JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch)

Sergei Pugachev founded MezhProm Bank, which later became insolvent. Creditors sought to enforce substantial liabilities against him. He had established five discretionary trusts governed by New Zealand law, naming himself among the beneficiaries and reserving extensive powers as protector. Those powers included controlling important trustee decisions and changing trustees. He argued that the settled assets no longer belonged beneficially to him and were therefore unavailable to the claimants. The English court examined the terms and true effect of the trusts, as well as allegations that the arrangements were shams designed to conceal his continuing control.

Did the terms of offshore trusts actually divest Mr Pugachev of beneficial ownership, and, alternatively, did the arrangements disguise the parties' true intentions?

Birss J held that the trust arrangements did not prevent the creditors reaching the relevant assets. The primary analysis concerned the true effect of the deeds. Pugachev's extensive protector powers were personal rather than fiduciary and left him able to control the property for his own benefit. On that construction, the arrangements did not achieve the beneficial divestment claimed. The judgment also examined sham as an alternative, considering whether the documents were intended to create a misleading appearance of rights different from the real arrangement. These are distinct routes: interpreting the powers in an effective document is not the same inquiry as establishing a common intention that its apparent legal effect should be false.

A trust's effect depends on its operative terms and the nature of retained powers, not its label. Extensive personal control may leave beneficial ownership with the settlor. Sham is a separate inquiry requiring the relevant shared intention to misrepresent the legal arrangement.

Pugachev is especially useful for separating construction from sham. It does not establish that every settlor-beneficiary or protector makes a trust invalid. The nature, extent and combination of the powers mattered. Nor is an artificial tax or asset-protection arrangement automatically a sham merely because it is unusual. The case concerned New Zealand-law trusts in English proceedings, so analysis must keep the governing law and the enforcement context visible rather than treating all trusts alike.