We all deprecate those that seek to dress up a nomineeship or agency as a proper trust presumably to gain some tax or other advantage. An example of such abuse is provided by the case of JSC Mezhdunarodniy Promyshlenniy Bank, State Corporation ‘Deposit Insurance Agency’ v Sergei Viktorovich Pugachev & Ors1 which concerned five New Zealand trusts set up by Mr Pugachev who had controlled Mezhprom Bank, a private bank which suffered in the 2008 financial crash and entered into insolvent liquidation in late 2010 with liabilities exceeding US$1 billion (much of which is owed to the Russian Central Bank). In 2011, Mr Pugachev fled Russia after a criminal investigation was opened against him in connection with the Bank’s demise. In late 2011, and then following asset protection advice provided by an organization called GPW + Co Ltd based in London in mid- and late 2013, Mr Pugachev established the five New Zealand trusts. In mid-2014, the Bank and its liquidator started proceedings against Mr Pugachev in London to recover the bank’s losses. They challenged the validity of the five New Zealand trusts, inter alia, on grounds of sham. Mr Pugachev did not participate in the trial; he enjoys the dubious distinction of holding the record for the longest prison sentence for contempt of court2 (unserved due to his decamping to France) in a judgment which found him to have given false evidence with no honest belief in its truth. Following trial of the action, Birss J’s judgment handed down on 11 October 2017 noted that the Claimants had suggested that only Mr Pugachev’s intention, as settlor, mattered to the question of whether the five trusts were shams. They then conceded that the trustees’ intentions were also relevant to this question, perhaps reflecting the weight of largely first instance authority on the test for sham. Perhaps the Claimants might argue at appellate level that the settlor’s unilateral intentions are decisive, assuming the matter proceeds. It is clear from the oft-quoted passage setting out the test for sham that Diplock LJ did not intend to lay down a definition of sham for general application.3 There was, therefore, thought to be some doubt as to whether the trustees’ intentions would be relevant. The views of the editors of an earlier edition of Lewin were that the settlor’s intentions alone were decisive: This form of words [i.e. Diplock LJ's remarks in Snook] carefully fashioned in the multi-lateral context of a refinancing operation, does not transplant easily into the trust context. Where a trust is unilaterally declared, then there is no difficulty, as only the settlor's intention can conceivably be relevant. Where, on the other hand, trustees are made parties to a trust deed, there would still seem no good reason for their intention to be a relevant factor to be taken into account, given that the trust is complete without any element of acceptance by the trustees. We have previously pointed out that a trust might be set aside or rectified on grounds of the settlor’s unilateral mistake and that synthesizing the test for sham trusts with the test for sham contracts was questionable because: It seems that the reason for the Court taking the laissez faire approach in Snook was the equality of bargaining position in a commercial negotiation. This provides a bulwark against abuse because it is inherently unlikely that one party to the negotiation, in a similar bargaining position, would simply go along with the nefarious intentions of the other. But the bargaining position of trustees vis à vis the settlor cannot be described as equal. The trustee’s choice is to accept the terms of the trusteeship that are on offer or lose the business. It must be questioned whether they can provide a meaningful bulwark against a settlor's nefarious intentions. To the contrary, the Panama Papers reveal that Mossack Fonseca thought backdating documents (a recognised basis of fraud) is a ‘well founded and accepted practice’ that is ‘common in our industry4and is not to cover up or hide unlawful acts'.5 Having reluctantly conceded that trustees’ intentions are relevant, the Claimants faced formidable hurdles in showing that the solicitor trustee, Mr William Patterson, not only intended the true arrangement to be different to the one contained in the document, but that he also intended that third parties would be misled as to the true arrangement. We have previously described these hurdles as follows6: The first of these [that the true arrangement is different to the one contained in the document] is difficult enough, because the starting point in ascertaining the parties’ intentions is the language they have used in the document. This language is construed objectively by asking what might be the intentions of reasonable persons if placed in the situation of the parties. The parties’ subjective intentions are usually inadmissible. This leads to a presumption that the parties intend to give effect to the arrangement in the document. Going behind this and showing some other arrangement is going to be difficult. How might a creditor or Revenue authority go about this? Parties setting out to deceive Revenue authorities or creditors tend not to record the fact that there is a separate different arrangement in writing. And even if they did how would the Revenue authority or creditor know about this at the beginning when they are framing their case. They will not find out until disclosure of the trustees’ documents are given. The trouble is that before then the trustee is likely to seek to strike out the case. The best the creditor can hope for is to say that the trustees always did what the settlor asked. This is exactly what Grupo Torras said in the Esteem case7 in Jersey. The Royal Court thought such evidence did not provide a basis to conclude that the trustee intended to operate the trust other than in accordance with its terms. They said there is nothing wrong in settlors expressing wishes to trustees. They thought that the settlor's requests were within the range of what a reasonable trustee might consider to be in the interests of the beneficiaries and the family was close knit with the settlor acting as the family spokesman in dealing with the trustees. Even if the attacker can overcome these hurdles and show the actual arrangement is different, it is also necessary to show that the settlor and original trustees intend to mislead third parties by presenting the transaction as being something that it is not. This amounts to dishonesty. Judges start from the premise that people are honest, though they might well be willing to infer dishonesty from the fact that the true arrangement is different to what is contained in the paperwork, especially if the settlor might derive some tax saving or asset protection benefit from this. But a judge will often take a lot of persuading that a trustee had any such dishonest intention because the trustee has nothing to gain and much to lose from dishonest behaviour. A finding of an actual intention on the part of the trustees is going to be confined to extreme cases such as Rahman8, where the trustee readily accepted that Rahman was calling the shots and the trustee did not know what was going on. Birss J’s judgment dealt with these hurdles in the following way: 427 In his cross-examination Mr Patterson said that he was not in a position to comment on Mr Pugachev's intentions. In one sense that is true of any human being but when an experienced lawyer is being asked to draw up a trust deed it is rather odd for them to disavow knowledge of the settlor's actual intentions. 428 When it was put to him that keeping control of the assets was clearly what Mr Pugachev intended from the outset, Mr Patterson said he could not express a view and it seemed to him to be a matter of submission. When it was put to him that Mr Patterson went along with what Mr Pugachev intended, Mr Patterson denied this (in the sense that he denied going along with Mr Pugachev intending to retain control) and said that ‘in treating Mr Pugachev as settlor, the intention of the settlor was to place the property in trust … And so on my understanding of a trustee's role in this case, paying close attention to the settlor's intentions is entirely appropriate’. Since Mr Patterson disavowed knowledge of Mr Pugachev's actual intentions, the point he was making was in effect that he was entitled to assume that Mr Pugachev intended to place the property in trust. That is fine up to a point, after all Mr Patterson was instructed to set up a trust. All the same his clear evidence was that he did not know what Mr Pugachev's actual intentions were. 429 In re-examination Mr Patterson was asked about his own intentions. He said that he had no intention that Mr Pugachev would have complete control over the assets in the trust, that he would not have regarded Mr Pugachev as the absolute owner and ‘that it was never his intention to relinquish control over the trust to Mr Pugachev. I have given this a lot of thought. I do not accept that evidence’. It does not sit comfortably with other evidence such as Mr Patterson's reference to Mr Pugachev as the UBO, nor with his approach to the removal of Alexander, nor with his opinion about the effect of the OPK trust deed, nor with the totality of his email exchanges about Mr Pugachev's ability to alter the trust deed. 430 If these really were Mr Patterson's intentions at the time then it is striking that there is no evidence he expressed them to Mr Pugachev directly or indirectly through his lieutenants. Nor does Mr Patterson suggest he ever told Mr Pugachev directly or indirectly that any of Mr Pugachev's powers as Protector, such as to remove trustees, were fiduciary and therefore fettered in some way. 431 Furthermore, although in his witness statement for this case at paragraph 136 (quoted above) Mr Patterson asserts that the Protector's power to remove trustees is fiduciary, his thinking on this seems to have evolved over time (compare the trusts law article in 2009 and also what seems to have been a conditional basis on which the point was put to Heath J in New Zealand in 2015). 432 This case is nothing like Midland Bank v Wyatt. Plainly it would be absurd to say that Mr Patterson gave no thought to the contents of the document and it would be absurd to say that Mr Patterson signed the deed (as director of the trustee) not knowing or caring what he was signing. Mr Patterson knew very well what he was signing. He drafted it. 433 Mr Patterson himself said in his witness statement that he was concerned by the sham claim because in order for the claim to be made out ‘the claimants would have to show that the trustees, which at the time of formation of the Trusts I was a Director of, were participants in the sham and had the requisite shamming intention. For the reasons set out in this statement, the Trusts were not shams’. 434 The claimants' case is that Mr Patterson had no intention independent of Mr Pugachev. In my judgment that is the true and fair way of looking at it. Mr Patterson is an experienced professional. For a person in Mr Patterson's position, the obvious inference from the circumstances as a whole was that Mr Pugachev's intentions were what I have found them to be, including in particular that they were a pretence to disguise control, that Victor was part of the pretence and that control was to be maintained via the role of Protector. 435 Mr Patterson says he did not know what Mr Pugachev's intentions actually were. That may be so, but I do not accept that Mr Patterson did in fact infer that Mr Pugachev wanted to relinquish control. If Mr Patterson had wanted to find out what the settlor's actual intentions were, he could have asked, but he did not. Mr Patterson did nothing to suggest to Mr Pugachev's team that the new deed might not have the effect of leaving Mr Pugachev in ultimate control as Protector. If he had raised it then I am sure there would have been a negative reaction. If he had turned his mind to raising it, then Mr Patterson would have realised that that is what would be likely to happen. The best that can be said is that Mr Patterson prepared and signed these deeds entirely recklessly as to the settlor's true intentions. His involvement directing the trustee cannot add anything to the involvement of Mr Liechti and Ms Dozortseva, who were not independent of Mr Pugachev either. 436 Given Mr Pugachev's true intentions, the finding on the True Effect of the Trusts claim means that these trusts are not shams. They fulfil Mr Pugachev's true intention not to lose control. That is not surprising. For example it means that the terms of the opinion Mr Patterson gave for the OPK trust deed which was used as a template also applies to these trust deeds in just the same way. In other words – while the trustees of these deeds are properly appointed as trustees, effective control of the actions of the trustees is held by the Protector through the Protector's powers. In this respect the Protector has ultimate control of the trusts. 437 However if a proper approach to the construction of these deeds was to lead to a conclusion that the Protector's relevant powers are fiduciary, as Mr Patterson now says they are, and that in turn was to lead to a conclusion that under the deeds Mr Pugachev is not the beneficial owner, then those deeds are a sham. The settlor intended to use them to create a false impression as to his true intentions and the trustees went along with that intention recklessly. Sham and the true effect of the trusts 438 The situation in this case reminds me of a similar phenomenon in patent law known as the Angora cat problem first identified by Professor Franzosi, an eminent academic expert in the field. It was described by Jacob LJ in the Court of Appeal in European Central Bank v Document Security Systems  EWCA Civ 192 at paragraph 5. In some circumstances a patentee can argue for a narrow interpretation of a document while defending it in one context but then argue for a different wide interpretation when asserting it in another context. Jacob LJ explained that: ‘Professor Mario Franzosi likens a patentee to an Angora cat. When validity is challenged, the patentee says his patent is very small: the cat with its fur smoothed down, cuddly and sleepy. But when the patentee goes on the attack, the fur bristles, the cat is twice the size with teeth bared and eyes ablaze.’ 439 This vice, that the same patent document can be presented in radically different ways in different circumstances to suit the owner's needs is not unique to patents. Both constructions may be arguable and so the canny professional who drafted the document can even salve their conscience by presenting two inconsistent but arguable interpretations on different occasions. 440 The problem can apply to any written instrument and this case provides another example in a different context. When the validity or effect of the trust is challenged, the trustee can put forward emollient submissions about Protector's powers being confined and narrow as a result of their fiduciary nature. That has happened in these proceedings. But in other circumstances, for example when Mr Pugachev needs collateral for a bank loan, a completely different stance can be taken in relation to the very same instrument. Mr Pugachev can be presented as the owner of the trust assets. This latter event has happened too. A concrete example was in April 2013, when a bank asked for collateral for a loan, Mr Pugachev's family office presented a trust asset (Old Battersea House) as an asset owned by Mr Pugachev. It might have been a slip by Mr Liechti but I do not believe so. If the bank needed persuading, a formal opinion could even be written for these trust deeds in just the same terms as the one Mr Patterson prepared for the OPK deed. The fact the loan did not go ahead is not the point. 441 I do not believe this characteristic of the deeds in this case is accidental. Whether ‘sham’ is a perfect description is not clear but it does not matter. This is not a case in which, contrary to what an ordinary looking trust deed with just a settlor and a trustee may state in words, the whole scheme always was in truth that the settlor would exercise covert control of the trustee and both settlor and trustee always intended that that would be so. In that sort of case the word sham accurately describes the trust deed. 442 However whatever label is to be applied to this case, in my judgment the combination of circumstances here means that the court should not give an effect to these instruments that would result in the assets being regarded as outside Mr Pugachev's ultimate control. The whole scheme was set up to facilitate a pretence about ownership (or rather its absence) should the need arise. (emphasis added) As we noted in the editorial to our last issue,9 the mere fact that a settlor has retained complete control of a trust does not mean that it is a sham: a bare trust is an obvious case of such a trust which is not a sham. The vice here was that if one interpretation of the trust instrument were accepted, then it was a sham in the classic (ie Snook) sense as the italicised words in the above reasons for judgment make clear: if the other were accepted, then it had not been effective to divest Mr Pugachev of the trust assets. On either view, the same legal consequences followed. It should be noted that the evidentiary difficulties confronting the Claimants in the Pugachev case will not apply where the Revenue is a party to the proceedings, given that usually a Revenue authority has the benefit of a reverse onus of proof. The consequence of a failure to offer evidence in relation to the establishment and/or activities of trusts will usually be that a Court is far more comfortable reaching a conclusion that a sham is involved. Data protection: an update Our last editorial focused in large part on the implications for trustees and other trust law practitioners of the ruling of the Court of Appeal in Dawson-Damer v Taylor Wessing LLP.10 Since that editorial was written, a proposed amendment to the Data Protection Bill currently making its way through parliament was tabled at the House of Lords committee stage by Lord Pannick.11 The amendment sought to introduce into the Bill an exception to data subjects’ general right to request and be provided with a copy of any personal data held by a data controller in circumstances where the data controller is (or acts as agent or confidential adviser to) a trustee or other trust officer, and the personal data in question consists of information falling within the categories set out in Re Londonderry’s Settlement.12 In our view this proposed amendment is very much to be welcomed as it would provide essential protection of a central principle governing the operation of trusts. Privacy is a fundamental right, but that does not mean that rights afforded by data protection legislation should be permitted to trample on well-established and sensible trust law principles; those principles should be protected for all of the cogent reasons advanced by Lord Pannick, as they have been in other jurisdictions. By the time this Editorial comes to press, the draft amendment will have been considered at the report stage in the House of Lords. We are sure the passage of the Bill will be followed closely by all trust law practitioners and it is to be hoped that the draft amendment receives the endorsement it deserves. The International Academy of Estate and Trust Law Formed in 1975, with the purpose of drawing trust and estate lawyers from different jurisdictions together to discuss topical issues, the International Academy of Trust and Estate Law continues to thrive. We are proud to publish many of the papers presented to its conference held in Chicago in May 2017, and to be associated with the Academy. The published papers do not include an analysis of the US position in relation to sham. Leading US cases on the subject include Byrum, Goodwyn, and Wyly.13 They suggest courts generally evaluate whether a trust is a sham using a four-pronged test which asks whether: (i) the relationship of the grantor to the transferred property changed materially; (ii) an independent trustee exists to prevent the grantor from acting solely in his or her own interest; (iii) at least some economic interest in the trust assets passed to other beneficiaries; and (iv) the trust imposed at least some meaningful restrictions on the settlor’s use of the trust assets. It is understood that no one of these factors is determinative, but if all four of them are lacking, a court will usually conclude that the trust is a sham. This involves similar considerations to those in the Pugachev case—including the question of whether the settlor was in control and whether such control was consistent with the written terms of the trust—though, of course, there are important differences that need to be borne in mind. Salve We are proud to welcome Paolo Panico and Professor Robert Sitkoff to our Editorial board and Luigi Belluzzo, Dr David Morrison, Alain Nijs, Dr Andreas Richter, and David Wallace Wilson as country correspondents. Footnotes 1.  EWHC 2426 (Ch). 2. Rose J  EWHC 192 (Ch) –;  EWHC 258 (Ch). 3.  2 QB 786. To the contrary, Diplock LJ used such phrases as ‘… it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word’. He then goes on to say ‘if it has any meaning in law’. 4. A view which no proper trustee or lawyer could hold. 5. ‘Trusts: Weapons of Mass Injustice or Instruments of Economic progress?’ (2017) 23 Trusts & Trustees. 6. ibid. 7. Re Esteem Settlement  JLR 188. 8. Abdel Rahman v Chase Bank (CI) Trust Company Limited  JLR 103. 9. (2017) 23(10). 10.  EWCA Civ 74. 11. HL Deb 13 November 2017, vol 785. 12.  Ch 918. 13. 408 US 125 (1972); TC Memo 1973-153 (16 July 1973); 56 F Supp 3d 394 (2014). © The Author(s) (2018). Published by Oxford University Press. All rights reserved.
Trusts & Trustees – Oxford University Press
Published: Feb 1, 2018
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