Trustees' liability for breach: proprietary claims - Equitable remedies available for proprietary claims

Learning Outcomes

After studying this article, you will be able to distinguish between personal and proprietary claims following a breach of trust, identify when proprietary claims are available to beneficiaries, and explain the main equitable remedies—such as constructive trusts, equitable liens, and tracing—used to recover misapplied trust property. You will also understand the limits and defences to proprietary claims, including the position of bona fide purchasers and the doctrine of laches.

SQE1 Syllabus

For SQE1, you are required to understand the circumstances in which beneficiaries may bring proprietary claims following a breach of trust, the nature of equitable remedies available for such claims, and the practical and legal consequences of asserting proprietary rights. In your revision, focus on:

  • The distinction between personal and proprietary claims after a breach of trust
  • The process and requirements for tracing trust property in equity
  • The main equitable remedies available for proprietary claims (constructive trusts, equitable liens, subrogation)
  • The rules and limits on proprietary claims, including defences (bona fide purchaser, laches, dissipation)
  • The practical consequences of proprietary claims, especially in insolvency and asset appreciation scenarios

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. What is the main difference between a personal claim and a proprietary claim following a breach of trust?
  2. Name two equitable remedies available to beneficiaries making a proprietary claim.
  3. What is the significance of tracing in the context of proprietary claims?
  4. Can a proprietary claim succeed against a third party who purchased trust property in good faith and without notice of the breach? Explain briefly.

Introduction

When a trustee misapplies trust property, beneficiaries may seek to recover their loss through either a personal claim (for compensation) or a proprietary claim (to recover the property itself or its traceable proceeds). Proprietary claims are a powerful tool in trust law, allowing beneficiaries to assert rights over specific assets and access a range of equitable remedies. Understanding when and how proprietary claims arise, and the remedies available, is essential for SQE1.

Proprietary Claims: Overview

A proprietary claim enables a beneficiary to assert an equitable right over specific property or its traceable substitute, rather than simply seeking monetary compensation from the trustee.

Key Term: proprietary claim
A claim by a beneficiary to recover specific trust property (or its traceable proceeds) following a breach of trust, asserting an equitable interest in that property.

Key Term: personal claim
A claim for compensation against the trustee personally for loss caused by a breach of trust.

Why Proprietary Claims Matter

Proprietary claims offer several advantages:

  • Priority in insolvency: Beneficiaries can recover trust property ahead of the trustee’s personal creditors if the trustee is insolvent.
  • Access to asset appreciation: If misapplied property has increased in value, beneficiaries can claim the higher value.
  • No statutory limitation: Proprietary claims are generally not subject to the six-year limitation period, though they may be barred by laches (unreasonable delay).
  • Tracing through substitutions: Beneficiaries can follow trust property into new forms or mixed assets, provided the property is identifiable.

When Can Beneficiaries Make a Proprietary Claim?

Proprietary claims arise where trust property has been misapplied and is still identifiable, either in its original form or as a substitute. If the property has been dissipated (e.g. spent on holidays or living expenses), a proprietary claim will usually fail, and beneficiaries are limited to a personal claim.

Typical Scenarios

  • The trustee still holds the original trust property.
  • The trustee has exchanged trust property for another asset (clean substitution).
  • The trustee has mixed trust property with their own funds or with funds from another trust.
  • Trust property has been transferred to a third party, but is still identifiable.

Insolvency and Asset Appreciation

Proprietary claims are especially important if the trustee is insolvent, as beneficiaries can recover the property ahead of unsecured creditors. If the property has increased in value, a proprietary claim allows beneficiaries to claim the full value, not just the original amount.

Equitable Remedies for Proprietary Claims

Where a proprietary claim is established, equity offers a range of remedies to restore the beneficiary’s rights.

Constructive Trust

A constructive trust is imposed by the court where it would be unconscionable for the holder of property to deny the beneficiary’s interest. The property is treated as held on trust for the beneficiary.

Key Term: constructive trust
A trust imposed by equity to prevent unjust enrichment, typically where property has been misapplied or retained in breach of trust.

Equitable Lien

An equitable lien gives the beneficiary a security interest over property, allowing them to recover the value misapplied from the trust, especially if the property has fallen in value.

Key Term: equitable lien
An equitable right to have property sold to satisfy a debt or loss, usually where trust funds have been used to improve or acquire the property.

Subrogation

Subrogation allows beneficiaries to step into the shoes of a creditor whose debt was paid using trust assets, giving them the same security rights as the original creditor.

Key Term: subrogation
The right of a claimant to assume the position and rights of another, typically where trust funds have been used to discharge a secured debt.

Account of Profits

If a trustee has made a profit from misapplied trust property, the court may order an account of profits, requiring the trustee to pay over any gains to the trust.

Key Term: account of profits
An order requiring a trustee or fiduciary to pay over any profits made from a breach of trust or misuse of trust property.

Tracing: The Mechanism Behind Proprietary Claims

Tracing is the process by which beneficiaries identify and claim assets that represent the original trust property, even if it has changed form or been mixed with other property.

Key Term: tracing
The process of identifying trust property (or its substitute) through various transactions, enabling a proprietary claim.

Common Law vs. Equitable Tracing

  • Common law tracing is limited to property that remains separate and identifiable. It cannot follow property through mixtures.
  • Equitable tracing is more flexible, allowing beneficiaries to trace through mixed funds and substitutions, provided there is a fiduciary relationship.

The Lowest Intermediate Balance Rule

If trust money is paid into a mixed account and the balance falls below the amount of trust money, the beneficiary’s claim is limited to the lowest balance reached before any new funds are added.

Key Term: lowest intermediate balance rule
The principle that a claimant’s proprietary claim to a mixed fund is limited to the lowest balance the account reached after the trust money was paid in.

Worked Examples

Worked Example 1.1

A trustee uses £30,000 of trust money and £20,000 of personal funds to buy a car. The car is now worth £60,000. What can the beneficiaries claim?

Answer: The beneficiaries can claim a 60% share of the car (reflecting their contribution) or a charge (lien) for £30,000. If the car has increased in value, claiming a proportionate share is usually preferable.

Worked Example 1.2

A trustee mixes £10,000 of trust money with £5,000 of personal funds in a bank account. The trustee spends £12,000 on a holiday and the remaining £3,000 is still in the account. What can the beneficiaries claim?

Answer: Applying the lowest intermediate balance rule, the beneficiaries can claim the £3,000 remaining, but cannot claim the dissipated funds spent on the holiday.

Worked Example 1.3

Trust funds are used to pay off a mortgage on the trustee’s house. What remedy is available to the beneficiaries?

Answer: The beneficiaries may be subrogated to the rights of the discharged mortgagee, giving them an equitable charge over the house for the amount of trust money used.

Limits and Defences to Proprietary Claims

Proprietary claims are not unlimited. Key limits include:

Bona Fide Purchaser for Value Without Notice

A proprietary claim cannot succeed against a third party who acquires trust property in good faith, for value, and without notice of the breach. This person takes the property free of the beneficiary’s equitable interest.

Key Term: bona fide purchaser for value without notice
A person who acquires property for value, in good faith, and without knowledge of any prior equitable interest, taking it free of such interests.

The Doctrine of Laches

Although proprietary claims are not generally subject to statutory limitation, they may be barred if the beneficiary has delayed unreasonably and the defendant has been prejudiced.

Key Term: laches
An equitable defence where a claim is barred due to unreasonable delay that makes it unfair to grant relief.

Dissipation of Assets

If the trust property has been spent on non-traceable items (such as holidays or living expenses), and cannot be identified, a proprietary claim will fail. The beneficiary is then limited to a personal claim against the trustee.

Key Point Checklist

This article has covered the following key knowledge points:

  • The distinction between personal and proprietary claims after a breach of trust
  • The advantages of proprietary claims, including priority in insolvency and access to asset appreciation
  • The main equitable remedies for proprietary claims: constructive trusts, equitable liens, subrogation, and account of profits
  • The process and requirements for tracing trust property in equity
  • The lowest intermediate balance rule and its effect on claims to mixed funds
  • The main limits and defences to proprietary claims, including bona fide purchaser, laches, and dissipation

Key Terms and Concepts

  • proprietary claim
  • personal claim
  • constructive trust
  • equitable lien
  • subrogation
  • account of profits
  • tracing
  • lowest intermediate balance rule
  • bona fide purchaser for value without notice
  • laches
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