This document summarizes the law around tracing trust assets when misappropriated by a trustee. It discusses the differences between tracing in common law and equity. In common law, tracing is allowed if the property has not changed form, but if it has, only damages are available. In equity, tracing is allowed even if the property has changed form or been mixed with other assets. There are also specific rules discussed around tracing mixed assets, between multiple trusts, in bank accounts, and exceptions where tracing is not available such as against a bona fide purchaser or when the property can no longer be identified.

1. TRACING
INTRODUCTION
Basically it means to trace the
misappropriated property of the
trust assets.
There two types tracings:
(a) In common law so long as
the property is not change
its form then can trace but if
it goes beyond it the
remedy is damages
(b) Equity it goes beyond it
Tracing the legal or equitable right
of beneficiary to follow the trust
asset for which they are entitled to
or other assets which the trust
assets have been converted, and
to follow them into the hands of
those who may hold them.
Thus , where the Executor makes
mistake distribution of assets as in
the Re Diplocks case, the next of
kin…….. go against them.
But they also have a direct claim
in…………..
Min of Health v Simpson (1951)
ADVANTAGES OF PROPRIETORY
REMEDY
ESSENTIAL REQUIREMENTS
TRACING IN COMMON LAW
If A lends his car to B and B becomes
insolvent then A`s car does not goes
into B`s bankruptsy. A steps in and
claims it ahead of B`s creditors. If B`s
trsutees in bnkruptcy refuses to return
it , A has an action in conversion and a
right to get the full value of the car.
H/ever if A had lend B RM5000,A`s
claim for the payment would be reduce
to personal claim and he would have to
compete with the bankruptcy with no
other creditor. Sometime, is h/ever there
is a proprietory remedy at Common law
(eg) A lends his car to B . B wrongfully
sell it to C for $1000 and then went
bankruptcy. C still hold $5000, then A
can claim the money in his own right
and not as equitable owner.
Trailer v Groome
Africa v Dickson
But in all these cases and other cases
it was admitted that common law can
follow the fiscal assets even if a
changed in form or something
exclusively purchased with persons
money so long it is identifiable.
But once it get mixed up with other
money or property.
The situation goes beyond the capability
of the common law property remedy .In
such a situation, equity is theonly
remedy.
TRACING IN EQUITY
Lord Denning in Chief Constable of
Kent v Reg (1983)
Lord Atkins observation in Banque
Bange Court Etranger v Hamburough
RULES CONCERNING TRACING
What May Be Traced:
(1)Assets which are unmixed can be traced under
common law
(2)Mixed assets can be traced under Equity.But there
are 3 situation under equity:
(a) RULE ONE
Where mixing had been done unauthorisedly, tracing
is allowed and the beneficiary has a first charge over
the mix funds or any other property purchased with
such funds, in proportion to the amount of the trust
money.
H/ever where mixing is done authrisely there is no
tracing. Thus where a bank trustee deposited trust
money with itself under an expressed power to do so
and was thenn wound up. It was held that as mixing
was done lawfully trust money becomes the bank`s
money and could be recovered only through personal
action, even if it is means joining the long que of
unsecured crediutors.
Space investment Ltd v Canadian Inpredial Bank
of Commerce Trust Co.(Bahamas)Ltd.
It is so becox the settlor had accepted the risk of
insolvency by allow the depositi
But whhen Bank Trustee misapprorpiated trust money
for its own benefit, tracing is allowed but not in case
where mixing was done lawfully.
RULE TWO
Position as between 2 trust or trust and 3rd
party
where trustee mixes funds belonging to 2 trust or
transfer it to an innocent volunteer (who pay no
consideration and who has no notice of this
misappropriation) who has mixed it with his own
assets ten tracing is done according to the following
rule:
Where mixing funds belong to 2 trust or more, then
they share ‘pari pasu’ (proportionately) the mixed
funds or any property purchased.
(eg) 2 trust money is put together ‘ 60% + 40% then a
property is purchased, the division will be
proportionate.
Where trustee transfer the asset to an innosent
vollunteer , tracing is allowed becox volunteer takes
the property subject to the equitable interest attaching
with such property.
But tracing is not available against a bona fide
purchaser for value woithout notice.
(eg) A trustee offered a Rolex watch for $17000 and
not for ($100).
RULE THREE
Relating to Bank Account
Trustee mixes his own money with the trust
money, here he is presumed to spend his
own money first.
Re Halletts Estate
If trustee becomes insolvent than the
beneficiary of the trust will have a priority over
other creditors while claiming from the assets
belonging to the trustee.
LOST OF THE RIGHT TO TRACE
(a) Where property ceases to be identified
then cannot trace.(eg) but if wheat changed to
flour still can trace
(b)Bona fide purchaser for value without
notice
(c)Where tracing would be inequitable
Trust fund misapproriated and used
to improve or alter a building. (eg) Trustee
build his own house and he took $500 to paint
his house. It is not reasonable to requested to
sell the house to recover $5500. So here the
beneficiaries has a charge o the house $500.
(d) Payment of debts
Trustee debted to B and paid the debt from
trus fudn w/out B`s knowledge, here
beneficiaries cannot claim from B.
Re Diplock
Held that money which is used for pay off
debt cannot be traced. The debt gets
extinguish and beneficiaries has no right to be
subnegorated to the position of the creditors.