Introduction

We have seen in Chapters 11 and 14 how the determination of the courts to protect the interest of the beneficiaries in the event of trustee insolvency or misconduct was manifested in two ways in particular: (i) the separation of trust property from the insolvent's own assets; and (ii) the provision of the process of equitable tracing. Thus, property held by an insolvent or bankrupt person or company in trust for another is, with one exception, not available to the liquidator or trustee in bankruptcy to meet the claims of creditors. The exception is where an insolvent trustee has outlaid its own moneys in satisfaction of the trust's liabilities. A right of indemnity arises against trust assets for such liabilities satisfied on the trust's behalf (eg in running a business of the trust). This gives the trustee a proprietary interest in the trust assets, which may pass to a trustee in bankruptcy or liquidator for the benefit of creditors (see generally Hayton and Marshall at pp 693–703). In certain rare circumstances it has been held that property held on trust may be available to the liquidator to cover its costs if the insolvent's other assets are insufficient (see Chapter 14, p 740). The reasoning behind the fundamental principle that the insolvent's property does not include trust property is clear enough: trust property is beneficially owned not by the insolvent or bankrupt trustee, but by the beneficiaries.