Learning Outcomes
After studying this article, you will be able to explain how English law deals with trustees who mix trust property with other assets, identify and apply the main tracing and proprietary claim rules (including Re Hallett, Re Oatway, and Clayton's Case), and distinguish between the remedies available to beneficiaries. You will be able to answer SQE1-style MCQs on tracing, proprietary claims, and the consequences of mixing trust funds.
SQE1 Syllabus
For SQE1, you are required to understand the legal consequences when trust property is mixed with other property, and how beneficiaries may trace and recover assets. Focus your revision on:
- the principles of tracing in equity and the requirements for a proprietary claim
- the key rules and presumptions applied when trust property is mixed with a trustee’s own funds or with other trusts’ funds (Re Hallett, Re Oatway, Clayton’s Case, and related doctrines)
- the remedies available to beneficiaries (constructive trust, equitable lien, pari passu sharing)
- the limitations and practical issues that arise when tracing into mixed funds or dissipated assets
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.
- What is the main difference between the Re Hallett and Re Oatway tracing rules when a trustee mixes trust funds with their own money?
- When two trusts’ funds are mixed in a single account and withdrawals are made, which rule is usually applied to determine whose money is spent first?
- What proprietary remedies are available to beneficiaries when trust funds have been used to purchase an asset that has increased in value?
- What is the effect of the “lowest intermediate balance” rule on a beneficiary’s ability to trace into a bank account?
Introduction
When a trustee breaches their duty by mixing trust property with other assets, beneficiaries may seek to recover their property or its traceable proceeds. English law provides specific tracing rules and proprietary remedies to protect beneficiaries in these situations. For SQE1, you must be able to identify the correct tracing rule, apply it to a scenario, and explain the consequences for both the trustee and the beneficiaries.
Tracing and Proprietary Claims: The Basics
When trust property is misapplied or mixed with other assets, beneficiaries may trace their property into its new form and assert a proprietary claim. Tracing is the process of identifying trust property (or its substitute) in the hands of the trustee or a third party.
Key Term: tracing
The process by which a claimant identifies trust property (or its substitute) as it passes through different forms or hands.Key Term: proprietary claim
A legal action asserting a right to specific property or its traceable proceeds, rather than a claim for compensation.Key Term: constructive trust
An equitable remedy imposed by the court requiring a person (often a trustee or recipient of trust property) to hold property for the benefit of another due to wrongdoing or unconscionable conduct.
Mixing of Trust Property: Why It Matters
When trust property is mixed with other property—such as a trustee’s own funds or the assets of another trust—special rules determine how much, if any, of the mixed fund or asset the beneficiaries can recover. The law aims to prevent trustees from profiting from their wrongdoing and to maximise recovery for beneficiaries.
Key Term: mixed fund
A fund or asset comprised of both trust property and other property (such as a trustee’s own money or another trust’s money).
Tracing into Mixed Funds: Key Rules and Presumptions
Re Hallett’s Rule: Trustee’s Money Spent First
When a trustee mixes trust money with their own funds in a bank account and makes withdrawals, the law presumes the trustee spends their own money first. This maximises the amount available for the beneficiaries.
Key Term: Re Hallett's rule
The presumption that, when a trustee mixes trust funds with their own money and makes withdrawals, the trustee is deemed to spend their own money first.
Worked Example 1.1
A trustee deposits £8,000 of their own money and £12,000 of trust money into a single account. The trustee then withdraws £10,000 for personal expenses. How much of the remaining £10,000 in the account is presumed to belong to the trust?
Answer: Under Re Hallett’s rule, the trustee is presumed to have spent their own £8,000 first, and £2,000 of trust money. The remaining £10,000 is treated as trust money.
Re Oatway Rule: Maximising Recovery for Beneficiaries
If the trustee spends money from a mixed account to buy an asset and then dissipates the rest, the beneficiaries can claim the asset up to the value of the trust money used. This prevents the trustee from keeping valuable assets at the expense of the trust.
Key Term: Re Oatway rule
The principle that, when a trustee buys an asset from a mixed fund and dissipates the rest, beneficiaries may claim the asset up to the value of the trust money used.
Worked Example 1.2
A trustee mixes £5,000 of trust money with £5,000 of personal funds and uses £8,000 to buy shares, then spends the remaining £2,000 on a holiday. The shares later rise in value. Can the beneficiaries claim the shares?
Answer: Yes. Under Re Oatway, the beneficiaries can claim the shares up to £5,000 (the amount of trust money used), including any increase in value.
The “Lowest Intermediate Balance” Rule
If the balance in a mixed account falls below the amount of trust money paid in, the beneficiaries’ claim is limited to the lowest balance reached before new money is added.
Key Term: lowest intermediate balance
The smallest balance in a mixed account after trust money is paid in; sets the maximum amount beneficiaries can claim if the account is later replenished.
Worked Example 1.3
A trustee pays £6,000 of trust money into an account with £2,000 of personal funds. The balance falls to £1,000 before the trustee pays in another £5,000. How much can the beneficiaries claim?
Answer: Only £1,000—the lowest intermediate balance—unless the trustee can show the later deposit was intended to restore the trust money.
Tracing into Assets Purchased from Mixed Funds
If a trustee uses a mixed fund to buy an asset, beneficiaries may choose the remedy that gives them the best result:
- If the asset has increased in value, they may claim a proportionate share (constructive trust).
- If the asset has decreased in value, they may claim an equitable lien (a charge for the amount misapplied).
Key Term: equitable lien / charge
A right to have a specific asset sold to satisfy a debt or claim, such as the amount of trust money used to acquire the asset.
Worked Example 1.4
A trustee mixes £7,000 of trust money with £7,000 of personal funds and buys a painting for £14,000. The painting is now worth £20,000. What can the beneficiaries claim?
Answer: The beneficiaries may claim a 50% share of the painting (worth £10,000), or an equitable lien for £7,000. They will usually choose the option that gives them the highest value.
Mixing Funds from Two Trusts: Pari Passu and Clayton’s Case
When a trustee mixes funds from two or more trusts, the law aims to treat all innocent beneficiaries fairly.
Key Term: pari passu
A method of sharing an asset or fund proportionally among claimants according to their contributions.Key Term: Clayton's Case rule
The “first in, first out” rule: when funds from different sources are mixed in a bank account, withdrawals are presumed to come from the earliest deposits first.
Worked Example 1.5
A trustee pays £4,000 from Trust A and £6,000 from Trust B into a single account. The trustee withdraws £7,000 to buy a car, then spends the rest. How are the interests allocated?
Answer: Under Clayton’s Case, the first £4,000 withdrawn is from Trust A, and the next £3,000 is from Trust B. Trust A’s money is spent first, so Trust B has a remaining claim to £3,000. However, courts may instead apply pari passu sharing if it is fairer.
Exam Warning
The “first in, first out” rule in Clayton’s Case can produce unfair results. Courts may depart from it and apply pari passu sharing if strict application would be unjust.
Tracing into Property Held by Innocent Volunteers
If trust money is mixed with an innocent party’s funds and used to buy an asset, the beneficiaries can claim a proportionate share of the asset, regardless of whether it has increased or decreased in value.
Worked Example 1.6
A trustee pays £3,000 of trust money and £9,000 of an innocent volunteer’s money into a joint account. They buy a car for £12,000. The car is now worth £8,000. What can the beneficiaries claim?
Answer: The beneficiaries can claim a 25% share of the car (worth £2,000), reflecting their contribution.
Limitations on Tracing and Proprietary Claims
Tracing is not possible if the property has been dissipated (e.g., spent on a holiday) or if the account is overdrawn. Beneficiaries cannot trace into funds received by a bona fide purchaser for value without notice.
Key Term: bona fide purchaser for value without notice (bfpfvwn)
A person who acquires property for value, in good faith, and without knowledge of any prior equitable interest; takes free of the beneficiaries’ claim.
Remedies Available to Beneficiaries
Beneficiaries may choose the remedy that gives them the best result:
- A constructive trust (proportionate share) if the asset has increased in value.
- An equitable lien (charge) if the asset has decreased in value.
- Pari passu sharing if multiple innocent parties are involved.
Key Point Checklist
This article has covered the following key knowledge points:
- Tracing allows beneficiaries to identify and recover trust property or its substitute, even after mixing.
- When a trustee mixes trust money with their own, Re Hallett’s rule presumes the trustee spends their own money first.
- Re Oatway allows beneficiaries to claim assets purchased from mixed funds if the rest is dissipated.
- The “lowest intermediate balance” limits recovery if the account balance falls below the amount of trust money paid in.
- When funds from multiple trusts are mixed, Clayton’s Case (first in, first out) or pari passu sharing may apply.
- Beneficiaries may claim a constructive trust or an equitable lien, depending on whether the asset has increased or decreased in value.
- Tracing is not possible if the property is dissipated or acquired by a bona fide purchaser for value without notice.
Key Terms and Concepts
- tracing
- proprietary claim
- constructive trust
- mixed fund
- Re Hallett's rule
- Re Oatway rule
- lowest intermediate balance
- equitable lien / charge
- pari passu
- Clayton's Case rule
- bona fide purchaser for value without notice (bfpfvwn)
