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...

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