• In the case of JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch), the test for sham trusts was reaffirmed. This test is of subjective, common intention between the trustees and settlor.

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

  • P (D) founded MezhProm Bank which developed into one of Russia’s largest private banks
  • Following the 2008 global financial crisis, the bank was declared insolvent
  • Deficiency in assets totalled an approximate £2bn, after his friendship with Putin began failing, D moved to England
  • D set up 5 discretionary trusts in New Zealand, each naming him as the discretionary beneficiary
  • He was also named the protector of each, meaning he could refuse the trustees exercising their powers, and could remove them
  • D claimed he did not have beneficial ownership of these trusts for which the C creditors sought to enforce their judgement over

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

  • Were the 5 trusts valid?

Held by the High Court

C’s claim was successful – the trusts were shams as it was always P’s intention to retain control of the assets and hide them from third parties through a trust.

Justice Birss

Citing Arden LJ in Hitch v Stone [2001], the test for a document to be a sham [147]:

  • “The test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.” [66, Arden LJ in Hitch v Stone [2001]]

Furthermore, citing A v A [150]:

  • External evidence is relevant, meaning an artificial arrangement is not enough. Nor does departing form an agreement meant they never intended for it to be effective
  • Unilateral intentions of the settlor are not enough, there must be a common intention
  • Reckless indifference constitutes a common intention, ‘going along with’ [Midland Bank], shammer not knowing nor caring what they are signing
  • Trust not initially a sham cannot then become one
  • Finding a sham is a serious matter,  especially for professional trustees

In the present case:

  • D acting as a protector is not fiduciary in nature but are “purely personal powers which may be exercised selfishly” [454]
  • As the Protector to his own assets, D is left in control of the assets, he is the beneficial owner and this amounts to a bare trust for him [455]
  • His “intention in setting up all five trusts was to retain control of the assets but use them as a pretence to mislead third parties by hiding his control. No other natural person involved in setting up the trusts … had an intention independent” his [456]

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