Core principles of trust law - Equitable remedies and tracin...

Learning Outcomes

This article explores equitable remedies and tracing in trust disputes, covering:

• Identification and practical use of core equitable remedies (injunctions, specific performance, accounts, rescission, constructive trusts and equitable liens)
• Distinguishing between personal and proprietary remedies and evaluating when each is strategically advantageous (e.g., insolvency or asset appreciation)
• Application of tracing rules to unmixed substitutions, mixed funds and bank accounts to follow trust property and its substitutes
• Selecting between proprietary remedies such as constructive trusts and equitable liens to maximize recovery in different factual scenarios
• Use of urgent preventative measures, including freezing and search orders, to preserve assets and evidence pending final determination
• Recognition of key bars and defences to equitable relief and tracing, such as clean hands, laches, bona fide purchase for value without notice, and change of position
• Applying these principles to realistic problem questions to advise on remedies, procedural steps, and likely outcomes in SQE2-style trust disputes

SQE2 Syllabus

For SQE2, you are required to understand the practical operation of equitable remedies and tracing in the context of trust disputes and misapplied assets, with a focus on the following syllabus points:

• Distinguishing between personal and proprietary equitable remedies in trust law.
• Recognizing when injunctions, specific performance, or orders for account/disclosure may be appropriate.
• Explaining and applying tracing rules to recover trust property or its substitute.
• Evaluating key limitations or bars to equitable relief (e.g., clean hands, delay, value, change of position).
• Advising clients on potential outcomes and courses of action based on these principles.
• Selecting between constructive trust and equitable lien when claiming over substitutes.
• Understanding recipient and accessory liability (knowing receipt and dishonest assistance) and the remedies that flow from them.

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 difference between a personal and a proprietary equitable claim in trust law?
2. Name two practical situations in which a beneficiary can seek an injunction relating to trust property.
3. When tracing trust assets, what must exist between the property and the defendant?
4. State one defence that may prevent a successful tracing claim or equitable remedy.

Introduction

Understanding equitable remedies and tracing is essential in resolving trust disputes. Beneficiaries or trustees often need to seek the assistance of the court, either to enforce obligations, recover misapplied assets, or prevent ongoing harm. This article focuses on the main forms of equitable relief available in trust cases and the operation of tracing rules in recovering trust assets or their proceeds.

Equitable Remedies in Trust Law

Equitable remedies go beyond simple awards of compensation. They are discretionary and focus on achieving fairness where legal remedies are inadequate or unavailable. In trust law, the main equitable remedies you must be able to identify and apply are:

• Injunctions (prohibitory and mandatory)
• Specific performance
• Orders for account/disclosure
• Rescission
• Constructive trusts and proprietary orders

Equity may also appoint receivers over assets at risk or grant search orders to prevent destruction of evidence in urgent cases. In all interim applications, the applicant usually gives an undertaking in damages to compensate if relief later proves unjustified.

Personal versus Proprietary Remedies

A personal remedy is an order against the person, such as to pay money or perform an act. A proprietary remedy gives the claimant rights over specific property, such as a declaration that trust property or its substitute remains held for the beneficiary. Proprietary remedies are often strategically preferable where the defendant is insolvent or the asset has increased in value, because they confer priority over unsecured creditors and allow the claimant to capture any uplift.

Key Term: Personal remedy
A court order enforceable against a person, usually requiring payment of money or compliance with an obligation.

Key Term: Proprietary remedy
A court order recognizing the claimant's rights over particular property (or its substitute), allowing recovery or an interest in that property.

Key Term: Injunction
A court order compelling or restraining a party from doing a specific act.

Key Term: Specific performance
An order requiring a person to perform a positive contractual, statutory, or trust-related duty, often involving the transfer of property.

Key Term: Tracing
The process by which a claimant demonstrates that particular property (or its proceeds or substitute) in another's hands derives from property to which they have an equitable (or sometimes legal) interest.

Key Term: Freezing order
An injunction preventing a defendant from dealing with or dissipating assets pending judgment, typically granted where there is a serious issue to be tried and a real risk of dissipation.

Key Term: Account of profits
An order requiring a fiduciary (or knowing recipient in appropriate cases) to quantify and disgorge gains made by breach of duty.

Key Term: Equitable lien
A proprietary security right over an asset to secure repayment of a sum (e.g., misapplied trust money used to buy or improve property), typically used when the asset has not necessarily appreciated or where a security remedy is tactically sufficient.

Thresholds and features of equitable relief

• Injunctions are granted where damages are inadequate and it is just and convenient. The court weighs the seriousness of the issue, the balance of convenience, and requires undertakings in damages; full and frank disclosure is required on without notice applications.
• Specific performance compels performance of positive obligations where damages are inadequate and supervision is feasible; it is rarely granted for personal services or obligations requiring constant supervision.
• Orders for account/disclosure require trustees or fiduciaries to render proper accounts and provide trust documentation; failures may be met with further mandatory relief.
• Rescission sets aside transactions induced by misrepresentation or undue influence; bars include affirmation, impossibility of restitutio in integrum, delay, and intervention of a bona fide purchaser for value without notice.
• Proprietary relief (constructive trust or equitable lien) is granted to reverse unjust enrichment or uphold fiduciary obligations: the choice between constructive trust and lien depends on factors such as asset appreciation and whether a proportionate share or security is preferable.

Worked Example 1.1

A trustee wrongfully transfers trust shares to himself. The shares increase dramatically in value. Can the beneficiary obtain a proprietary remedy, a personal order, or both?

Answer:
The beneficiary can seek a proprietary remedy (a declaration that the shares are still trust property and are held for the beneficiary), requiring their return. The beneficiary could also seek an account for profits if the trustee made further gains.

Injunctive Relief and Preventative Measures

Beneficiaries may need urgent court orders to prevent loss of trust property, such as:

• Freezing orders (to prevent dissipation of assets)
• Search and preservation orders (to prevent destruction of records)
• Orders restraining breaches of trust (prohibitory injunctions)
• Mandatory orders compelling specific steps (e.g., delivery up of trust documents or property)

Courts assess the adequacy of damages, urgency, and whether it is just to grant the order. The applicant must usually show a serious question to be tried, that damages would be inadequate, and that the balance of convenience favors an injunction. A real risk of dissipation must be shown for asset-freezing relief; the court may tailor the scope (domestic, worldwide) and can order disclosure of asset information to police compliance.

Injunctions are enforced by contempt sanctions. Interim orders require an undertaking in damages; the court can order fortification or costs protection where appropriate.

Worked Example 1.2

A trustee plans to sell a valuable painting that is trust property and intends to abscond with the proceeds. What remedy can the beneficiary seek?

Answer:
The beneficiary should urgently apply for an injunction to prevent the sale (stopping the breach of trust) and may also seek a freezing order to prevent removal of funds or assets abroad.

Tracing — Recovering Misapplied Assets

Tracing allows claimants to follow value as it passes through the hands of others or is exchanged for substitute property. This is critical where trust property is misappropriated and still identifiable (or replaced by something else acquired from it). Tracing itself does not create the claim; it is the evidential process that underpins either a proprietary claim to the asset or its substitute, or a claim to a security interest over it.

For tracing to succeed, the claimant must establish an original equitable interest (typically a trust or fiduciary relationship), and must be able to identify the property or its substitute. The ultimate remedy may be personal (a money judgment) or proprietary (recovery of the asset or an interest in it).

Key Applications of Tracing

Tracing is possible through both clean substitutions and mixed funds. In mixed funds, claimants may claim a proportional share or sometimes the asset itself, subject to rules such as the presumption that a trustee spends their own money first, the beneficiary’s first charge over assets bought from mixtures, the “lowest intermediate balance” limit, or allocation rules in mixed trust funds and pooled bank accounts. Where the substitute asset has appreciated, proprietary relief can capture the uplift; if it has depreciated, consider whether a lien securing a fixed sum is preferable.

Worked Example 1.3

A trustee misappropriates £10,000 and purchases a car in her own name. The car is later traded for a rare sculpture. Can the beneficiary claim the sculpture?

Answer:
Yes, using tracing principles, if the original money and substitutions can be followed and are still identifiable, the beneficiary can assert a proprietary claim over the sculpture.

Tracing into bank accounts and mixed funds

Several equitable allocation rules apply, reflecting core maxims that presumptions operate against the wrongdoer and fairness between innocent parties:

• Presumption that a trustee spends their own money first from a mixed personal account if it favors the beneficiary. If applying that presumption would benefit the wrongdoer, the court may give the beneficiary a first charge over assets purchased out of the mixed fund.
• Lowest intermediate balance: the proprietary claim to a mixed account is limited to the lowest balance after misapplied funds were paid in and before later credits; later innocent credits do not replenish the trust amount unless intended to do so.
• First in, first out (for mixtures of two trust funds or of a trust and an innocent volunteer in a running account), although the court may adopt equitable apportionment where FIFO would be unjust.
• Backwards tracing can be permitted in coordinated schemes (where steps are linked and funds are applied as part of a common plan), so the lack of strict chronological linkage does not defeat tracing where substance shows the scheme was designed to frustrate recovery.

Where trust money and personal money purchase an asset together, beneficiaries usually have the first claim, and a proportionate proprietary share or a lien can be declared. The choice between a constructive trust and an equitable lien is tactical: claim a share if the asset has appreciated or will appreciate; claim a lien if a fixed security interest better fits the circumstances.

Worked Example 1.4

A trustee pays £5,000 of trust money into a personal current account with a £3,000 balance and later buys shares costing £2,000. The rest of the account is spent on holidays. What proprietary claim can the beneficiaries make?

Answer:
The beneficiaries can assert a first charge over the shares purchased from the mixed account. They are not limited by the presumption that the trustee spent their own money first where that would benefit the wrongdoer; equity treats the beneficiaries as having a prior claim over assets purchased with mixtures.

Choosing between constructive trust and lien

Where trust money partially funds acquisition or improvement of property:

• A constructive trust gives a proportionate co-ownership share, valuable if the property has increased in value (e.g., 40% of proceeds reflecting the contribution).
• An equitable lien secures repayment of the sum misapplied (often plus interest) against the asset, useful where the asset has depreciated or a secured repayment is strategically preferable.

Recipient and accessory liability

Tracing often underpins claims against third parties:

• Knowing receipt: a recipient who receives trust property in breach of trust and it is unconscionable to retain benefits may be personally liable and, in appropriate cases, subject to proprietary claims.
• Dishonest assistance: a person who assists a trustee’s breach dishonestly is personally liable to make good loss; proprietary claims generally do not arise because they did not receive the property.
• Innocent volunteers: not personally liable, but subject to proprietary tracing claims unless inequitable (e.g., irreversible changes of position).

Bars and Defences to Equitable Remedies

Not all equitable remedies or tracing claims will succeed. Defences may include:

• The defendant is a bona fide purchaser for value without notice (a good faith buyer who paid value and did not know of the breach). This defeats proprietary claims and rescission.
• The claimant delayed (laches) or otherwise acted inequitably (“clean hands” doctrine), especially on discretionary interim relief or where rescission is sought.
• The property has been dissipated or irretrievably mixed in ways that render identification impossible (e.g., consumed services, medical procedures); a personal claim may still be pursued.
• The innocent recipient’s circumstances have changed so that restitution would be unfair (change of position), particularly where enforcing a proprietary claim would cause disproportionate prejudice.

Key Term: Bona fide purchaser
A person who purchases legal title for value and without notice of adverse equitable interests; takes free of prior equitable claims.

Key Term: Change of position
A defence to restitution where a recipient, acting in good faith, has altered their position in reliance on the receipt, making repayment or proprietary enforcement inequitable.

Key Term: Laches
An equitable defence where undue delay by a claimant makes granting relief unjust.

Key Term: Clean hands
A maxim that a party seeking equitable relief must themselves have behaved equitably; improper conduct can bar relief.

Exam Warning

A common mistake is to confuse tracing with claiming property — tracing is the process; the right to recover the asset (or value) depends on the result of the process and may still be defeated by a good faith purchaser or other bar.

Limits to Tracing

You usually cannot trace into the hands of someone who has provided value in good faith, without notice of the breach, or where the asset no longer exists in any recognizable form. Dissipation, mixing with an innocent person’s funds in ways that make identification impracticable, or destruction terminates the right to a proprietary remedy, although a personal remedy may sometimes survive. In bank accounts, the lowest intermediate balance rule limits the amount recoverable; deposits after dissipation are not treated as trust replacement unless factually so intended. Where independent trusts are mixed by a wrongdoer, fairness between innocent beneficiaries drives apportionment rather than one trust’s priority.

Revision Tip

Always distinguish between establishing an equitable interest (which may support a proprietary remedy) and the need to show that the property is still identifiable or substitutable for tracing to succeed.

Selecting Remedies in Practice

When choosing relief:

• Consider insolvency and priority: proprietary relief ranks ahead of unsecured creditors.
• Consider asset trajectory: constructive trust gains on appreciation; lien secures a fixed sum if depreciation is likely.
• Consider urgency: apply for freezing/search orders where there is a real risk of dissipation or destruction.
• Consider proof burdens: interim orders require cogent evidence of serious issue and risk; proprietary claims require clear identification and linkage.
• Consider litigation economy: orders for account/disclosure can be an efficient step to quantify misapplied assets and support final relief.

Worked Example 1.5

A beneficiary discovers that a trustee sold trust land to an investor who paid market value and had no notice of the trust breach. Can the beneficiary set aside the sale or claim the land?

Answer:
No. A bona fide purchaser for value without notice takes free of prior equitable interests and defeats proprietary claims. The beneficiary’s remedies lie against the trustee (personal compensation and account), not the good faith buyer.

Worked Example 1.6

Trust money (£50,000) is mixed with the trustee’s £150,000 to buy a flat now worth £180,000. What proprietary remedy best captures value?

Answer:
A constructive trust for a proportionate share is usually preferable where the asset has appreciated. Here a 25% contribution would justify a 25% beneficial share, capturing the uplift. Alternatively, an equitable lien for £50,000 plus interest is available if a security-focused remedy is tactically better.

Worked Example 1.7

A beneficiary waits more than six years after a trustee’s breach to seek an injunction and proprietary relief. What issues arise?

Answer:
Equitable remedies are discretionary and subject to laches. Undue delay, especially where it causes prejudice, can bar or narrow relief. For proprietary claims and injunctions, the court can refuse relief notwithstanding the limitation rules applicable to personal actions, particularly if the delay amounts to acquiescence or undermines fairness.

Key Point Checklist

This article has covered the following key knowledge points:

• Equitable remedies in trust law include injunctions, specific performance, account/disclosure, rescission, and proprietary remedies (constructive trust and lien).
• Personal and proprietary claims differ: proprietary claims attach to property and confer priority and potential uplift; personal claims require the defendant to pay or perform.
• Tracing enables recovery of misapplied trust property or its substitute where an equitable interest and identification are established; mixed funds require application of equitable allocation rules.
• Interim injunctive relief (including freezing orders) requires a serious issue, inadequacy of damages, balance of convenience, and undertakings in damages; without notice applications require full and frank disclosure.
• Defences to equitable relief include good faith purchase for value, delay and clean hands, change of position, and loss of identifiability of the asset.
• Strategic selection between a constructive trust and an equitable lien depends on asset appreciation and tactical considerations.
• Recipient and accessory liability differ: knowing receipt may attract both personal and proprietary responses; dishonest assistance produces personal liability to make good loss.
• Courts may refuse equitable relief where the claimant fails to act equitably or where property is no longer traceable; personal remedies may still be available against the trustee.

Key Terms and Concepts

• Personal remedy
• Proprietary remedy
• Injunction
• Specific performance
• Tracing
• Freezing order
• Account of profits
• Equitable lien
• Bona fide purchaser
• Change of position
• Laches
• Clean hands