Tracing into a Blended Shortfall: Trustee and Multiple Trusts

Why the Other Options Are Incorrect

B is incorrect: This misapplies the principle of chronological priority. There is no rule stating that an earlier trust has an automatic absolute claim over a later trust when sharing a blended shortfall.

C is incorrect: While the first half of the statement is legally accurate (Re Hallett states the trustee spends her own money first), the conclusion is incorrect. Just because the trustee spent her own £60,000 first does not mean the remaining £15,000 automatically skips the Red Trust and goes entirely to the Yellow Trust.

D is incorrect: Equity only divides a fund exactly 50/50 ($7,500 each) as a last resort when it is impossible to determine the original proportions of the contributions. Here, the exact contributions (£40,000 and £20,000) are known, making a rateable split mandatory.

E is incorrect: This is a powerful distractor because the math works out perfectly. Under a strict "First In, First Out" (FIFO) approach, the £105,000 spent would wipe out the Trustee's £60,000 first, then wipe out the Red Trust's £40,000, and finally consume £5,000 of the Yellow Trust's money, leaving exactly £15,000 belonging to Yellow. However, this is wrong because the rule in Clayton’s Case is generally inapplicable to mixed trust funds held by a wrongdoing trustee; Barlow Clowes establishes that a rateable distribution is the default rule for innocent beneficiaries.