Sofie Hoffman and Sharon Kenchington review a case in which the England and Wales Court Appeal considered the court's jurisdiction to make a disclosure order, ancillary to a worldwide freezing order (this article was originally published in the STEP Journal in December 2015). 

The Court of Appeal was asked to consider powers exercisable by the Court in connection with a freezing order made against Sergei Pugachev, the founder of the JSC Mezhdunarodniy Promyshlenniy Bank, latterly one of the largest privately owned banks in Russia. In November 2010, the bank was declared to be insolvent and placed into temporary administration. The court-appointed liquidator brought proceedings against Mr Pugachev in Russia (and also in England) alleging that, after the bank received substantial loans from the Russian Central Bank for the purpose of recapitalisation, Mr Pugachev executed a scheme designed to extract money from the bank for his own benefit and the benefit of companies under his control. A worldwide freezing order up to the value of £1.1 billion was made against Mr Pugachev on 11 July 2014.

The Freezing Order

As is well known, the challenge often faced by a Claimant who obtains a freezing order, is to ascertain what assets are likely to be available to meet a final judgment. In complex fraud cases, those assets will inevitably include trust assets which are either held on trust for the defendant or which the defendant claims to hold on trust for a third party. An important tool available to the Defendant is the jurisdiction of the Court to make effective disclosure orders, to enable a Claimant to ascertain the truth behind the trust arrangements.

Under paragraph 5 of the freezing order, Mr Pugachev's assets up the value of £1.1 billion were frozen. Paragraph 6 of the order provided as follows "paragraph 5 of the freezing order applies to all the Respondent's assets whether or not they are in his own name and whether they are solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise. For the purposes of this order the Respondent's assets include any asset which he has the power; directly or indirectly, to dispose of or deal with as if it were his own. The Respondent 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 Claimants had reason to believe that the funds extracted by Mr Pugachev had been settled into off short trusts. They therefore also sought by way of clarification to the assets covered by the order, the following specific provision at paragraph 7(c) "This prohibition includes the following assets in particular….(c) any interest under any trust or similar entity including any interest which may arise by virtue of the exercise of any power of appointment, discretion or otherwise howsoever’". The order also included at paragraph 9 a provision for the disclosure of information of assets worldwide exceeding £10,00 whether held in Mr Pugachev's his own name or not and whether solely or jointly owned, giving the value, location and details of all such assets.

Mr Pugachev disclosed that he was included in the class of discretionary beneficiaries under five named New Zealand trusts. No further details of the trusts were provided. The Claimants sought further information about these discretionary trusts. Henderson J made a disclosure order requiring Mr Pugachev to confirm the identity of the trustee(s), settlor(s), any protectors and the beneficiaries of the trusts, to provide details of the trust assets and to supply copies of the trust deeds in his control or which he had a right to inspect or copy. The trustees applied to David Richards J to discharge those paragraphs of Henderson J's Order. He refused to do so. Mr Pugachev appealed against Henderson J's Order and the trustees appealed against David Richards J's Order.

What were the specific questions for the Court of Appeal?

The Court of Appeal had to consider whether the Court has jurisdiction to order a member of a class of beneficiaries under a discretionary trust to make disclosure of the details of the trust and the trust assets and if so, in what circumstances should that jurisdiction should be exercised.

Mr Pugachev's counsel submitted that Henderson J was wrong in concluding that his ‘interest’ as one of the class of beneficiaries under the discretionary trusts came within the scope of paragraph 7 (c) of the freezing order. He argued that paragraph 7 (c) was effectively an explanation of paragraph 6 which only included assets that could truly be said to be Mr Pugachev's own assets. This was reinforced by paragraph 5 of the order which prohibited Mr Pugachev from removing ‘his assets’ from the jurisdiction and from disposing or dealing with ‘his assets’; and by paragraph 9 which limited disclosure to ‘his assets worldwide’. Hence the governing concept underlying the freezing order was that it applied only to Mr Pugachev's assets.

Lewison LJ noted that paragraph 7 (c) of this freezing order seemed to distinguish between an interest under a trust and an interest which may arise by virtue of the exercise of any discretion and said that both parts of paragraph 7 (c) must have been intended to mean something. He assumed that the first part of the paragraph would catch a vested interest under a trust (either in possession or remainder) while the second part was ‘to be read in the context of the order as a whole, which imposes immediate prohibitions on dealing with assets, and obligations of disclosure which must be complied with...’ …

Further that the word ‘interest’ takes its meaning from the context in which it is used and that here it was an interest which was dependent on the exercise of a discretion.

Lewison LJ concluded that the interest could only be the interest of a member of a class of beneficiaries created by a trust in whose favour a discretion could be exercised and said that this was reinforced by paragraph 6 of the order which referred to ‘all the Respondent's assets …and whether the Respondent is interested in them legally, beneficially or otherwise’…

In Lewison LJ's view the words ‘or otherwise’ must have been intended to add something and in the context of paragraph 7(c) of the order they would include the interest of a potential beneficiary under a discretionary trust.

Mr Pugachev had already disclosed his interests as a member of a discretionary class of beneficiaries, but the question was whether he could be compelled to go further. The trustees of all five trusts were New Zealand corporations. A New Zealand solicitor was a director of all the companies and his wife, also a New Zealand solicitor, was a director of two of the companies. They were also shareholders in each trust company and sat on the boards of directors with a Russian lawyer who was an associate of Pugachev. Pugachev had been a protector of the trusts until the freezing order was granted.

In hearing the trustees' application against Henderson J's Order, David Richards J had said it was clear that the evidence disclosed ‘good grounds for supposing that Mr Pugachev was in a position to control assets held within the trust structures’ and noted that one of the trusts owned a company which owned Mr Pugachev's London home on which the rent was allowed to accrue without being paid. That led him to infer that Pugachev could ‘dictate or at the very least influence when, and even perhaps if, it is paid’. He also noted that the trustees had not adduced any evidence about how Mr Pugachev's lifestyle was funded or to establish that they and Pugachev were at arm’s length. Lewison J agreed with David Richards J that the issues raised called for further explanation.

Counsel for Mr Pugachev and for the trustees argued that if the claimants had not established ‘good reason to suppose’ that the trust assets were susceptible to execution then those assets could not or should not be frozen and that unless the threshold conditions for making a freezing order were satisfied the Court had no jurisdiction to make an order for the disclosure of information.

Conclusions

Lewison LJ pointed out that Mr Pugachev's interests in the trusts, whatever those interests might be, were already within the scope of the freezing order although the underlying assets of the trust were not. The bank was not asking that the trust assets be brought within the scope of the freezing order immediately, but for the opportunity to test its assertion that Mr Pugachev was the effective owner of those assets against his (and the trustees') assertion that he was not. If the assertion was correct, the bank might then be in a position to apply to widen the scope of the freezing order. The case is an example of the Court's wide jurisdiction to make extensive ancillary disclosure orders to assist a Claimant to ascertain the true nature of a Defendant's interest in trust assets. 

What is the issue? Whether the Court has jurisdiction to make a disclosure order, ancillary to a freezing order, against a defendant to provide extensive information regarding trusts of which he is a discretionary beneficiary (including, the details of the trustee(s), settlor(s), protector, beneficiaries and details of the trusts' assets) held).

What does it mean for me? The fact that a discretionary beneficiary does not legally or beneficially own the trust assets does not preclude the courts from making extensive ancillary disclosure orders against the beneficiary to provide wide-ranging information about the trusts. 

What can I take away? If the disclosure provided by the beneficiary, reveals that he effectively controls the trust assets, the claimant may well be able to successfully extend the scope of the freezing order to include all of the assets held in the trusts.