In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev & ors [2017] EWHC 2426 (Ch), the High Court for England and Wales has affirmed a possible avenue to attack trust assets, where, on a proper construction of the trust deed or deeds at issue, the substance of those deeds permits a debtor/defendant to retain beneficial ownership of the trust assets.

The claimants in the case obtained judgment in Russia against Mr Pugachev in 2015 for approximately US$1b (Judgment).  In 2016 the claimants brought proceedings in England to enforce the judgment against assets held in discretionary trusts associated with Mr Pugachev.  The claimants argued, among other things, that:

  • The true effect of the deeds of trust was to create bare trusts for Mr Pugachev
  • Alternatively, the deeds of trust were shams and the true intention was to create bare trusts for Mr Pugachev.

Birss J reviewed the trust deeds and held:

  • Mr Pugachev was the settlor, discretionary beneficiary, and protector of the trusts.  Objectively construed, the trust deeds allowed him to retain complete control over the assets he settled into the trusts.  Accordingly, the Judge concluded that "in substance the [trust] deeds allow Mr Pugachev to retain his beneficial ownership of the assets"
  • Additionally, the trust deeds were also a sham because subjectively the true intention was that Mr Pugachev retain control.  Notwithstanding the fact that a New Zealand lawyer was appointed as a director of each of the trustee companies, the Judge held that the lawyer had no intentions independent of Mr Pugachev.

On both bases, the Court held that the trusts did not prevent the claimants from enforcing the Judgment against the trust assets.  This decision confirms creditors will have the ability to attack trusts in cases where the settlor has extensive powers under the trust deed to ensure the settlor ultimately controls and retains ownership over trust assets. 

The decision is noteworthy from a New Zealand perspective, as the trusts were governed by New Zealand law, and the Court considered and applied principles held in a New Zealand Supreme Court case of Clayton v Clayton [2016] NZSC 29.  As such, the decision is likely to be highly persuasive in New Zealand.

See the Court's decision here.