REMEDIES FOR

BREACH OF TRUST & FIDUCIARY DUTY

Learning outcomes
By the end of this chapter, you should be able to:

• define the difference between following, tracing and claiming

• explain why the law of tracing often falls into the law of trusts
• explain when the common law does not allow a title holder to trace
• understand and apply the rules governing tracing through mixtures
• explain what backwards tracing is and why the law regarding it is unsettled
• outline the proprietary and personal claims that can arise following the tracing process
• show how rights to subrogation can arise following the tracing process.

Tracing
Tracing is something of a mystery. It is a process by which a claim to an asset held by a defendant can be
transferred to another asset that the defendant acquired in exchange for the original asset.

For example:

your trustee, in breach of trust, gives RM10,000 of the trust money to Sally, you can, of course,
claim against Sally for the return of that money. Having received the money as a gift, Sally is a
done (i.e. volunteer) and thus not a bona fide purchaser for value without notice.

If Sally spends the money on a car, then you can ‘trace’ from the original RM10,000 to the car.
Having traced in this way, you can then claim that the car is held on trust for you.

Although the rules of tracing are fairly well settled, controversy still surrounds its juridical basis. Since
virtually all cases involve torts or breaches of trust, some see it as a response to wrongdoing. Others,
especially Birks, Burrows, Chambers and Lionel Smith, see it instead as a response to unjust enrichment.
In The law of tracing (1997) p.357, Smith observed that trust claims based on tracing are ‘functionally
identical to purchase-money resulting trusts’. Others still see it as existing beyond the territory of these
nominate heads.

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Following, tracing, and claiming

• It is helpful to distinguish between following, tracing and claiming. We follow assets, trace through
exchanges and claim rights. This terminology was used by Smith in The law of tracing (1997) and
adopted by Millett LJ in Boscawen v Bajwa [1995] EWCA Civ 15, [1996] 1 WLR 328. One follows
an asset when it is transferred from one person to another. One traces from one asset to another
when the former is exchanged for the latter. One claims rights to the assets that are identified by
following or tracing.
• For example,

If, in breach of trust, the trustee gave a painting held on trust to John, the beneficiaries
could follow it into John’s hands and make a proprietary claim to it. If John sold the
painting for RM1,000, they could trace through the exchange from the painting to that
money, and claim that the money is held for them on trust. If John paid the money into a
bank account, they could trace from the money to the bank account (i.e. the bank’s debt to
John) and say that it is held on trust for them.

• It has been argued by Smith and others that when tracing through an exchange, one is tracing the
value of the original asset into the new asset. However, if one asset is exchanged for another,
enabling the beneficiaries to claim a trust of the substitute, the values of those assets are not relevant
to the claim. For example, if RM1,000 of trust money is used to buy a painting, the beneficiaries
can claim the painting regardless of its value, even if it turns out to be worth millions: Foskett v
McKeown [2000] UKHL 29, [2001] 1 AC 102.

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Tracing at common law

• Taylor v Plumer (1815) 3 M&S 562, 105 ER 721 is supposed to provide the foundational authority
for the common law right to trace (i.e. for the legal owner of an asset to trace to an asset acquired
in exchange and assert legal title to the new asset), but it does no such thing. It is now generally
recognised that the case was decided upon equitable principles: see L. Smith ‘Tracing in Taylor v
Plumer: equity in the King’s Court’ [1995] 2 LMCLQ 240.
• Nevertheless, it appears that the common law can provide the legal owner with a power to assert
title in the traceable proceeds (Lipkin Gorman v Karpnale Ltd [1988] UKHL 12, [1991] 2 AC 548).
This requires an act on the part of the legal owner, who does not automatically, by operation of
law, acquire ownership of traceable proceeds in the way the beneficiary does in equity in respect
of the traceable proceeds of trust rights. To the extent that this power to assert title counts as tracing
at common law. It also appears that the rules governing tracing through mixtures are less developed
at common law than they are in equity.
• In FC Jones & Sons v Jones [1996] EWCA Civ 1324, [1997] Ch 159, a trustee in bankruptcy was
allowed to trace at common law from cheques drawn on the account of the bankrupt firm and paid
into a brokerage account in the name of the wife of one of the partners. Millett LJ said (at [28]) that
equitable tracing rules should be available in support of the common law claim:

“There is no merit in having distinct and differing tracing rules at law and in equity, given
that tracing is neither a right nor a remedy but merely the process by which the plaintiff
establishes what has happened to his property and makes good his claim that the assets
which he claims can properly be regarded as representing his property. The fact that there
are different tracing rules at law and in equity is unfortunate although probably inevitable,
but unnecessary differences should not be created where they are not required by the
different nature of legal and equitable doctrines and remedies. There is, in my view, even
less merit in the present rule which precludes the invocation of the equitable tracing rules
to support a common law claim; until that rule is swept away unnecessary obstacles to the
development of a rational and coherent law of restitution will remain”.

• Where assets have been transferred in breach of trust, equity allows beneficiaries not only to follow
those assets into the hands of third parties (not being bona fide purchasers for value without notice)
but to trace to assets received through an unauthorised exchange. After the exercise of tracing,
beneficiaries may claim against the persons who hold or held the traceable proceeds of trust assets.

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• The common law has no exact equivalent to tracing, although it does allow title holders to assert a
title in the traceable proceeds of rights held at common law in certain circumstances. It is orthodoxy
that the common law power to assert title cannot be exercised following the mixing of the assets in
question with other assets.

The rules of tracing

1. The requirement of a fiduciary relationship
In order for an individual to have the advantage of the equitable rules of tracing, they must normally
have an interest under a trust, for it is the value of that right which is traced into proceeds. However,
equity is also willing to allow claimants to trace where other fiduciaries breach their duty (Re Diplock
[1948] Ch 465 (CA), affirmed [1951] AC 251). So, for example, if company directors use their power
to transfer the company’s assets in breach of their fiduciary duties, say by transferring company money
to their own bank accounts, the company will have the advantage of the equitable rules of tracing to
trace into any proceeds acquired with that money. Courts have shown themselves willing to find the
existence of a fiduciary relationship in order for plaintiffs to apply the tracing rules (El Ajou v Dollar
Land Holdings [1993] 3 All ER 717), even where none really existed (Chase Manhattan v Israel-British
Bank [1981] Ch 105).

2. Whole and part ownership

These rules are straightforward. If the trustee takes RM500 of trust money and spends it all to buy a
rare book, then the beneficiaries can claim that the book is held for them absolutely. If the trustee uses
RM250 of trust money and RM250 of their own money to buy the book, it will be held by the trustee
for the trustee and beneficiaries in equal shares: Foskett v McKeown [2000] UKHL 29, [2001] 1 AC
102.

3. Tracing through mixtures

What happens when the trustee or a third-party recipient of trust assets mixes them with their own so
that the original assets cannot be identified? The rules have largely developed in the case of a trustee
or recipient mixing trust money or its traceable proceeds with their own by depositing it at a bank so as
to add to the balance of their bank account; for example, depositing RM500 of trust money in their
bank account, which has a balance of RM250, raising the balance to RM750. The first thing to note is
that equity does not regard this mixing as giving rise to co-ownership of the chose in action against the
bank, as it does in the example of the last section where trust money and the trustee’s money went to
purchase a new asset, the rare book. The trust does not have a 2/3 share in the chose in action, the

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trustee a 1/3 share. Equity seems to hold that the trust money and the trustee’s money remain separately
held, although which money belongs to whom is not distinguishable. Because of this, if RM300 is
withdrawn from the bank account by the trustee and spent on an armchair, it is not regarded as co-
owned by them in 2/3 and 1/3 shares. Rather, equity employs rules to determine whose money was
withdrawn and spent to acquire the title. The rules are different when the person who mixes the trust
money is a wrongdoer, for example, a trustee in breach or a third-party recipient who takes trust rights
in the knowledge that they receive it in breach of trust, from those that apply to an innocent mixer, such
as a third-party recipient who does not know that the money was wrongfully taken from a trust.

4. The rules governing wrongdoers

The rules are wrongly seen as a set of evidentiary presumptions. The first presumption is that
wrongdoers who mix trust money or its traceable proceeds with their own, and then take money out of
the mixture and spend it, are presumed to spend their own money first, so that anything which remains
can be claimed by the beneficiaries: Re Hallett’s Estate (1880) 13 Ch D 696 (CA).

However, equity very soon afterward admitted the opposite presumption in Re Oatway [1903] 2 Ch
356 where a beneficiary was able to make a claim to shares bought with money first taken from the
mixture and where the rest was then dissipated with no traceable product. The explanation traditionally
given is that there is a presumption that the trustee always acts in the best interests of the trust
beneficiaries.

However, that presumption is constrained by another rule, the lowest intermediate balance rule. Say,
for example, following the purchase of a worthless armchair, the trustee spends the rest of the money
in the account on worthless shares, reducing the balance to zero. The trustee then adds RM500 of their
own money. The courts have held that the beneficiary cannot claim that the new balance of RM500 is
theirs. If the trustee spends all the trust money and later replenishes the account, as in this example, it
will not be presumed that they were paying back the trust money they took, despite the fact that that is
exactly what a trustee who was acting in the best interests of their beneficiaries would do: James Roscoe
(Bolton) Ltd v Winder [1915] 1 Ch 62 (affirmed in Bishopsgate Investment Management Ltd v Homan
Ltd [1994] EWCA Civ 33, [1995] Ch 211).

A presumption of honesty does not therefore work. In any case, it is difficult to see why we should be
presuming someone to be honest when all the evidence shows the exact opposite. In truth, the only way
to reconcile these three cases is not to think of presumptions at all, but in terms of the resolution of
evidential difficulties. In both Hallett and Oatway such difficulties existed. Somebody’s money was

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left in the account in Hallett, while somebody’s money bought the shares in Oatway. The difficulty was
that the trustee’s wrongful act of mixing made it impossible to tell whose it was. It might have been the
trustee’s own money, it might have been the trust money, or it might have been a combination of both.
That evidential difficulty having been caused by the trustee’s wrongful act, the benefit of the doubt was
given to the innocent party, the beneficiaries. Thus, if it suited the beneficiaries to say that trust money
had been spent first, as in Oatway, then they could do so. On the other hand, if it suited them to say that
the trustee’s own money had been spent first, as in Hallett, they could do that as well. But when we get
to a case like Roscoe v Winder [1915] 1 Ch 62, there is no doubt to resolve beyond the lowest
intermediate balance, for we know where the money came from which later increased the balance: from
the trustee’s own funds.

5. The rules governing innocent persons

The beneficiary does not get the benefit of any doubt against an innocent person who mixes trust money
with their own. The rules attempt to be neutral as between them. However, the traditional rule tended
to lead to haphazard results. That rule, drawn from Clayton’s case (1816) 8 LJ Ch 256, is the ‘first in
first out’ (FIFO) rule, which works exactly as it sounds. Thus, if an innocent recipient added RM500
of trust money to their bank account already containing RM250, then their money will be spent first.
So the innocent recipient will acquire a 5/6 share of a title to an armchair bought for RM300, since all
of their RM250 was used up in the purchase, and the beneficiary gets a 1/6 share, since to make up the
RM300 purchase price the innocent had to draw upon RM50 of the trust money. The remaining RM450
in the account is all the beneficiary’s, and so if it is spent on worthless shares, they are the beneficiary’s
alone.

The Court of Appeal in Barlow Clowes International Ltd v Vaughan [1991] EWCA Civ 11, [1992] 4
All ER 22 affirmed the general applicability of the FIFO rule, but it also acknowledged that it can work
unfairly, and indeed in that case the claimants were treated as having shares in the entire fund
proportionate to their contributions, so that they shared pro rata in the traceable proceeds available.

6. Backwards tracing
Backwards tracing is the notion that beneficiaries can trace into an asset that was purchased on credit
when the provider of that credit is paid off with trust money. Thus, if a trustee or recipient of trust funds
buys a car for RM10,000 with money borrowed from a bank or with their credit card and then pays off
the loan or credit card bill with trust money, can the beneficiaries trace backwards and claim the car as
the traceable proceeds of the trust money? Without saying so, English law seems to have allowed

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backwards tracing in a few cases: Agip (Africa) Ltd v Jackson [1990] Ch 265; affirmed [1990] EWCA
Civ 2, [1991] Ch 547 (backwards tracing through the bank clearing system); El Ajou v Dollar Land
Holdings plc [1993] 3 All ER 717 (Ch D); reversed [1993] EWCA Civ 4, [1994] 2 All ER 685 (tracing
through credit facilities); Foskett v McKeown [2000] UKHL 29, [2001] 1 AC 102 (tracing into
payments made on an asset, a life insurance policy that had already been acquired). In the only English
case that has addressed the issue explicitly, Bishopsgate Investment Management Ltd v Homan [1994]
EWCA Civ 33, [1995] Ch 211, the Court of Appeal denied that backwards tracing was recognised in
English law.

The Privy Council, on appeal from the Court of Appeal of Jersey, allowed backwards tracing in Federal
Republic of Brazil v Durant International Corp [2015] UKPC 35, [2015] 3 WLR 599. A total of
US$10.5 million in bribes had been paid into a bank account and, at roughly the same time, a total of
US$13.5 million had been paid out of that account to the defendants. However, only US$7.7 million in
bribes had been paid into the account before the money had been paid out to the defendants. The
remaining US$2.8 million in bribes had been paid into the account after the defendants had been paid.
The Privy Council held that all the bribes could be traced to the defendants. Lord Toulson said:

33. … the plaintiffs submit, as Professor Smith argues, that money used to pay a debt can in
principle be traced into whatever was acquired in return for the debt. That is a very broad
proposition and it would take the doctrine of tracing far beyond its limits in the case law to date.
As a statement of general application, the Board would reject it. The courts should be very cautious
before expanding equitable proprietary remedies in a way which may have an adverse effect on
other innocent parties. If a trustee on the verge of bankruptcy uses trust funds to pay off an
unsecured creditor to whom he is personally indebted, in the absence of special circumstances it is
hard to see why the beneficiaries’ claim should take precedence over those of the general body of
unsecured creditors.

34. However there may be cases where there is a close causal and transactional link between the
incurring of a debt and the use of trust funds to discharge it…

38. The development of increasingly sophisticated and elaborate methods of money laundering,
often involving a web of credits and debits between intermediaries, makes it particularly important
that a court should not allow a camouflage of interconnected transactions to obscure its vision of
their true overall purpose and effect. If the court is satisfied that the various steps are part of a co-
ordinated scheme, it should not matter that, either as a deliberate part of the choreography or

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possibly because of the incidents of the banking system, a debit appears in the bank account of an
intermediary before a reciprocal credit entry…

39. … An account may be used as a conduit for the transfer of funds, whether the account holder
is operating the account in credit or within an overdraft facility.

40. The Board therefore rejects the argument that there can never be backward tracing, or that the
court can never trace the value of an asset whose proceeds are paid into an overdrawn account. But
the claimant has to establish a co-ordination between the depletion of the trust fund and the
acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction,
such as to warrant the court attributing the value of the interest acquired to the misuse of the trust
fund.

Claiming
1. Personal claims
There are various claims that can be made against trustees and third parties in cases of breach of trust.
In many cases, such claims will depend upon tracing, because it is only after the process of tracing has
been undertaken that it will be known whether certain claims arise. So, for example, if the trustee
transfers money in breach of trust to a third party, Sam, who adds it to his bank account, any proprietary
claim against Sam will involve tracing through exchanges from the trust money to the bank account or
to assets purchased from withdrawals from that account.

Similarly, a personal claim can be reliant upon the tracing process. Let us say that Sam now draws a
cheque for RM1,000 on the account in favour of his cousin, Madeleine, telling her that it is a birthday
present, and let us further assume that one can trace some of the trust money into that payment. Now
assume that Madeleine finds out that the money was wrongly taken from the trust, but decides to spend
the money on a holiday to Italy regardless. Madeleine may be personally liable for ‘knowing receipt’,
as she dishonestly dealt with a trust right, or rather the traceable proceeds of a trust right. That is,
although no proprietary claim can arise against Madeleine, for she has spent the trust money, she may
be personally liable to restore its value to the trust. Unless we had followed and traced the trust rights
from the trustee to Sam, and then traced through his bank account into an asset (the cheque) which we
followed into Madeleine’s hands, this personal claim could not arise. So remember that although tracing
is a process of dealing with rights, it can be an essential feature in establishing personal, not just
proprietary, claims.

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Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2012] 3 WLR 835 [2012]
3 All ER 425 is an interesting case involving tracing and claiming with respect to European Union
Allowances (created by the EU Emissions Trading Scheme) which were misappropriated from the
claimant’s carbon emissions account at the German Greenhouse Gas Emissions Trading Scheme
Registry and transferred to the defendant’s carbon emissions account at the UK Greenhouse Gas
Emissions Trading Scheme Registry. The case discusses the various personal and proprietary claims
potentially available at common law and in equity.

2. Proprietary claims
There are two standard proprietary claims that can be made in respect of traceable assets. Where the
traceable proceeds is an asset that has risen in value, the beneficiary will claim that it is held for them
in trust, because they will then have the advantage of the rise in the asset’s value. Where the asset has
declined in value, the beneficiary can decline ownership of the asset, and instead demand repayment of
the trust money, with that debt secured by an equitable lien over the asset. An equitable lien is an
entitlement to have an asset sold to pay off a debt, if the debt in question is not paid off by the debtor.

A lien will be most convenient for the beneficiary in the case where an asset is purchased with money
from both the beneficiary and the wrongdoer and it later declines in value. For example, if RM5,000 of
the trustee’s own money were used to purchase a car for RM10,000 which is now worth only RM7,000.
If the beneficiaries claim an ownership share, they will have a half-interest in the car worth only
RM3,500. They would be better to forego that right, and demand that the trustee repay them RM5,000
from their own pocket (a personal claim against the trustee to restore the trust) and claim a lien on the
car to secure that obligation. Thus if the trustee does not pay back the RM5,000, the beneficiaries can
have the car sold, for RM7,000, of which they have the right to RM5,000. Thus by foregoing the
ownership share they get all their money back.

3. Subrogation
Subrogation occurs when A acquires B’s rights against C by operation of law. The insurance context
provides an illustration: assume that an insurer, A, insures B against negligent injuries by a third party.
If C, a third party, negligently injures B, B will have a right to sue C for damages to compensate B for
B’s injury. However, when A the insurer pays B an insurance award to cover B’s loss, A acquires by
subrogation B’s right of action against C. A is said to be subrogated to B’s claim against C. Similarly,
in certain circumstances, if A pays off a debt that B owes to C, then A will be subrogated to C’s claim
against B, which A paid off. In other words, A can now bring an action against B for the amount that
B previously owed to C. The right to be subrogated in such a circumstance can be acquired by a

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beneficiary if trust money is used to discharge a debt. The trust will be subrogated to the creditor’s right
of action against the debtor whose debt was discharged with trust money. This will be particularly
useful if trust money was used to discharge a secured debt, such as a mortgage, for there will be
subrogation both to the debt and the security for that debt. If, for example, trust money is used to pay
off the trustee’s mortgage, the trust will be subrogated to the rights of the mortgage lender, including
the right to sell the property and use the proceeds of sale to satisfy the debt if it is not repaid. See
Boscawen v Bajwa [1995] EWCA Civ 15, [1996] 1 WLR 328. This may be especially valuable if the
trustee is bankrupt, since the charge on the trustee’s house will ensure that the proceeds from the sale
of the trustee’s house will go first to paying off the debt owed to the trust.

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