

Key Term: Lowest Intermediate Balance
The principle limiting a tracing claim into a mixed bank account to the lowest balance held between the mixing and the claim, preventing tracing into subsequent deposits of the trustee's own money.

Key Term: Coordinated Scheme (Backwards Tracing)
An exception where equity permits tracing despite the usual prohibition on backwards tracing because a series of transactions are part of an orchestrated plan using trust money to acquire or preserve assets through loans and repayments.

Mixed Funds (Two Trusts or Trust + Innocent Volunteer)

If a trustee mixes funds from two different trusts, or mixes trust funds with money belonging to an innocent third party (a volunteer who received the money without knowledge of the breach):

• Clayton's Case Rule: Traditionally, the 'first in, first out' (FIFO) rule applied to withdrawals from an active current account. The first sum paid in is presumed to be the first sum paid out. This can produce arbitrary results, so courts are cautious about using it where it would be unfair.
• Pari Passu (Proportionate Sharing): The courts now often prefer to share the remaining mixed fund or any asset bought from it pari passu (proportionately) between the innocent claimants based on their contributions. This is considered fairer than the arbitrary FIFO rule, especially for savings or pooled accounts where FIFO is impractical or unjust. Savings accounts typically default to pro rata sharing.

When an innocent volunteer has mixed trust funds with their own money to purchase an indivisible asset, the beneficiaries will generally take a proportionate share. As between innocent parties, equity commonly refuses to confer a lien that would secure the trust’s amount at the expense of the volunteer where the asset has fallen in value; each bears their share of gains and losses proportionately.

Key Term: Innocent Volunteer
A person who receives trust property without giving value and without notice of the trust or breach. Proprietary claims can be pursued against them through tracing, but personal liability is not imposed merely by receipt.

Defences to Tracing

A proprietary claim based on tracing can be defeated by certain defences:

• Bona Fide Purchaser For Value Without Notice (BFPFVWN): If trust property passes to someone who gives valuable consideration (is a purchaser) and acts in good faith without any actual or constructive notice of the beneficiary's interest, the beneficiary's equitable interest is extinguished. This person is often called 'Equity's darling'.
• Change of Position: An innocent volunteer (who received the property without giving value and without knowledge of the breach) may have a defence if they have detrimentally changed their position in reliance on the receipt (e.g., spending the money irrecoverably or improving a home where enforcement would be inequitable). This defence is not available to wrongdoers and will be shaped by equitable fairness on the facts.
• Dissipation: Tracing ends if the property or its proceeds cease to exist in identifiable form (e.g., money spent on general living expenses, dinner, or paying off an unsecured debt). However, if trust money is used to pay off a secured debt (like a mortgage), the beneficiaries may be subrogated to the lender's security rights.
• Inequitable Result (Re Diplock Principles): Equity will not allow tracing if it would produce an unfair or impractical result against an innocent volunteer, for example, forcing sale of a volunteer's home significantly improved using a small amount of trust money. However, where trust funds and the volunteer’s funds were both used to acquire property, proportional recovery remains available.

Key Term: Change of Position
A defence available to an innocent recipient who has irreversibly altered their position in reliance on the receipt, such that it would be unjust to require full restitution. Not available to wrongdoing recipients.

Key Term: Subrogation
An equitable remedy where the claimant steps into the shoes of a creditor (e.g., a mortgagee) whose secured debt was discharged using trust money, enabling the claimant to exercise the creditor’s security rights.

Worked Example 1.3

A trustee misappropriates £10,000 from Trust A and £20,000 from Trust B, paying both sums into their personal bank account which previously held £5,000 of their own money (Total £35,000). The trustee then withdraws £15,000 to buy shares now worth £18,000. They then withdraw £10,000 and spend it on a holiday (dissipated). £10,000 remains in the account. How can the beneficiaries trace?

Answer:

1. Against Trustee's Money First (Re Hallett): The trustee's own £5,000 is deemed spent first.
2. First Withdrawal (£15K for shares): The remaining £10,000 of the trustee's money is deemed spent. The next £5,000 must be trust money. Which trust? Apply Clayton's Case (FIFO): £5,000 from Trust A (first in). The shares were bought with £10K trustee money and £5K Trust A money.
3. Second Withdrawal (£10K for holiday): This must be trust money. Apply FIFO: the remaining £5,000 from Trust A is spent first, then £5,000 from Trust B. Both are dissipated.
4. Remaining Balance (£10K): This must be Trust B money (£20K paid in - £5K spent on holiday = £15K initially remaining from Trust B, but only £10K left in account).
5. Outcome using FIFO: Trust A traces £5K into the shares (can claim 1/3 of £18K = £6K or a lien for £5K). Trust B traces £10K into the remaining bank balance.
6. Alternative (Pari Passu): If FIFO is unjust, the court might apply pari passu. The shares (£15K cost) and remaining balance (£10K) totalling £25K came from £10K trust A money and £20K trust B money (ratio 1:2). Trust A gets 1/3 (£8,333), Trust B gets 2/3 (£16,667). This would likely apply to the shares (£6K for A, £12K for B) and the remaining balance (£3,333 for A, £6,667 for B). Application can be complex but illustrates the court’s flexibility where FIFO would be arbitrary.

Worked Example 1.4

A trustee pays £12,000 of trust money to an innocent volunteer, Victor, who uses £12,000 together with £36,000 of his own money to install a new extension on his home, increasing its value by £40,000. The beneficiaries seek a proprietary claim against the extension. What result?

Answer:
Victor is an innocent volunteer. Equity is slow to enforce liens that compel sale of a home to satisfy the trust’s claim where enforcement would be inequitable. A claim to a proportionate share of the extension is impractical because the improvement is inseparable from the land. Applying Re Diplock principles, the court is likely to conclude it would be inequitable to enforce a proprietary claim against the extension. The beneficiaries can instead sue the trustee personally and, if other remedies are exhausted (for example, the trustee is insolvent), consider whether a limited personal claim against Victor is available in an estate context; but against an innocent volunteer owner-occupier, proprietary enforcement into improvements is generally refused.

Worked Example 1.5

A trustee uses £50,000 of trust money to pay off the balance of a secured mortgage on their house. The house is then immediately sold and the trustee disappears. Can the beneficiaries recover anything via tracing?

Answer:
The beneficiaries can revive the discharged mortgage security by subrogation, stepping into the lender’s shoes to the extent trust money satisfied the loan. This entitles them to exercise the former mortgagee’s rights against the property or the sale proceeds on the same terms as the original mortgage. Subrogation avoids the dissipation risk otherwise posed by paying secured debts.

Exam Warning

Tracing rules, especially concerning mixed funds and bank accounts, can be complex. Focus on understanding the core principles (Re Hallett, Re Oatway, FIFO, pari passu, lowest intermediate balance) and the main defences (BFPFVWN, change of position, dissipation). Distinguish between following the same asset and tracing into substitutes. Backwards tracing is exceptional and fact-sensitive; do not rely on it unless a coordinated scheme is clear. Exam questions are more likely to test the application of these core principles in straightforward scenarios rather than highly complex calculations.

Key Point Checklist

This article has covered the following key knowledge points:

• Third parties can become liable for breaches of trust through knowing receipt or dishonest assistance.
• Knowing receipt requires receipt of trust property for the recipient's own benefit with knowledge making retention unconscionable.
• Dishonest assistance requires dishonest help given by a third party to a trustee committing a breach, judged by objective standards.
• Intermeddling in trust affairs can render a person liable as a trustee de son tort.
• Equitable tracing allows beneficiaries to follow trust property into new forms or into the hands of third parties (except BFPFVWN).
• Tracing requires an initial fiduciary relationship, an equitable proprietary interest, and identifiable property; equity will refuse relief where enforcement is inequitable against an innocent volunteer.
• Specific rules apply when tracing into mixed funds (Re Hallett, Re Oatway, FIFO, pari passu, lowest intermediate balance); savings accounts commonly default to pro rata sharing.
• Beneficiaries can elect between a constructive trust (taking increases) and an equitable lien (securing the amount misapplied) depending on value changes.
• Subrogation is available where trust money discharges secured debts.
• Defences to tracing include BFPFVWN, change of position (for innocent volunteers), dissipation, and laches/inequitable result; proprietary claims are not subject to the six-year limitation period but are subject to equitable delay principles.

Key Terms and Concepts

• Knowing Receipt
• Dishonest Assistance
• Tracing
• Following
• Clean Substitution
• Fiduciary Relationship
• Lowest Intermediate Balance
• Bona Fide Purchaser For Value Without Notice
• Innocent Volunteer
• Equitable Lien
• Trustee de son tort
• Change of Position
• Subrogation
• Coordinated Scheme (Backwards Tracing)