The Purgative effect of the Pugachev judgment


In October 2017 the English High Court handed down a significant judgment in which it found that the assets of five discretionary trusts settled by Russian oligarch, Sergei Pugachev could be used to satisfy claims by Mr Pugachev’s creditors.



Sergei Pugachev was a Russian businessman, and the founder of Mezhprom Bank, which was once Russia’s leading private bank. In 2010 Mezhprom Bank collapsed and Mr Pugachev fled Russia for London. The claimants (including the Russian deposit insurance agency (“DIA”)), asserted that Mr Pugachev had misappropriated approximately $95m of DIA funding provided to Mezhprom Bank during the global financial crisis of 2007-2008 and settled it on five New Zealand law discretionary trusts into which it could be traced. Mr Pugachev was named as both a discretionary beneficiary and the Protector of each of the five trusts. As Protector, he had extensive reserved powers.

The claimants brought three alternative claims in order to assert a claim to the trust assets through

Mr Pugachev:

  • The True Effect of the Trust Claim”: The trusts were “illusory” and Mr Pugachev had not therefore properly divested himself of beneficial ownership of the assets; or
  • “The Sham Trust Claim”: Each of the trusts were a sham and Mr Pugachev remained the beneficial owner of the assets; or
  • “The 423 Claim”: in the event that the first two claims failed and Mr Pugachev was not the beneficial owner of the assets, the settlement of the assets fell to be set aside under s.423 of Insolvency Act 1986 as transactions defrauding creditors, thereby returning the assets to Mr Pugachev’s estate for the benefit of his creditors.


The Decision

The court found for the claimants in all three claims but the decision in respect of the True Effect of the Trust Claim and The Sham Trust Claim are undoubtedly the most interesting aspects of the decision.


The True Effect of the Trusts Claim

Mr Pugachev was the Protector of each of the trusts, with Viktor, his son, as the named successor Protector. The trust deeds provided that Mr Pugachev’s Protectorship would automatically terminate in circumstances where he was “under a disability”, a term which included when Mr Pugachev was subject to the claims of creditors. The court described this as an attempt to make the trust judgment proof and that it would not accept it. The Protector’s powers were extensive (although all of these powers would fall within those capable of grant or reservation under Article 9A Trusts (Jersey) Law 1984) and included powers to:

  • veto the distribution of income or capital from the trusts;
  • veto the investment of the trust funds;
  • veto the removal of beneficiaries;
  • veto any variation to the trust deeds;
  • veto the release or revocation of any power granted to the trustees;
  • veto the early termination of the trust period;
  • veto an amendment to the trusts by the trustees;
  • appoint and remove trustees, with or without cause; and
  • add further beneficiaries.

Save other than in the case of the powers to appoint and remove trustees and to add further beneficiaries, the powers reserved to Mr Pugachev were principally negative – i.e. they were powers of veto over an exercise initiated by the trustee.

The court considered that given Mr Pugachev’s extensive powers it was difficult to see how the trustees could act without his consent on any matter likely to affect the trusts in any significant way.

A critical issue analysed in detail in relation to this aspect of the claim was whether or not, as a matter of construction, the powers held by Mr Pugachev as Protector were fiduciary or personal in nature. If the powers were fiduciary, Mr Pugachev would be under a legal obligation to exercise them in the best interests of the beneficial class as a whole and not for his own selfish purposes. If the powers were fiduciary, in settling the trusts, Mr Pugachev may be said to have divested himself successfully of his beneficial ownership of the trust assets.

The judge found that, on the basis of the facts of this particular case, the powers reserved to Mr Pugachev were personal and not fiduciary. As such, Mr Pugachev was not bound to consider the interests of other beneficiaries in exercising his powers and he could act selfishly in his own interests. Given the extensive nature of his powers as Protector, he could in practice block any action of the trustees that he did not approve of and could remove and substitute any trustee who did not follow his directions. As he was also a discretionary beneficiary, he could in practice ensure that the trust assets were held for his benefit alone.

Under those circumstances (which are not that unusual in offshore trusts) the judge held that objectively, as a matter of construction, Mr Pugachev had not divested himself of beneficial ownership of the assets when settling the trusts. The proper construction of each trust instrument was therefore that the assets were, in effect, held by the trustees on bare trusts for Mr Pugachev, which made them vulnerable to claims by his creditors.

In reaching his decision, the judge noted that he considered the term “illusory trust” to be somewhat misleading and unhelpful. It was clear that Mr Pugachev wanted to create a trust and he did, in fact, create a trust; he just did not succeed in creating it on what, on the face of it, appeared to be the express terms of the trust deeds. The court’s conclusion on the construction of the trust documents was not the same thing as a finding of sham: On a true construction of the trust deeds, the powers conferred on Mr Pugachev as Protector were personal and the trusts (albeit not shams) did not successfully divest Mr Pugachev of the beneficial ownership he had in the assets transferred into them. In adopting the approach it did, based upon the construction of the instruments, the court was able to side-step the issue of whether the trusts were valid or not.


The Sham Trust Claims

In order for a trust deed to be a sham, it must be created with an intention to mislead third parties by giving a false impression that legal rights and obligations were created in accordance with the trusts and that assets were so held. This is the common definition of a sham in both England and Jersey (MacKinnon v Regent Trust Company Limited 2005 JLR 199). The court did not consider the trusts in this case to be shams because, on their proper construction, they fulfilled Mr Pugachev’s true intention as settlor not to divest himself of control of the assets. There was therefore no divergence between the trust documentation and Mr Pugachev’s intentions.

However the judge stated that, if he was wrong as to the True Effect of the Trust Claim and the proper approach to construction of the trust deeds was that the Protector’s powers were fiduciary (and Mr Pugachev had divested himself of control of the assets), then the trust deeds were alternatively a sham. This is because, in this scenario, there would have been a difference between the trust documentation (which on their face successfully divested the settlor of control) and Mr Pugachev’s intentions (which were to keep it).

A potential difficulty the claimants faced in the sham claim was demonstrating that the trustees had a common intention with Mr Pugachev to mislead (since in order for a sham to exist, both parties to a trust deed must intend to create a sham). In considering what constituted a common intention, the court held, applying family cases such as A v A, that reckless indifference as to what is being agreed is enough to constitute common intention. On this basis he found that Mr Pugachev intended to use the trust deeds to create a false impression as to his true intentions and the New Zealand trustees went along with that intention recklessly and thus could be said to have a common intention.



While the decision in Pugachev did not concern Jersey trusts, it is nevertheless a very significant decision for Jersey trustees and settlors of trusts administered in Jersey (not only those with Jersey as their proper law).

Although the court was satisfied in this case that the trusts were all a sham (in the sense the trusts were a pretence to give the impression that the assets did not belong to Mr Pugachev when in fact the opposite was the case) sham is a notoriously difficult allegation to prove. That is because it requires evidence of both the settlor’s and the first trustee’s subjective intention that they both intended to mislead the world by giving a false impression about the legal rights and obligations created but the trust instruments. Such evidence must be of sufficient weight to displace the usual presumption (which can be a strong one) that formal trust documents should be taken to mean what they say.

Where, as in Jersey, trusteeship is a closely regulated activity which places a premium on the concept of integrity, a finding that a regulated trustee is party to a sham arrangement is very serious which in practice makes a finding of sham less likely (although not impossible).Less surprisingly, the court can be expected to take a realistic approach to the identification of the settlor (and who’s intention is relevant), notwithstanding that formally; the trust instruments were all unilateral declarations of trust by the trustees and Mr Pugachev was not identified as the settlor. A similar approach is to be expected with the use of a nominee settlor or a settlor of convenience. In England as in Jersey, the settlor is not who the document says is the settlor but the person who in fact contributes the trust property.

There are no Jersey authorities that expressly support the proposition in the English case of A v A [2007] EWHC 99 (Fam) that reckless indifference (i.e. a party to a deed who goes along with a sham neither knowing or caring what he is signing) is a sufficient shamming intent. Although it seems the English authority on which this proposition is based, Midland Bank plc v Wyatt, [1997] 1 BCLC 242, was considered by the Jersey Court of Appeal in MacKinnon, it does not feature in the reasoning. The relevant passage was considered in In The Matter Of The Fountain Trust [2005 JLR 359] at paragraph 14 but was not followed. We may be beginning to see a slight divergence between the Jersey and English law on what can constitute the requisite shamming intent.

The most striking feature of the decision is the court’s analysis of the True Effect of the Trusts Claim which was significantly influenced by its analysis of the nature of the powers held by Mr Pugachev as Protector of the trusts. The fact that the powers were extensive and wide-ranging were clearly a highly relevant factors, although it is to be noted that they were not wider than the powers that are capable of reservation in many offshore jurisdictions, including in Jersey. It also appears to have been significant that most of the Protector’s powers were not expressly limited in any way and in relation to the power to remove trustees could be exercised by Mr Pugachev “with or without cause”. In future it may be necessary to ensure there is no room for ambiguity in how powers should be exercised. Had that been the case the court would not have taken the approach it did in this case which was to assume the powers were personal unless expressed to be otherwise.

However, the fundamental reason for the court’s conclusion that Mr Pugachev’s powers were personal was the overlap between his roles as settlor, Protector and as a beneficiary of the trusts. Specifically the combination of Mr Pugachev’s status as discretionary beneficiary with wide veto powers and his power to remove trustees at will created a concentration of powers in the person of Mr Pugachev he had not ceded control of the assets to the trustees without the power to get them back and was therefore, as a matter of construction, still to be treated as the beneficial owner.

The decision makes it clear that whether or not a power is personal or fiduciary is not simply a question of the nature of the power or its breadth.

The decision gives rise to a theoretical possibility that nature of the power is ambulatory and can change from personal to fiduciary (and back again) depending into whose hands it falls to be exercised depending, it seems, on whether the Protector is also a beneficiary of the trust (and therefore self-interested in the exercise). Put another way, a matter of construction, the same powers may be considered personal in the hands of one Protector but become fiduciary in the hands of another Protector.

The decision is a salutary warning for those looking to reserve powers to settlors/Protectors who also retain a beneficial interest in the fund. While the reservation of powers to a settlor who is excluded from benefit, or the grant of powers to a Protector who cannot benefit may be more capable of justification, the concentration of such wider powers of control in a beneficiary who is expected to act in their own interest is more rather likely to attract suspicion that their powers of oversight are personal also.

The court’s analysis on the “Trust Effect of the Trusts Claim” takes the issue in cases of this type from being one of a search for evidence of the relevant parties’ subjective intentions, to one of objective construction. The approach on “true effect of the trusts” claim paves the way for what may be a more straightforward way for courts to analyse whether trust assets are available to the settlor’s creditors. A plaintiff does not have to go so far as to say the trusts are invalid, the trusts may be valid but may not mean what they appear to.

The decision also has significant implications for those advising on the settlement of Jersey trusts that involve the grant of powers to a Protector or the reservation of powers to a settlor under Article 9A Trusts Jersey Law 1984. A stated purpose of one of a revision to Article 9A as part of a seventh amendment to the Trusts (Jersey) Law 1984, due to be enacted this year, is to put beyond all doubt, as a matter of Jersey law, that it is permissible to allow a settlor to reserve to themselves all the powers in Article 9A(2) and for the trust still to be valid.

Settlors should not be given the impression that while reservations of powers are permissible under Jersey law, that will not preclude the risk that an extensive reservation of powers may give rise to problems for a settlor if the trust and its affairs are scrutinised in other jurisdictions. The High Court has signalled that a concentration of extensive powers in the hands of a beneficiary who is also the Protector and the settlor is potentially problematic.

The efficacy of the firewall provisions in Article 9 of the Trusts (Jersey) Law 1984, which have as their object the protection of Jersey trusts from interference by foreign courts, is compromised where the trust assets are not located in Jersey, under the protection of the Royal Court.

The court’s comments concerning the requisite shamming intent can involve reckless indifference is also relevant to the terms on which trust instruments are drawn up and executed. In practice, how often do settlors have a full understanding of the terms of a trust, what powers are being reserved and what implications that might have? How often, in practice, do we repeatedly see the re-use of boilerplate rather than bespoke trust instruments? Without having full contemporaneous file notes of what occurred when the trust was settled and what was understood by whom, there is more than a negligible risk that ignorance might later come to be interpreted as reckless indifference.



The decision may yet have significant ramifications for a range of ‘trust-busting’ cases of this type; from asset recovery to the recognition and enforcement of judgments to ancillary relief. The decision may pave a smoother path for plaintiffs to challenge the validity of a trust on the basis that the settlor retains so much control that the true beneficial ownership of assets has not transferred to the trustees, even in circumstances where a sham (as in many cases) is hard to or cannot be proven.

Those advising settlors on the reservation of powers listed in Article 9A Trusts (Jersey) Law should exercise extreme caution to ensure settlors have a full understanding of what they are doing. They must not give the impression that because the Trusts (Jersey) Law provides that extensive reservation of powers is legitimate under Jersey law, the trust is necessarily immune from an assault in another jurisdiction where the assets may be located. Indeed, the very fact of extensive reservation of powers by settlors who are also Protectors and discretionary beneficiaries, might actually encourage claims.

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