JSC Mezhdunarodniy Promyshlenniy Bank & Anor v Pugachev & Ors

A trust deed must be construed as a whole to determine the substance of the rights and powers it creates. Where a settlor is also a discretionary beneficiary and protector, and the protector’s extensive powers may be exercised selfishly, the settlor may retain beneficial ownership despite the deed’s discretionary-trust form.

The character of a protector’s powers depends on the deed’s objective construction, including the powers’ scope, purpose and combined effect. A sham requires a common intention to create a misleading appearance of rights. Reckless indifference by a trustee can satisfy that requirement. If an asset-protection arrangement genuinely divests the settlor, transfers made with the substantial purpose of prejudicing potential creditors may fall within section 423 of the Insolvency Act 1986.

The claimants were a Russian bank in insolvent liquidation and its liquidator. They claimed that five New Zealand discretionary trusts held assets beneficially belonging to the first defendant. He was the first protector, a discretionary beneficiary and the beneficial source of all the assets, including assets transferred through his son as nominee.

The claimants advanced three alternative cases. They contended that the true effect of the deeds was to leave the first defendant beneficially entitled; that the deeds were shams; or that the transfers were transactions intended to prejudice creditors under section 423 of the Insolvency Act 1986. The central questions were the nature of the protector’s powers, the parties’ intentions and the purpose of the transfers.

1. The claim succeeded on the true effect of the deeds. All assets transferred into the trusts had previously belonged beneficially to the first defendant. His son transferred assets as his nominee. Appropriate declarations would therefore be made, while consequential relief was reserved and the freezing orders remained in place.

2. The nature of a protector’s power depends on the objective construction of the deed. The court must consider the power’s purpose, scope and combined effect, together with the protector’s other roles. The decisive distinction was between a power exercisable selfishly and one exercisable only for the purposes of the trust or the beneficiaries as a class.

3. The first defendant’s protector powers were personal, not fiduciary. He was the settlor, first protector and a discretionary beneficiary. He could veto distributions, investments and variations; add beneficiaries; remove trustees with or without cause; appoint replacements; and arrange for his son to act during a disability. Taken together, those powers enabled him to prevent benefits passing to others and to replace trustees unwilling to distribute assets to him.

4. The deeds therefore left him in effective control and beneficial ownership. In substance, the trustees held the assets on bare trust for him. The provisions displacing him as protector when compelled by law reinforced that conclusion because they attempted to suspend his control when a court might require its exercise for creditors.

5. The exclusion and indemnity provisions did not destroy the trusts’ irreducible core. Properly construed, they did not protect fraud, conduct outside the trustees’ powers, or a wilful act or omission known to be a breach of trust.

6. Alternatively, if the protector’s powers were fiduciary and the deeds therefore divested the first defendant of beneficial ownership, the deeds were shams. He intended to retain control while creating a misleading appearance that the assets were no longer his. The trustees’ directing minds had no independent intention; the professional responsible for the deeds acted at least with reckless indifference to the settlor’s true intention.

7. Although unnecessary to the result, every trust and transfer would also have satisfied section 423 of the Insolvency Act 1986. A real and substantial purpose was to conceal control from persons who might make claims against the settlor.

• High Court (Chancery Division): An application by the original trustees to discharge trust-disclosure requirements was dismissed: [2014] EWHC 3547 (Ch).
• Court of Appeal: The trust-disclosure orders were upheld: [2015] EWCA Civ 139.
• High Court (Chancery Division): The present first-instance trial determined the beneficial ownership, sham and section 423 claims. Earlier interlocutory judgments in the proceedings did not determine those merits.