What happens where there has been a clean substitution? (Trustees' liability for breach: Proprietary claims)-FS Flashcards
(12 cards)
What is a “clean substitution” in the context of a proprietary claim for breach of trust?
A clean substitution occurs when a trustee misappropriates trust property and directly exchanges it for a new asset (e.g., buying shares). The property purchased is traceable as a direct replacement.
What two options are available to beneficiaries in a clean substitution scenario?
Beneficiaries may either
(1) claim ownership of the substituted asset
or (2) enforce an equitable lien (charge) over it for the amount misappropriated.
When would beneficiaries choose to take ownership of a substituted asset?
When the substituted asset has increased in value, so they benefit from the appreciation.
When would beneficiaries choose to enforce an equitable lien over the substituted asset?
When the substituted asset has decreased in value, allowing them to recover at least the amount misappropriated through sale, and potentially pursue the rest via a personal claim.
What legal case established the rules governing clean substitution and tracing?
The rules were established in Re Hallett’s Estate.
Why is a proprietary remedy preferable when the substituted asset has appreciated and the trustee is bankrupt?
Because proprietary claims do not form part of the trustee’s bankrupt estate, allowing beneficiaries to claim the asset directly.
What remedy should beneficiaries seek if a trustee uses misappropriated funds to buy shares that increase in value?
A proprietary remedy to take ownership of the shares, allowing recovery of both the original value and the appreciation.
Why is a personal remedy inappropriate in a clean substitution case where the trustee is bankrupt?
Because personal claims rank equally with other unsecured creditors and may recover little or nothing from the bankrupt’s estate.
What is an equitable lien in the context of a clean substitution?
An equitable lien is a security interest over the property purchased with misappropriated trust funds, allowing beneficiaries to enforce repayment of the amount stolen if they choose not to take ownership of the asset.
What happens if beneficiaries enforce an equitable lien and the asset’s value is less than the amount misappropriated?
Beneficiaries may recover part of the value via the lien and pursue the remaining loss through a personal claim against the trustee.
Why might beneficiaries prefer an equitable lien over ownership in a proprietary claim?
If the substituted property has fallen in value, a lien allows them to sell it quickly and sue for the difference, rather than be stuck with an underperforming asset.
Can beneficiaries pursue both a proprietary and a personal claim?
Yes, but only to the extent they do not recover more than their actual loss — they cannot be compensated twice for the same breach.
