Claims against wrongdoers (Equitable proprietary claims against strangers- FS

Question 1

What is the Definition of Claim Against a Wrongdoer

Answer 1

A legal remedy pursued by beneficiaries when a third party (wrongdoer) receives and misuses trust property. The same tracing rules apply as if the property were still with the original trustee.

Question 2

What tracing rules apply to wrongdoers?

Answer 2

The same tracing principles apply to wrongdoers as to trustees in breach. Beneficiaries can:

• Recover the exact property if unchanged.
• Claim substituted property (clean substitution)
• Claim a proportionate share or equitable lien if the funds were mixed

Question 3

What is a “clean substitution” in equitable tracing?

Answer 3

A clean substitution occurs when misappropriated trust property is directly used to purchase a new identifiable asset, allowing beneficiaries to claim ownership of the substituted asset.

Question 4

What are the tracing remedies available when funds are mixed in an account?

Answer 4

1. Proportionate share of the mixed asset
2. Equitable lien (charge) over the asset to secure repayment of the trust’s contribution

Question 5

Tracing Rules for Mixed Accounts (per Re Hallett / Re Oatway principles)

Answer 5

• Presumption of innocence: The wrongdoer is deemed to spend their own money first.
• If trust funds are used to acquire identifiable assets, beneficiaries can claim the asset.
• Where trust funds are dissipated last, no recovery is possible for the dissipated portion

Question 6

Can a proprietary claim be made if part of the trust money was dissipated?

Answer 6

Yes. Beneficiaries can claim what remains—e.g., identifiable assets purchased with trust funds—even if part of the money was spent wastefully.

Question 7

In a mixed account, how do courts determine which money was spent first?

Answer 7

Courts apply the Re Hallett presumption: the wrongdoer is presumed to spend their own funds first, preserving trust funds to the extent possible for recovery.

Question 8

Why could beneficiaries claim ownership of the shares in the Sun Wu scenario?

Answer 8

Because under the Re Hallett rule, Sun Wu is presumed to have spent his own £10,000 first (on the funeral and spa), leaving the trust’s £25,000 traceable into the shares.