Proprietary Remedies for Breach of Trust: Tracing, Constructive Trusts and Equitable Security
When trustees or fiduciaries misapply trust property, beneficiaries are not limited to personal claims against the wrongdoer. In many cases, equity allows beneficiaries to assert proprietary rights in the property itself or in assets that represent it. These claims, commonly described as proprietary claims following breach of trust, are among the most powerful remedies available in English private law.
Proprietary claims enable beneficiaries to assert rights against property that has passed into the hands of others. They therefore play a crucial role where the original trustee has become insolvent or where the value of the misappropriated property has increased. Yet the law governing these claims is technically demanding. It requires careful analysis of the claimant’s proprietary interest, the processes of following and tracing, and the range of remedies that equity may grant.
This post examines the structure of proprietary claims in English law and the remedies available when trust property has been misapplied.
Proprietary claims and their foundations
A proprietary claim arises where a claimant asserts rights in property that has been transferred in breach of trust or fiduciary duty. The claim derives from the claimant’s existing proprietary interest in the misapplied property. In other words, the claimant is not merely seeking compensation for wrongdoing but is instead asserting that the property, or its substitute, continues to belong to them in equity.
Where a breach of trust results in the transfer of property, the beneficiary may seek to establish that another person now holds property that is properly attributable to the trust. The claimant’s task is therefore to demonstrate that the property in the defendant’s hands either:
1. is the original property itself, or
2. represents substitute property derived from it.
If this can be established, the beneficiary may assert a proprietary claim against that property.
Although such claims are founded on proprietary rights, they do not always lead to proprietary remedies. Courts may instead award personal remedies depending on the circumstances. The distinction between proprietary and personal responses therefore remains central.
Following and tracing
The law distinguishes between two related processes: following and tracing.
Following refers to the process of identifying the same asset as it passes from one person to another. If trust property itself can be identified in the hands of a defendant, the beneficiary may simply follow the asset and assert their continuing proprietary interest.
Tracing, by contrast, becomes necessary when the original property has been exchanged for something else. In these cases, the claimant seeks to identify substitute property representing the value of the original asset.
Crucially, tracing is not itself a remedy or cause of action. As Lord Millett explained in Foskett v McKeown, tracing is merely the process by which a claimant demonstrates what has happened to their property. It is an evidential exercise that supports a proprietary claim.
This distinction is essential. Tracing allows a claimant to establish a connection between the original property and the substitute asset. But it is the claimant’s proprietary interest—rather than the tracing process itself—that ultimately grounds the claim.
The analytical framework for proprietary claims
In practical terms, proprietary claims following breach of trust can be analysed through a structured sequence of questions.
First, the claimant must establish that they possessed a proprietary interest in the misappropriated property. In the trust context this will usually be an equitable proprietary interest held by the beneficiary.
Secondly, the claimant must show that the property can either be followed into the defendant’s hands or that its value can be traced into substitute property received by the defendant.
Thirdly, if this connection can be established, the claimant may assert a proprietary claim against the asset now held by the defendant.
Fourthly, once the claim is established, the court must determine the appropriate remedy to vindicate the claimant’s proprietary rights.
Finally, where the claim is equitable rather than legal, the defendant may seek to rely on the defence that they are a bona fide purchaser for value without notice, sometimes referred to as “equity’s darling”.
This framework highlights the layered nature of proprietary claims. The claimant must first establish the existence of a proprietary interest and trace it into identifiable property before questions of remedy arise.
Proprietary remedies
Where a proprietary claim is successfully established, equity offers two principal forms of proprietary remedy: constructive trusts and equitable security interests.
These remedies differ in important ways and may produce significantly different outcomes depending on the circumstances.
Constructive trusts
The most powerful proprietary response is the constructive trust. Where the defendant holds property that represents trust property or its substitute, the court may declare that the defendant holds that property on constructive trust for the claimant.
The effect of a constructive trust is to recognise that the claimant has a continuing equitable interest in the property. This allows the claimant to recover the property itself, or an appropriate share of it, rather than merely receiving monetary compensation.
Constructive trusts are particularly attractive where the property has increased in value. Because the claimant’s interest attaches to the property itself, the claimant benefits from any appreciation in value.
The modern authority illustrating this principle is Foskett v McKeown, where misappropriated trust money was used to pay premiums on a life insurance policy. The House of Lords held that the beneficiaries could claim a proportionate share of the insurance proceeds through a constructive trust. Lord Millett emphasised that this outcome followed directly from the beneficiaries’ proprietary interest in the misapplied funds.
Constructive trusts therefore ensure that beneficiaries are not deprived of gains generated by the use of their property.
Equitable charges and liens
In other circumstances, a claimant may prefer an equitable security interest, typically in the form of an equitable charge or lien.
Unlike a constructive trust, which gives the claimant a share of the property itself, a charge or lien recognises the value of the claimant’s interest in the property. It therefore operates as a security interest over the asset.
This remedy may be particularly advantageous where the value of the property has declined. Because the claimant’s interest is measured by the value of the original asset rather than the current value of the property, the claimant may prefer to assert a charge securing that value.
If the defendant becomes insolvent, the charge or lien gives the claimant priority over unsecured creditors. However, where the value of the property falls below the value secured by the charge, the claimant may still face a shortfall. In such cases the claimant may need to supplement the proprietary remedy by proving in the debtor’s insolvent estate (or bringing a personal claim for the deficit if the debtor is solvent).
The choice between constructive trusts and security interests therefore reflects strategic considerations about the value of the property and the defendant’s solvency.
Election between remedies
A distinctive feature of proprietary claims is that claimants may elect between different remedies. Where trust property has been used to acquire substitute property, the claimant may choose between asserting a constructive trust over the property or claiming an equitable charge securing the value of the original asset.
The choice will typically depend on whether the property has increased or decreased in value. If the property has appreciated, the claimant will usually prefer a constructive trust. If the property has depreciated, a charge may be more advantageous.
This ability to elect reflects equity’s concern with vindicating proprietary rights while allowing claimants to choose the remedy that best protects their interests.
Backwards tracing
If an asset was acquired on Monday, and the trust money only arrived on Tuesday, then the Tuesday money cannot have been used to by the Monday asset, and no proprietary claim can attach to that asset. This is the rule against backwards tracing.
This makes tracing particularly difficult where trust property has passed through multiple transactions or has been mixed with other funds. The courts have recognised that tracing may continue through a series of substitutions provided that the claimant can identify a continuing link between the original asset and the property now held by the defendant.
In Brazil v Durant, the Privy Council confirmed that tracing may operate through multiple transactions even where the intermediate steps cannot be fully reconstructed, provided that the claimant can establish that the value of their property has passed into the relevant asset. This flexible approach ensures that tracing is not defeated simply because the wrongdoer has attempted to obscure the path of misappropriated funds.
Defences to proprietary claims
Even where a claimant establishes a proprietary interest and successfully traces it into the defendant’s hands, the claim may be defeated if the defendant can establish the defence of bona fide purchaser for value without notice.
This defence protects purchasers who acquire property:
• for value
• in good faith
• without notice of the claimant’s equitable interest.
Such purchasers take the property free of the claimant’s equitable rights. The defence therefore plays an important role in protecting commercial transactions and ensuring the security of property transfers.
However, the defence applies only where the defendant has provided value and lacked notice of the claimant’s interest. Mere recipients who have not provided value will generally remain subject to the claimant’s proprietary rights.
The significance of proprietary remedies
Proprietary remedies occupy a central place within the law of trusts and fiduciary obligations. Their significance lies in the advantages they confer on claimants.
Unlike personal claims, proprietary remedies allow claimants to:
• recover specific property rather than its monetary value
• trace their property into substitute assets
• obtain priority over unsecured creditors if the defendant becomes insolvent.
These advantages explain why beneficiaries often seek proprietary relief where trust property has been misappropriated.
At the same time, the availability of proprietary remedies depends on the claimant’s ability to demonstrate the continuing existence of a proprietary interest in identifiable property. Where the property cannot be traced or has been dissipated, the claimant may be confined to personal claims against the wrongdoer.
Conclusion
Proprietary claims following breach of trust illustrate one of equity’s most distinctive contributions to private law. By recognising the continuing proprietary interests of beneficiaries and allowing those interests to be traced into substitute property, equity ensures that wrongdoers cannot defeat trust obligations simply by transferring or exchanging assets.
Through remedies such as constructive trusts and equitable security interests, the law provides powerful mechanisms for vindicating proprietary rights. These remedies allow beneficiaries not only to recover misappropriated property but also to benefit from gains generated by its use and to obtain priority over competing creditors.
Yet these remedies also reflect a careful balance. While equity protects the proprietary interests of beneficiaries, it also safeguards the security of commercial transactions through defences such as the bona fide purchaser rule.
The resulting framework—combining proprietary rights, tracing principles and flexible remedies—remains one of the most sophisticated features of the modern law of trusts.
