Freezing Orders And Discretionary Trusts - Disclosure Orders Regarding Trusts

Trusts are used for a wide range of legitimate reasons, from family trusts to trust instruments used in banking structures. However, they can also be misused by fraudsters to conceal their ownership of assets, and so as to put assets beyond the reach of claimants who might otherwise execute a judgment against them. This email alert considers disclosure orders the English Court can make in fraud litigation in relation to trust assets.

Freezing assets

The most common orders requiring disclosure in fraud litigation are freezing orders. The purpose of a freezing order is to stop a defendant from dissipating his assets so as to avoid the eventual enforcement of a judgment. They normally also require the defendant to disclose his assets. However, freezing orders only catch assets which the defendant owns or controls.

As a result, the starting point is that freezing orders do not normally cover trust assets, unless the defendant is able to control them as though they were his own. Similarly, whilst freezing orders require a defendant to disclose his assets (including any interest in trusts), they do not require disclosure of the assets of the trust itself.

Ancillary injunctions in support of freezing orders - clarification from the Court of Appeal

When the English Courts grant freezing orders, they can grant other injunctions in support of them. In particular, they can make disclosure orders to support the freezing order. In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2016] 1 W.L.R 160, the English Court of Appeal clarified these powers in relation to trust assets.

In Pugachev, the claimants (the liquidators of a Russian bank) brought claims against Mr Pugachev in Russia. They then obtained an English worldwide freezing order in support of the Russian proceedings.

The order prohibited Mr Pugachev from disposing of his assets anywhere in the world up to the value of £1.1 billion. This prohibition extended to any interest under a trust and any asset which Mr Pugachev had the power to dispose of as if it were his own. The order said that the prohibition applied "if a third party holds or controls the asset in accordance with [Mr Pugachev's] direct or indirect instructions". The order also required Mr Pugachev to disclose details of his assets.

Mr Pugachev's asset disclosure revealed that he was one of a class of discretionary beneficiaries of five New Zealand trusts. The claimants believed that Mr Pugachev was the real owner of the assets held...