Trusts & Trustees, Vol. 24, No. 2, March 2018, pp.
151–156
Articles
‘Trust-busting’ after JSC Mezhdunarodniy
Promyshlenniy Bank v Pugachev & ors
[2017] EWHC 2426 (Ch)
Tim Akkouh* and Christopher Lloydy
Abstract
Mezhprom v Pugachev is an important ‘trust-bust-
ing’ decision of the English Chancery Division
(Birss J). The Judge held that the true effect of
five detailed trust deeds was to create a series of
bare trusts for the settlor, though he would (if
necessary) also have concluded that the trusts
were shams. The decision makes it easier for dis-
cretionary trusts settled for asset preservation pur-
poses to be unwound where the settlor retains
substantial control over the trust assets; it will,
therefore, be welcomed by those acting for claim-
ants in civil fraud actions.
Background facts
The case has colourful background facts. Mr Pugachev
is a former Russian senator and close associate of
President Putin. He is also the former owner and con-
troller of Mezhprom Bank (the ‘Bank’), which entered
into insolvent liquidation in late 2010 with liabilities
exceeding US$1 billion (much of which is owed to
the Russian Central Bank). Mr Pugachev fled Russia
when a criminal investigation was opened against him
in connection with the Bank’s demise in early 2011.
In late 2011 and mid- and late 2013, Mr Pugachev
established five New Zealand law discretionary
* Tim Akkouh, Barrister, Erskine Chambers, 33 Chancery Lane, London WC2A 1EN. Tel: þ44 (0)20 7242 5532; Fax: þ44 (0)20 7831 0125
y
Christopher Lloyd, Barrister, Erskine Chambers.
ß The Author(s) (2018). Published by Oxford University Press. All rights reserved.
151
trusts (the ‘Trusts’). They predominantly held real
estate in London, St Barths, Russia, Switzerland, and
Massachusetts. The St Barths property, a stunning sea-
front villa, was the jewel in the crown—valued at ap-
proximately US$40 million and available for rent for as
much as US$250,000 a week. At about the same time as
the final two trusts were established, civil proceedings
were started against Mr Pugachev in Russia seeking to
hold him liable for the Bank’s insolvency.
The trustees of the Trusts (the ‘Trustees’) were
freshly incorporated New Zealand companies. Their
directors included certain individuals loyal to Mr
Pugachev working from his family office in London
and Mr William Patterson, an experienced New
Zealand solicitor.
The Trusts were purported discretionary trusts,
whose beneficiaries included Mr Pugachev and three
infant children of Mr Pugachev’s relationship with Ms
Alexandra Tolstoy (the broadcaster and granddaugh-
ter of Leo Tolstoy). Mr Pugachev was the Trusts’ first
protector, having wide negative consent powers and
the power to remove trustees ‘with or without cause’,
to appoint new trustees, and to vest the trust property
in his chosen replacements pursuant to a power of
attorney contained in the trust deeds.
In mid-2014, the Bank and its liquidator
started proceedings against Mr Pugachev in London,
where he was living in one of the trust
doi:10.1093/tandt/ttx199
Advance Access publication 18 January 2018
152 Articles
properties.1 A worldwide freezing order was granted
and Mr Pugachev’s subsequent disclosure of assets in
purported compliance therewith was heavily criticized
by the courts. This led to a hearing before the Court
of Appeal in early 2015 in which it held that a discre-
tionary beneficiary of a trust subject to a freezing
order could be required to disclose detailed informa-
tion about the trust’s assets: [2016] 1 WLR 160
(Arden, Lewison, Christopher Clarke LJJ). This was
an important decision in its own right: the disclosure
was ordered even though the Bank could not at that
stage establish a good arguable case, that it would be
able to enforce against the Trusts’ assets.
The case returned to the Court of Appeal in August
2015, when the Claimants sought a freezing order
against the new and replacement Trustees. The in-
junction was granted pursuant to the Court’s
Chabra jurisdiction,2 because the Bank could by
then establish (i) a good arguable case that it would
be able to enforce its judgments against Mr Pugachev
against the assets of the Trusts and (ii) there was a real
risk that, without such an injunction, the Trust assets
would be dissipated at Mr Pugachev’s behest.
The Bank’s claims
The Bank claimed to be able to enforce against the
assets in the Trusts on three bases:
First, a combination of Mr Pugachev’s position as
settlor and discretionary beneficiary, together with his
extensive powers as protector, meant that the true
effect of the deeds of trust was to create bare trusts
for Mr Pugachev. The Bank referred to this as the
‘illusory trust’ claim, although Birss J described it as
the ‘True Effect of the Trusts’ claim.
Secondly, the deeds of trust were shams and
that the true intention was to create bare trusts for
Mr Pugachev.
Thirdly, the Trusts should be set aside under sec-
tion 423 of the (English) Insolvency Act 1986 on the
1. Following Mr Pugachev’s agreement to submit to the jurisdiction of the Russian courts in connection with the claim seeking to hold him liable for
the losses caused by the Bank’s insolvency, the English proceedings were initially confined to the grant of interim relief under s 25 of the Civil Jurisdiction
and Judgments Act 1982.
2. Named after the decision in TSB Private Bank v Chabra [1992] 1 WLR 231.
Trusts & Trustees, Vol. 24, No. 2, March 2018
basis that they were entered into by Mr Pugachev for
the purpose of putting assets beyond the reach of a
person, the Bank, who was making or may make a
claim against him.
Birss J acceded to the first claim and delivered a
detailed judgment explaining why he would, in any
event, have acceded to the second claim. His essential
reasoning was as follows:
1. That on a proper construction of the trust deeds,
the wide powers conferred on the protector were
purely personal powers which the protector
could exercise in his own selfish interests.
Mr Pugachev’s powers were so extensive that he
retained beneficial ownership of the assets.
2. Alternatively, if on an objective interpretation of
the trust deeds the protector’s powers were fidu-
ciary such that Mr Pugachev did not have unfet-
tered control and ownership of the assets, then
the trust deeds were shams because it was the
parties’ subjective intention that Mr Pugachev
retain the sole beneficial interest in the assets.
The remainder of this article will explain the
Judge’s reasoning and its implications for those
involved in the establishment or administration, or
seeking to enforce against the assets, of discretionary
trusts. References found in square brackets are to
paragraphs of Birss J’s decision.
The Judge’s starting point
The Judge’s starting point was that discretionary
trusts are structures that are particularly attractive
for unscrupulous settlors wishing to shield their
wealth from the claims of creditors. This is for a
number of reasons:
1. Trust assets will not be held in the settlor’s name.
The asset can instead be vested in the name of an
Trusts & Trustees, Vol. 24, No. 2, March 2018
anonymous special purpose vehicle established to
act as trustee. All the better if the trustee is a long
way away: ‘that just makes the job of searching a
little bit harder’ ([174]).
2. Discretionary trusts have the additional feature
that discretionary beneficiaries have no beneficial
interest in the trust assets. This confers two
advantages: if required to provide information
as to his assets, a beneficiary will be able to de-
cline to disclose that the trust assets or any inter-
est in them belongs to him ([175]); and assets
held within a true discretionary trust are not
amenable to execution if judgment is entered
against one of a class of discretionary beneficiaries
([176]).
3. But there is a problem. As the Judge put it:
Subject to the law on unwinding transactions to defraud
creditors, if a person gives away their property to some-
one else then it is no longer theirs. But that is not what
the unscrupulous person in the example wants to do at
all. As far as they are concerned the property is theirs.
The objective is not to lose control of it, the objective is
to hide it and protect it from creditors. ([179])
4. This is where the role of protector may come in:
the settlor can grant himself wide powers as pro-
tector. He can, for instance, prevent the trustees
from distributing the money to anyone but him-
self, and can remove recalcitrant trustees who fail
to do his bidding and replace them with trustees
willing to do what he wants.
5. A discretionary trust may thus be seen as an ef-
fective shelter from attack. The trustee can, after
the trust is established, go along with the settlor/
protector’s instructions, regarding him (and per-
haps referring to him) as the ‘client’ or ‘Ultimate
Beneficial Owner (UBO)’. But as soon as the trust
is challenged by creditors, the trust can be pre-
sented in a radically different way: the settlor/pro-
tector can be said to be subject to the full range of
fiduciary obligations when exercising his powers.
This, said the Judge, reminded him of the Angora
cat problem encountered in patent law:
Articles 153
when validity is challenged, the patentee says his
patent is very small: the cat with its fur smoothed
down, cuddly and sleepy. But when the patentee
goes on the attack, the fur bristles, the cat is twice
the size with teeth bared and eyes ablaze. ([438]
citing from the decision of Jacob LJ in European
Central Bank v Document Security Systems [2008]
EWCA Civ 192 at paragraph 5)
The ‘True Effect of theTrusts’claim
As we have noted, Mr Pugachev had extensive powers
as protector of the Trusts. The key powers were to:
 Withhold consent to the Trustees’ exercise of their
powers to invest and distribute the Trusts’ assets.
 Withhold consent to the Trustees’ exercise of a
range of other powers, such as to remove benefici-
aries and vary the terms of the Trusts.
 Appoint additional beneficiaries.
 Dismiss the Trustees ‘with or without cause’ and
appoint replacement trustees. Having removed the
Trustees, he could exercise a power of attorney to
ensure the transfer of the trust property to newly
appointed trustees.
Birss J asked himself two questions: (i) were Mr
Pugachev’s powers purely personal; and (ii) if so,
did that mean that he had failed to divest himself of
beneficial ownership of the Trusts’ assets.
As to the first question, the Judge held that these
powers were purely personal powers in the sense that
they could be exercised by Mr Pugachev in his own
selfish interests and without regard to the interests of
the other beneficiaries. The Judge relied in particular on
the fact that Mr Pugachev was the settlor, a discretion-
ary beneficiary, and the protector of the Trusts ([268]).
Much turns on the particular facts of the case. As
the Judge continued:
If such extensive powers had been conferred on a third
party as protector, with provisions barring that person
from being a beneficiary, then I can see that a different
154 Articles
result might follow but the fact it is a beneficiary on
whom these powers are conferred militates against the
idea of a limitation. One would expect a beneficiary
ordinarily to be entitled to act in their own interests.
Conversely if less extensive powers were conferred on
a beneficiary/protector then again one might arrive at
a different result but that is not this case. (ibid)
Other reasons supporting the Judge’s conclusion that
the protector’s powers could be selfishly exercised
included:
1. That the trust deeds failed to identify a settlor at
all. Birss J concluded that this was not accidental
([271]): Mr Pugachev’s name was instead omitted
to hide his involvement in establishing the Trusts.
2. The ability to remove trustees ‘without cause’
negatived the notion that the power was subject
to a limitation ([272]).
3. There was no warrant to conclude that certain
powers are fiduciary and others non-fiduciary
([270]).
As to the second question, the Judge held that the
effect of Mr Pugachev being able to exercise his
powers in his own interests was to ‘allow him to
retain complete control over the assets he settled
into the trusts’. More specifically:
1. if the Protector’s powers were personal then
‘in substance the ability of any of the
Discretionary Beneficiaries to receive any distri-
bution . . . would be in the hands of the
Protector’ ([236]);
2. the Protector would be able to appoint new dis-
cretionary beneficiaries ([237]);
3. the Protector could use these powers, appoint a
replacement Protector, or exercise the powers via
Victor (who ‘for all intents and purposes would
do his father’s bidding’) ([238]);
4. the making of a distribution of all of the trust
assets to a single discretionary beneficiary by car-
rying out the Protector’s wishes would not be
open to ‘realistic challenge’ ([243]); but
Trusts & Trustees, Vol. 24, No. 2, March 2018
5. even if it was, the Protector would remove a trus-
tee who refused to put the Protector’s interests
ahead of the other discretionary beneficiaries
([244]).
The Judge’s overall conclusion was that:
on their own terms these trusts do not divest Mr
Pugachev of the beneficial interest he had in the
assets transferred into them. In substance the deeds
allow Mr Pugachev to retain his beneficial ownership
of the assets ([278]).
The sham claim
As Birss J noted, there was little dispute on the law
relating to sham trusts ([145]–[154]). A deed of trust
is a sham or pretence if it is intended to mislead third
parties and the court as to the true basis on which the
assets are held. If assets are transferred to a trustee,
then the deed of trust is only a sham if the parties
subjectively share a common ‘shamming’ intention.
However, this requirement will be satisfied if the trus-
tee prepares and signs a trust deed acting entirely
recklessly as to the settlor’s true intentions ([435]).
In this case, the Trustees were each specially incor-
porated New Zealand companies, so the intentions
attributable to the companies were those of the nat-
ural persons who managed and controlled the rele-
vant actions of the companies.
On the facts, Birss J held that Mr Pugachev in-
tended at all times to retain ultimate control of the
assets and he intended to use the Trusts to hide his
ownership of the assets. His method of exercising
control was through his position as protector. He fur-
ther held that the New Zealand solicitor who acted as
a director of each of the trustee companies had no
intentions independent of those of Mr Pugachev. He
simply went along with what Mr Pugachev wanted
([434]–[435]).
As Birss J recognized, the case on sham dovetailed
with the case on ‘illusory trust’. The case on sham
depended on whether the Trustees and Mr
Trusts & Trustees, Vol. 24, No. 2, March 2018
Pugachev subjectively intended Mr Pugachev to have
complete control and ownership of the Trusts’ assets.
The trust deeds indisputably provided for Mr
Pugachev to have some control in his capacity as pro-
tector. If Mr Pugachev’s powers were fettered in some
way then the question was: did the parties subjectively
intend Mr Pugachev’s powers to be fettered, or was he
intended to be the sole owner and unfettered control-
ler of the assets? (see [304]–[307])
Birss J concluded that:
if a proper approach to the construction of these deeds
was to lead to a conclusion that the Protector’s relevant
powers are fiduciary, as Mr Patterson [the New Zealand
solicitor] now says they are, and that in turn was to lead
to a conclusion that under the deeds Mr Pugachev is
not a beneficial owner, then those deeds are a sham.
The settlor intended to use them to create a false im-
pression as to his true intentions and the trustees went
along with that intention recklessly. ([437])
The judge recognized that this is a sophisticated and
subtle form of sham. Mr Pugachev’s role in relation to
the assets was not completely disguised, but he could
say to third parties (as he did to the Claimants in this
case) ‘I am only a discretionary beneficiary and I have
limited powers as protector.’ On the other hand, the
true intention was that Mr Pugachev had ultimate
ownership and control of the assets.
The section 423 claim
In light of his decision on the other heads of claim, Birss
J reached the unsurprising conclusion that if the trust
deeds did operate to divest Mr Pugachev of his benefi-
cial interests in the assets, then their purpose was to hide
his control of the assets from his creditors. He did not
go on to consider the question of the appropriate
remedy under section 425 of the Insolvency Act 1986.
Implications
First, this decision is to be welcomed by creditors
looking to attack complicated trust structures. They
Articles 155
have traditionally alleged that the trusts are shams or
should be set aside under anti-avoidance legislation.
But an allegation of sham is often hard to prove and
some debtor-friendly jurisdictions (particularly in the
Caribbean) have limited or no anti-avoidance legisla-
tion. This decision gives creditors a new angle of
attack in cases where the debtor has retained extensive
powers under the trust instrument.
First, this decision is to be welcomed by cred-
itors looking to attack complicated trust struc-
tures. They have traditionally alleged that the
trusts are shams or should be set aside under
anti-avoidance legislation
Secondly, the decision is a salutary reminder that
those who are involved in the establishment and man-
agement of discretionary trusts must take care when a
settlor/beneficiary is also given wide powers as pro-
tector. Mr Patterson was criticized in a number of
respects. They included: the impression given to Mr
Pugachev’s agents, when establishing the first of the
Trusts, that Mr Pugachev could ‘change this docu-
ment at any time’ ([365]–[369]); Mr Patterson carry-
ing out ‘Mr Pugachev’s bidding’ by removing a
discretionary beneficiary when told to do so ([375]–
[379]); Mr Patterson referring to Mr Pugachev being
‘the client’ or ‘the UBO’ in internal correspondence;
and Mr Patterson giving evidence to the English court
in interlocutory proceedings that was ‘reckless’
([324]), not ‘candid’ ([340], [346]) or which consti-
tuted an attempt to mislead the court ([332]).
Thirdly, the decision cannot be seen as a one-off.
The courts are increasingly reluctant to allow defend-
ants to keep assets away from their creditors when
they retain de facto control over them. The trend
can be traced back to Robert Walker J’s decision in
ICIC v Adham [1988] BCC 134, where he made ref-
erence to ‘shadowy’ structures ‘formed in jurisdic-
tions where secrecy is highly prized and official
regulation is at a low level’ in the context of the ap-
pointment of interim receivers. A more recent ex-
ample is to be found in the Privy Council’s decision
in Tasarruf v Merrill Lynch [2012] 1 WLR 1721, where
156 Articles Trusts & Trustees, Vol. 24, No. 2, March 2018

a power to revoke a trust deed was regarded as ‘tan-
tamount to ownership’ and was vested in an equitable
execution receiver. The same year, Toulson LJ stated
that ‘Family trusts are a well-known possible device
for trying to place assets ostensibly beyond the reach
of creditors’ (North Shore Ventures v Anstead Ventures
[2012] EWCA Civ 11, [38]). Indeed, in the Court of
Appeal in Mezhprom, Lewison LJ—when concluding
that Mr Pugachev should give disclosure about the
Trusts—relied upon ‘. . . the court’s concern that
sophisticated and wily operators should not be able
to make themselves immune to the courts’ orders . . .’
([2016] 1 WLR 160, [58]).3
Thirdly, the decision cannot be seen as a one-
off. The courts are increasingly reluctant to
allow defendants to keep assets away from
their creditors when they retain de facto con-
trol over them

Tim Akkouh is a barrister at Erskine Chambers. He appeared for the Claimants, led by Stephen Smith QC,
in Mezhprom v Pugachev. He was called to the bar in 2004 and is the co-author of Trusts Law (5th edn,
Palgrave MacMillan 2017). He specializes in commercial, civil fraud, and contentious trusts work.
E-mail: TAkkouh@erskinechambers.com

Christopher Lloyd is a barrister at Erskine Chambers. He appeared for the Claimants, led by Stephen Smith QC,
in Mezhprom v Pugachev. He was called in 2011 and is an assistant editor of Lewin on Trusts. He specializes in
commercial, civil fraud, and contentious trusts work. E-mail: clloyd@erskinechambers.com

3. See also the Supreme Court’s decision in Prest v Petrodel [2013] 2 AC 415, where Lord Sumption suggested that a single purpose vehicle that is the registered
proprietor of a family home will often hold it on trust for the spouse that owns and controls the company. He continued as follows at [54]: ‘. . .The intention will
normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s
beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But . . . judges exercising
family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality
of the husband’s beneficial ownership.’
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