Mezhprom Bank v Pugachev [2017] EWHC 2426 (Ch)

Mezhprom Bank v Pugachev [2017] EWHC 2426 (Ch) Abstract In Mezhprom Bank v Pugachev, the central issue was whether creditors of Mr Pugachev could enforce against the assets of discretionary trusts of which he was a beneficiary. Birss J held that, properly construed, the ‘true effect’ of the trust deeds left ownership of the assets with Mr Pugachev or the deeds were shams. From a practical perspective, the decision raises questions as to what sorts of powers can be retained by settlor-protectors and confirms that professional trustees are not immune from findings of sham. Going forward, the distinction between a ‘true effect’ and sham analysis will need to be resolved. Background Mr Pugachev was a Russian oligarch said at his height to be worth some US$15 billion [7]. He founded Mezhprom Bank in 1992, which in time became one of Russia’s largest private banks [3]. He had various other Russian business interests but these were ‘lost’ after Mr Pugachev fell out of favour with Russia’s ruling class in 2008 [9]. During the financial crisis, Mezhprom Bank received support from the Russian central bank but ultimately failed. Deposit Insurance Agency (DIA) was appointed liquidator. The liquidation was recognized under the Cross-Border Insolvency Regulations 2006 in July 2014 [35]. In April 2015, the Russian court found that Mr Pugachev had misappropriated US$1billion from Mezhprom Bank [47]. DIA started proceedings to enforce the judgment, which was upheld by the Russian Court of Appeal, in the Chancery Division in October 2015 [54]. Henderson J made a worldwide freezing order against Mr Pugachev in July 2014 [36] and Peter Smith J ordered him not to leave the jurisdiction and to deliver up his passports in March 2015 [45]. In June 2015, Hildyard J made a further order restricting Mr Pugachev’s movements, but he left England for France [48]. He has not returned. In February 2016, Rose J found Mr Pugachev to be in contempt of court for failing to deliver up his French passport [57] and by procuring or permitting transfer of money contrary to the freezing order [58]. He was sentenced to two years’ imprisonment [60]. The claim In these proceedings, DIA sought to enforce against a number of real property assets in England and abroad held directly or indirectly (via corporate entities) by five New Zealand trusts [15], [27]–[30]. Mr Pugachev and members of his family were the beneficiaries of the trusts and the trust assets were his family homes. It was agreed that English and New Zealand law were materially identical. In essence, DIA claimed that Mr Pugachev was the true owner of the underlying assets on three bases [71]–[73]: That each of the five trusts were ‘illusory’; Alternatively, that the trusts were shams; or The establishment of the trusts were transactions susceptible to being set aside under section 423 Insolvency Act 1986. Illusory trusts—concept rejected The claimants relied upon the New Zealand decisions in Clayton v Clayton to support their argument that these trusts were ‘illusory’. However, Birss J did not consider the concept or the word ‘helpful’ [169]. Rather what the court was required and entitled to do was to consider the powers and duties under the trust deed as a whole to determine the realities of its operation [167]. In the appropriate factual matrix, the court may consider that the powers retained by the settlor-beneficiary are sufficiently broad and unfettered that he has retained control and ownership of the assets [161], [167]. The whole focus is on the ‘true effect’ of the trust deed and, therefore, is not the same as a finding of a sham [168]. The factual matrix—fiduciary protector? A critical feature in construing the trust deeds was the scope of the powers retained by the settlor, usually by way of the office of protector [180]. For Birss J the question ultimately resolved itself not into whether the powers were ‘fiduciary’ or not, but whether the donee of the powers could use them selfishly with regards the trust and its assets [182], [186]–[188]. The answer to that question lay in whether the power had to be exercised for a particular purpose considering all the relevant circumstances, including whether the donee of the power is also a beneficiary, trustee or settlor [203]. The ‘true effect’—bare trusts for Mr Pugachev The five trusts gave the protector inter alia the power to appoint replacement protectors, to give or withhold consent to income distributions, investment decisions, and the removal of beneficiaries, and to replace the trustees with or without cause. Mr Pugachev was the protector of each trust and his son would take that role if he became ‘disabled’ from acting. First, Birss J concluded that if the powers vested in Mr Pugachev as protector were not fiduciary then the ‘deeds allow him to retain complete control over the assets he settled into the trusts’ [245]. This was because the deeds expressly permitted the trustees to transfer all of the assets to Mr Pugachev to the exclusion of the other beneficiaries and Mr Pugachev had the power to remove the trustees if they refused to do so [244]. Nothing could happen to the assets without his say so. Secondly, Birss J concluded that the powers vested in Mr Pugachev were extensive and purely personal [267]. This conclusion was supported by (i) Mr Pugachev’s position as protector, settlor and beneficiary [269], (ii) that the power to remove trustees was expressly exercisable ‘without or without cause’ [272], and (iii) the definition of ‘disability’ to include one by operation of law suggested the trusts were always designed to render Mr Pugachev’s assets creditor proof [275]. The result was that Mr Pugachev controlled the trust assets and had retained the beneficial ownership therein [278]. Shams and professional trustees To establish that the trusts were shams, a common intention between the parties to mislead had to be demonstrated [150(iii)]. In the case of trusts this is between the settlor and the trustees.1 Birss J’s focussed on Mr Pugachev and Mr Patterson, the original trustee, who was a New Zealand solicitor. Birss J had little difficulty determining that Mr Pugachev never intended to give away control of his assets. Such an intention was not inconsistent with Mr Pugachev’s genuine desire that his children should benefit from his wealth [292]. He did not lightly relinquish control of anything and would lie to suit his purpose. This supported the inference that one of his intentions in transferring the property into the trusts was to put his assets beyond the reach of his creditors whilst retaining control over them [298]. Mr Patterson did not escape criticism. First, Mr Patterson was not impartial: his reputation was on the line and he was being paid to give evidence [308]. Secondly, Mr Patterson’s evidence in earlier interlocutory proceedings had been less than candid [340], at times recklessly made [324], and Birss J concluded that he could not be relied upon [332]. In particular, his Lordship found that Mr Patterson had previously considered whether the trusts were shams and had determined that similar trusts structures left Mr Pugachev in control of his Russian assets. It was perhaps unsurprising that Birss J concluded that—if the proper construction of the deeds had been there were limitations on Mr Pugachev’s powers—the trusts were shams. Mr Pugachev always regarded the assets as his own and he intended to use the trusts to mislead people otherwise [424]. Mr Patterson was an experienced professional and had not in fact inferred that Mr Pugachev wanted to give away the assets. Mr Patterson never asked and signed the deeds ‘entirely recklessly’ as to Mr Pugachev’s true intentions [435]. Implications The courts will not lightly accept that a settlor has divested himself of ownership or control over settled assets where he retains a significant degree of control over the trusts. Birss J’s ‘trust effects’ analysis is another mechanism by which the courts (and creditors) can side-step trust structures that have the apparent purpose of frustrating enforcement actions. Indeed, it may well prove a distinguishing feature of this case that there was primary evidence before the court of Mr Pugachev’s somewhat aggressive attempts to ‘protect his assets’: he had engaged the services of a consultancy in London specifically to this end [23]. Such conduct was clearly at the forefront of Birss J’s mind: the whole arrangement was ‘an attempt to make the trust judgment proof and should not be accepted’ [275]. Birss J’s judgment on the ‘true effects’ was said to be distinct from a ‘sham’ analysis. The crucial finding was that the deeds properly construed in the factual matrix left Mr Pugachev in control, yet that was also said to be the very purpose of the shamming intention—Mr Pugachev would retain beneficial ownership under a misleading trust structure that suggested otherwise. That being so, it is difficult to determine as a matter of principle where the line is to be drawn between a sham analysis and one based on the deeds’ ‘true effect’. The finding on the ‘true effects’ analysis was rooted firmly in the sorts of powers given to Mr Pugachev as protector and the manner in which they could be exercised for his benefit. Yet, those who advise on trust structures will recognize many of those powers as ones given to settlors wishing to retain some legitimate control over ‘their’ wealth. It will be important going forward for very careful thought to be given as to the extent of any retained powers and whether appropriate limitations on their exercise should be incorporated into the deeds. For example, the trust instrument could expressly state for whose benefit or what purpose the assets have been settled (see [274]). The decision also runs counter to the received wisdom that proving a sham against professional trustees is an uphill struggle. There were clearly significant issues with Mr Patterson’s evidence, however, Birrs J’s reliance on reckless indifference significantly extends the potential for professional trustees to be caught up in the shammer’s intention. In effect, Mr Patterson had simply gone along with Mr Pugachev’s instructions. Such a finding has a significantly broader reach than requiring the professional trustee to have actively shared and participated in the shamming intention. The upshot is that professionals should be careful to establish their clients’ purposes in establishing the trust and take steps to formally record their own intentions. The finding of a bare trust for Mr Pugachev may not necessarily prove a panacea. A number of the trust assets were held via corporate entities, which could well have creditors or other shareholders with prior-ranking interests. The corporate veil will always be a prima facie barrier frustrating enforcement against underlying assets. The decision may, however, prove significant in the matrimonial context. Since A v A the strict Snook test of sham has been applied in the Family Division, yet this decision arrives at the same result without the need to demonstrate the requisite intention. This is significant because the court can order the transfer of property in which one party to the marriage has equitable interests. Finally, there is an obvious policy rationale behind the strict test of common intention for shams—it is a serious thing for written documents, upon which third parties may rely, not to be given the plain meaning they outwardly have. Why are such concerns not engaged here? Birss J’s analysis renders much of the language of the deeds superfluous, yet this construction was considered appropriate. Without appropriate safeguards like the intention test, this approach poses serious difficulties regarding certainty and predictability. Footnotes 1. A v A [2007] EWHC 99 (Fam) [34]–[40]. Gregor Hogan is a barrister at Serle Court, Lincoln’s Inn. He practises in commercial chancery work. E-mail: ghogan@serlecourt.co.uk. © The Author(s) (2018). Published by Oxford University Press. All rights reserved. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Trusts & Trustees Oxford University Press

Mezhprom Bank v Pugachev [2017] EWHC 2426 (Ch)

Loading next page...
 
/lp/ou_press/mezhprom-bank-v-pugachev-2017-ewhc-2426-ch-3jMq1CcEqW
Publisher
Oxford University Press
Copyright
© The Author(s) (2018). Published by Oxford University Press. All rights reserved.
ISSN
1752-2110
D.O.I.
10.1093/tandt/ttx201
Publisher site
See Article on Publisher Site

Abstract

Abstract In Mezhprom Bank v Pugachev, the central issue was whether creditors of Mr Pugachev could enforce against the assets of discretionary trusts of which he was a beneficiary. Birss J held that, properly construed, the ‘true effect’ of the trust deeds left ownership of the assets with Mr Pugachev or the deeds were shams. From a practical perspective, the decision raises questions as to what sorts of powers can be retained by settlor-protectors and confirms that professional trustees are not immune from findings of sham. Going forward, the distinction between a ‘true effect’ and sham analysis will need to be resolved. Background Mr Pugachev was a Russian oligarch said at his height to be worth some US$15 billion [7]. He founded Mezhprom Bank in 1992, which in time became one of Russia’s largest private banks [3]. He had various other Russian business interests but these were ‘lost’ after Mr Pugachev fell out of favour with Russia’s ruling class in 2008 [9]. During the financial crisis, Mezhprom Bank received support from the Russian central bank but ultimately failed. Deposit Insurance Agency (DIA) was appointed liquidator. The liquidation was recognized under the Cross-Border Insolvency Regulations 2006 in July 2014 [35]. In April 2015, the Russian court found that Mr Pugachev had misappropriated US$1billion from Mezhprom Bank [47]. DIA started proceedings to enforce the judgment, which was upheld by the Russian Court of Appeal, in the Chancery Division in October 2015 [54]. Henderson J made a worldwide freezing order against Mr Pugachev in July 2014 [36] and Peter Smith J ordered him not to leave the jurisdiction and to deliver up his passports in March 2015 [45]. In June 2015, Hildyard J made a further order restricting Mr Pugachev’s movements, but he left England for France [48]. He has not returned. In February 2016, Rose J found Mr Pugachev to be in contempt of court for failing to deliver up his French passport [57] and by procuring or permitting transfer of money contrary to the freezing order [58]. He was sentenced to two years’ imprisonment [60]. The claim In these proceedings, DIA sought to enforce against a number of real property assets in England and abroad held directly or indirectly (via corporate entities) by five New Zealand trusts [15], [27]–[30]. Mr Pugachev and members of his family were the beneficiaries of the trusts and the trust assets were his family homes. It was agreed that English and New Zealand law were materially identical. In essence, DIA claimed that Mr Pugachev was the true owner of the underlying assets on three bases [71]–[73]: That each of the five trusts were ‘illusory’; Alternatively, that the trusts were shams; or The establishment of the trusts were transactions susceptible to being set aside under section 423 Insolvency Act 1986. Illusory trusts—concept rejected The claimants relied upon the New Zealand decisions in Clayton v Clayton to support their argument that these trusts were ‘illusory’. However, Birss J did not consider the concept or the word ‘helpful’ [169]. Rather what the court was required and entitled to do was to consider the powers and duties under the trust deed as a whole to determine the realities of its operation [167]. In the appropriate factual matrix, the court may consider that the powers retained by the settlor-beneficiary are sufficiently broad and unfettered that he has retained control and ownership of the assets [161], [167]. The whole focus is on the ‘true effect’ of the trust deed and, therefore, is not the same as a finding of a sham [168]. The factual matrix—fiduciary protector? A critical feature in construing the trust deeds was the scope of the powers retained by the settlor, usually by way of the office of protector [180]. For Birss J the question ultimately resolved itself not into whether the powers were ‘fiduciary’ or not, but whether the donee of the powers could use them selfishly with regards the trust and its assets [182], [186]–[188]. The answer to that question lay in whether the power had to be exercised for a particular purpose considering all the relevant circumstances, including whether the donee of the power is also a beneficiary, trustee or settlor [203]. The ‘true effect’—bare trusts for Mr Pugachev The five trusts gave the protector inter alia the power to appoint replacement protectors, to give or withhold consent to income distributions, investment decisions, and the removal of beneficiaries, and to replace the trustees with or without cause. Mr Pugachev was the protector of each trust and his son would take that role if he became ‘disabled’ from acting. First, Birss J concluded that if the powers vested in Mr Pugachev as protector were not fiduciary then the ‘deeds allow him to retain complete control over the assets he settled into the trusts’ [245]. This was because the deeds expressly permitted the trustees to transfer all of the assets to Mr Pugachev to the exclusion of the other beneficiaries and Mr Pugachev had the power to remove the trustees if they refused to do so [244]. Nothing could happen to the assets without his say so. Secondly, Birss J concluded that the powers vested in Mr Pugachev were extensive and purely personal [267]. This conclusion was supported by (i) Mr Pugachev’s position as protector, settlor and beneficiary [269], (ii) that the power to remove trustees was expressly exercisable ‘without or without cause’ [272], and (iii) the definition of ‘disability’ to include one by operation of law suggested the trusts were always designed to render Mr Pugachev’s assets creditor proof [275]. The result was that Mr Pugachev controlled the trust assets and had retained the beneficial ownership therein [278]. Shams and professional trustees To establish that the trusts were shams, a common intention between the parties to mislead had to be demonstrated [150(iii)]. In the case of trusts this is between the settlor and the trustees.1 Birss J’s focussed on Mr Pugachev and Mr Patterson, the original trustee, who was a New Zealand solicitor. Birss J had little difficulty determining that Mr Pugachev never intended to give away control of his assets. Such an intention was not inconsistent with Mr Pugachev’s genuine desire that his children should benefit from his wealth [292]. He did not lightly relinquish control of anything and would lie to suit his purpose. This supported the inference that one of his intentions in transferring the property into the trusts was to put his assets beyond the reach of his creditors whilst retaining control over them [298]. Mr Patterson did not escape criticism. First, Mr Patterson was not impartial: his reputation was on the line and he was being paid to give evidence [308]. Secondly, Mr Patterson’s evidence in earlier interlocutory proceedings had been less than candid [340], at times recklessly made [324], and Birss J concluded that he could not be relied upon [332]. In particular, his Lordship found that Mr Patterson had previously considered whether the trusts were shams and had determined that similar trusts structures left Mr Pugachev in control of his Russian assets. It was perhaps unsurprising that Birss J concluded that—if the proper construction of the deeds had been there were limitations on Mr Pugachev’s powers—the trusts were shams. Mr Pugachev always regarded the assets as his own and he intended to use the trusts to mislead people otherwise [424]. Mr Patterson was an experienced professional and had not in fact inferred that Mr Pugachev wanted to give away the assets. Mr Patterson never asked and signed the deeds ‘entirely recklessly’ as to Mr Pugachev’s true intentions [435]. Implications The courts will not lightly accept that a settlor has divested himself of ownership or control over settled assets where he retains a significant degree of control over the trusts. Birss J’s ‘trust effects’ analysis is another mechanism by which the courts (and creditors) can side-step trust structures that have the apparent purpose of frustrating enforcement actions. Indeed, it may well prove a distinguishing feature of this case that there was primary evidence before the court of Mr Pugachev’s somewhat aggressive attempts to ‘protect his assets’: he had engaged the services of a consultancy in London specifically to this end [23]. Such conduct was clearly at the forefront of Birss J’s mind: the whole arrangement was ‘an attempt to make the trust judgment proof and should not be accepted’ [275]. Birss J’s judgment on the ‘true effects’ was said to be distinct from a ‘sham’ analysis. The crucial finding was that the deeds properly construed in the factual matrix left Mr Pugachev in control, yet that was also said to be the very purpose of the shamming intention—Mr Pugachev would retain beneficial ownership under a misleading trust structure that suggested otherwise. That being so, it is difficult to determine as a matter of principle where the line is to be drawn between a sham analysis and one based on the deeds’ ‘true effect’. The finding on the ‘true effects’ analysis was rooted firmly in the sorts of powers given to Mr Pugachev as protector and the manner in which they could be exercised for his benefit. Yet, those who advise on trust structures will recognize many of those powers as ones given to settlors wishing to retain some legitimate control over ‘their’ wealth. It will be important going forward for very careful thought to be given as to the extent of any retained powers and whether appropriate limitations on their exercise should be incorporated into the deeds. For example, the trust instrument could expressly state for whose benefit or what purpose the assets have been settled (see [274]). The decision also runs counter to the received wisdom that proving a sham against professional trustees is an uphill struggle. There were clearly significant issues with Mr Patterson’s evidence, however, Birrs J’s reliance on reckless indifference significantly extends the potential for professional trustees to be caught up in the shammer’s intention. In effect, Mr Patterson had simply gone along with Mr Pugachev’s instructions. Such a finding has a significantly broader reach than requiring the professional trustee to have actively shared and participated in the shamming intention. The upshot is that professionals should be careful to establish their clients’ purposes in establishing the trust and take steps to formally record their own intentions. The finding of a bare trust for Mr Pugachev may not necessarily prove a panacea. A number of the trust assets were held via corporate entities, which could well have creditors or other shareholders with prior-ranking interests. The corporate veil will always be a prima facie barrier frustrating enforcement against underlying assets. The decision may, however, prove significant in the matrimonial context. Since A v A the strict Snook test of sham has been applied in the Family Division, yet this decision arrives at the same result without the need to demonstrate the requisite intention. This is significant because the court can order the transfer of property in which one party to the marriage has equitable interests. Finally, there is an obvious policy rationale behind the strict test of common intention for shams—it is a serious thing for written documents, upon which third parties may rely, not to be given the plain meaning they outwardly have. Why are such concerns not engaged here? Birss J’s analysis renders much of the language of the deeds superfluous, yet this construction was considered appropriate. Without appropriate safeguards like the intention test, this approach poses serious difficulties regarding certainty and predictability. Footnotes 1. A v A [2007] EWHC 99 (Fam) [34]–[40]. Gregor Hogan is a barrister at Serle Court, Lincoln’s Inn. He practises in commercial chancery work. E-mail: ghogan@serlecourt.co.uk. © The Author(s) (2018). Published by Oxford University Press. All rights reserved.

Journal

Trusts & TrusteesOxford University Press

Published: Mar 1, 2018

There are no references for this article.

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 12 million articles from more than
10,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve Freelancer

DeepDyve Pro

Price
FREE
$49/month

$360/year
Save searches from Google Scholar, PubMed
Create lists to organize your research
Export lists, citations
Read DeepDyve articles
Abstract access only
Unlimited access to over
18 million full-text articles
Print
20 pages/month
PDF Discount
20% off