JSC Mezhdunarodniy Promyshlennly Bank and another v Pugachev is the case in question. The Bank was founded by the Defendant in the early 1990s in Russia. Its banking licence was revoked in October 2010 and in November 2010 it was placed into insolvent liquidation by the Russian courts.
In a victory for international recognition, the Russian Liquidation was recognised by an order of Henderson J on 11th July 2014. The claimant liquidator to these proceedings asserted that there was a US$2.2billion deficiency in the assets. On 11th July 2014, in aid of the Russian proceedings, Henderson J granted a freezing order against Mr Pugachev who had left Russia in early 2011 and resides principally in London. By paragraph 5 of the Order, assets of Mr Pugachev were frozen up to a value of approximately £1.17billion.
The most relevant paragraph for our purposes is para 6 which states:
“Paragraph 5 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 purpose of this order the Respondent's assets include any assets 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”
In his disclosure, Mr Pugachev disclosed the existence of a number of trusts domiciled in New Zealand. These were said to be discretionary trusts. The trustees of those trusts applied for an order discharging or varying an order for disclosure of information relating to the trusts.
The trustees' evidence was to the effect that each was a discretionary trust, Mr Pugachev was one of a number of potential beneficiaries, he was not the settlor of the trusts, he was the Protector of each trust, he did not receive a significant income from the trusts, no distributions had been made to him and he had no loans from the trusts. It was accepted that one of the trusts owned a company which owned Mr Pugachev’s primary residence in London.
In his judgment Mr Justice David Richards analyses previous case law and that, for the trusts to be bound by an order against a third party, there has to be a sufficient degree of identity between the parties. One need not be the alter ego of the other but there must be “a sufficient degree of identification between the two to make it just to hold that the decision to which one was party should be binding in proceedings to which the other is a party. It is in that sense that I would regard the phrase “privity of interest" (Sir Robert Megarry V-C in Gleeson v J Wippell & Co )".
The judge carefully pointed out that the privity of interest point needed to be between the trustees and all the beneficiaries and not merely one of those beneficiaries.
The trustees made five points. The first was that there was no jurisdiction against the trust unless they were a sham. Second, there was no reason to think the trusts were a sham. Third, there was no reason to think assets were to be dissipated. Fourth, there was a risk of injustice to the trustees outweighing the risk of injustice to the claimants. Fifth, there had to be an undertaking in damages and a proper confidentiality regime.
The judge considered that the purpose of the disclosure regime in a freezing order was for the disclosure of his assets which included those in which the defendant retained beneficial ownership or control. On the evidence, there was sufficient to support an assertion that Mr Pugachev was in a position to control the trust assets. One of the trusts indirectly owned his residence, he is liable to pay a significant amount of rent but that has not been paid. It appears he can dictate or influence when or if it is paid. He and his family enjoyed a very expensive life style but none of his disclosure showed how it was funded. The absence of that disclosure gave a reasonable inference that it was funded by companies within one or more of the trusts.
The Judge said at para 46 of his judgment. “There are clearly strong connections between Mr Pugachev and the trusts, but neither he nor the trustees put forward any evidence to establish that they are at arms length. Trustees who conduct the affairs of a trust independently of a defendant whose only interest is as a discretionary or other beneficiary could be expected to come forward with evidence to establish that the trust's directly or indirectly held assets were not under his control.”
These comments by the Judge are very useful in setting out the reasoning as to why the trustees should be ordered to give full disclosure but it is important to emphasise that the claimants had evidence which enabled the court to conclude that Mr Pugachev as a beneficiary exercised some degree of influence or control over the trust. Although it could not be said that there was sufficient evidence to expose the trusts as a sham, there was sufficient evidence to warrant disclosure by the trusts.
The writer submits that this decision is a useful application of the privity of interest point in a more modern context and a useful basis to show that discretionary trusts can be subject to scrutiny BUT the court is only likely to exercise its powers of disclosure and find such privity of interest if there is some evidence which enables it to do so.
The Roller Coaster
In a twist that shows this saga will undoubtedly continue, Mr Pugachev applied to the Court of Appeal for permission to appeal the original granting of the order. A number of arguments were advanced on his behalf. The first question was whether it could be thought that Mr Pugachev had any interest under any trust.
A beneficiary under a discretionary trust can only dispose of that interest by renouncing any entitlement. The phase in the standard order referring to any interest which may arise by exercise of a discretion looks to the future and that, if that discretion is exercised, the prohibition on disposal would bite. This affords no basis for disclosure the purpose of which is to discover what assets a defendant has now available for execution and to prevent dissipation. It is not to prohibit disposal of what a defendant might receive from the trust before he receives it or becomes entitled to receive it. It follows that it would be wrong to provide confidential information of assets in which he might one day share but which he presently has no right to demand.
The Court of Appeal in a very brief judgment concluded that those arguments should be considered by a full court and they have reasonable prospects of success. As a coda to this however, the Court said that different considerations would apply if there was a good arguable case that the trusts were a sham or the alter ego of Mr Pugachev. However, the original arguments before Henderson J on the granting of the order had not been advanced on the basis that such a good arguable sham case had been established. In the absence of the case being advanced on that basis with evidence, the disclosure order was arguably a fishing exercise.
This now leaves us in the position where the High Court has granted an order originally on the assumption that the trusts were not a sham. This can be seen as a sensible approach by a claimant who seeks the order without having to satisfy the burden of proving sham. However, on a challenge by the Trustees, Mr Justice David Richards upheld a disclosure order against the trustees on the grounds that there was sufficient evidence to show a privity of interest.
This point has not been dealt with so far by the Court of Appeal on its permission to appeal judgment and it will be interesting to see whether after the full hearing, the court will uphold a requirement of prima facie evidence of a sham is required to found the disclosure order or whether it will uphold the arguably lower burden of proof privity of interest argument.
What is certain for us is that the outcome will have important ramifications for those seeking to challenge discretionary trusts.
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