In JSC Mezhdunarodniy Promyshlenniy Bank and Another v Sergei Viktorovich Pugachev and Others [2014] EWHC 3547 (Ch), the English High Court upheld a disclosure order against one of the beneficiaries of discretionary trusts (granted as part of a worldwide freezing order against him) in order to identify the true extent of his control of the trust assets. The decision demonstrates the wide scope of disclosure orders and how they enhance the effectiveness of freezing orders. In Hong Kong, the decision is likely to have precedent value in cases where freezing orders are obtained against defendants who are also the beneficiaries of obscure discretionary trust structures.

Facts

The Defendant, Mr Pugachev, was the owner of JSC Mezhdunarodniy Promyshlenniy Bank (the “Bank“) which, in 2010, was placed into insolvent liquidation. State Corporation “Deposit Insurance Agency” (the “DIA“) was appointed the Bank’s liquidator and brought proceedings against the Defendant in Russia alleging that he schemed to extract money from the Bank for his own benefit. In support of the Russian proceedings, the DIA obtained a worldwide freezing order (or Mareva order) against the Defendant.

The order froze assets up to a value of £1,171,490,852 (over HK$14 billion) and also included an order for disclosure of assets. Following the Defendant’s disclosure that he was one of a class of discretionary beneficiaries of five New Zealand-based trusts, the DIA sought, and obtained, an order requiring the Defendant to disclose:

  1. the identity of the trustee(s), settlor(s), any protector(s) and the beneficiaries of the trusts; and
  2. details of the trust assets, including their value and location.

This order (the “trust disclosure order“) also contained a provision allowing “anyone who is served with or notified of this order…to apply to the court to vary or discharge” it. In reliance on this, the trustees of the five discretionary trusts sought to discharge or vary the trust disclosure order. They argued that:

  1. As discretionary trust beneficiaries have no proprietary interest in trust assets against which a judgment debt can be enforced (such beneficiaries only have a right to be considered for distribution), the court had no jurisdiction to make the subsequent disclosure order unless the trusts were shams. There was no reason to suppose that to be the case here.
  2. There was no reason to think that the trust assets might be dissipated.
  3. The risk of injustice to the trustees if disclosure of the assets was ordered outweighed the risk of injustice to the Claimants if it is not ordered. There was a risk of dissemination of the disclosed information within Russia and a consequential risk of “hostile action” against the assets.
  4. If there were to be an order, there had to be a cross-undertaking in damages to compensate the trustees for any loss they may suffer if the order was wrongly granted and a confidentiality regime.

Decision

The High Court dismissed the trustees’ application and upheld the trust disclosure order.

Regarding the trustees’ first argument, the Court held that the scope of assets covered by the freezing order was much wider than the trustees suggested. According to the wording of the freezing order (which used standard wording), it extended to assets “which [the Defendant] has the power, directly or indirectly, to dispose of or deal with as if it were his own. The [Defendant] is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions“. The Court held that the evidence disclosed good grounds for supposing that the Defendant was in a position to control the discretionary trust assets. For example, one of the trusts indirectly owned the Defendant’s principal residence in London in relation to which it appeared that the Defendant could “dictate or at the very least influence when, and even perhaps if, [rent] is paid“.

As to the trustees’ second argument, the Court held that the risk of dissipation was not so relevant to an order for disclosure as to the grant of a freezing order. In any event, a distribution to any beneficiary would constitute dissipation since it would be a gratuitous transfer.

As for the risk of dissemination of information within Russia, this could be addressed by establishing a “confidentiality club” limiting the persons receiving the trust disclosure.

The cross-undertaking in damages sought by the trustees was not granted, as this was not normally the courts’ practice in relation to disclosure orders and would only be appropriate if there was evidence of a real risk of loss.

Comments

The decision to uphold a disclosure order in relation to discretionary trust assets demonstrates a broad approach to the interpretation and application of freezing orders. The Court acknowledged that a beneficiary under a discretionary trust does not, in theory, have a proprietary right in the trust assets. However, the Court was influenced by evidence which indicated that, as a matter of practical reality, the Defendant controlled assets held within the trust structures and held that these assets therefore had to be disclosed. Therefore, in determining the scope of the disclosure order, the likely practical reality of the trust arrangement prevailed over its legal form. For applicants, this is helpful given the uncertainty that frequently exists when a freezing order is granted, especially where opaque corporate and trust structures are involved. In Hong Kong, a court presented with similar facts is likely to follow the English High Court’s approach in this case. Therefore, the decision should serve as a warning to potential respondents who might seek to rely on discretionary trust structures to shield their assets from the effect of freezing orders.