In JSC Mezhdunarodny Promyshlennniy Bank v Pugachev,1 Birss J gave judgment for the claimants on all three grounds relied on by them to establish that substantial assets, comprising valuable residential properties in England and abroad as well as cash, added either directly or through underlying companies by Mr Pugachev2 to five trusts declared in writing over nominal sums by New Zealand trust companies under New Zealand law3 ostensibly for the primary benefit of a discretionary class comprising Mr Pugachev, his then life partner ('Alexandra'), and their three minor children4 either remained Mr Pugachev's beneficially throughout or should be made available to his creditors. The three grounds were that: (i) the 'true effect'5 of the trusts was that they were not, despite appearances, discretionary trusts for Mr Pugachev and his family but bare trusts for Mr Pugachev alone; (ii) the trust instruments were shams intended to conceal the intention of Mr Pugachev and his trustees that control of the assets should remain with Mr Pugachev throughout and the court should give effect to the true, rather than the sham, intention by declaring that the assets were held on bare trust for him throughout; and (iii) alternatively to (i) and (ii), section 423 Insolvency Act 1986 was engaged. This article looks at the reasons which Birss J gave under the first head (ie the 'true effect' claim) for finding against the interests and contentions of the three minor children who, being represented by their mother as litigation friend, were the only defendants who took part in the trial. The reason for doing so from an offshore perspective is that trusts not at all unlike Mr Pugachev's are frequently established in offshore jurisdictions the trusts jurisprudence of which is based on English case law.

The judge centred his analysis on the London Residence Trust (the 'LRT'). Although established with only nominal capital, he treated £12.5 million as having been added to the LRT at point of establishment6 to allow for the purchase of a London property, Old Battersea House, directly at trustee level. Subsequently, US$5 million7 was added to the LRT which the judge found to have been for the purpose of funding renovation of that property.8

Key provisions set out in the written declaration purporting to establish the LRT included: (i) a definition of the term 'Discretionary Beneficiaries' which referred to Mr Pugachev, his sons Victor and Alexander, Alexandra and her children with Mr Pugachev, future issue or adopted children of Mr Pugachev, and any other person or charity9 appointed by the Protector; (ii) a definition of the term 'Protector' which referred to Mr Pugachev as 'First Protector' but otherwise to 'the person or persons from time to time acting as Protector', later provisions in the instrument stipulating that Victor would be Protector during Mr Pugachev's 'Disability'10 and after his death, the Protector for the time being having power revocably or irrevocably to appoint a successor with a default power in the trustee to do likewise; (iii) a number of purportedly dispositive provisions stated to confer discretion on the trustee exercisable prior to the 'Date of Distribution',11 to distribute to, or vest in, any Discretionary Beneficiary income or capital, subject to written Protector consent; (iv) a purportedly dispositive provision of the fund at the Date of Distribution in favour of Alexandra and such of Mr Pugachev's children as might then be living and have obtained 21 years of age; (v) a purported power in the trustee, subject to written Protector consent, in effect to exclude any person from the class of discretionary objects; (vi) a power in the Protector to remove a trustee 'with or without cause', the power to appoint new or additional trustees also being vested in the Protector; and (vii) a power in the trustee to vary or amend any provision of the LRT, subject to written Protector consent.

The LRT had, however, two further sets of provisions which could be thought to throw some light on Mr Pugachev's intention so far as objectively ascertainable. The first dealt with occupation of Old Battersea House and the second dealt with investments. They will be taken together.

Occupation of Old Battersea House

It is perfectly common to see, buried somewhere in the administrative and management provisions of a trust, a power conferred on trustees to permit use and occupation of land by a beneficiary or, even, a power to purchase land for that purpose. Clause 5.1 of the LRT aimed to go further than that, however, in imposing a duty on the trustee to permit Mr Pugachev, or anyone else permitted by him, to reside specifically at Old Battersea House, rent-free, but otherwise subject to such reasonable terms and conditions as the trustee might think fit to impose.12 The clause further provided that Mr Pugachev, if he did not wish to reside there, might direct a letting of the property, the rental income of which would be income that fell to be dealt with under the purportedly dispositive powers over income summarized above. There was a further provision that Alexandra would have a similar right of residence (but not, it seems, to direct a letting or the purchase of a substitute residence) after Mr Pugachev's death or during his Disability so long as any of her children with Mr Pugachev were under 21 years of age.

To bolster the position, Clause 9 declared Old Battersea House to be the primary investment of the trust fund and (for that reason primarily, it might fairly be inferred) made the trustee's power of investment and reinvestment subject to written Protector consent.

It would seem, therefore, that Mr Pugachev's objectively ascertainable intention was to establish a trust of a house in specie so that he could have (or allow) use and enjoyment of it, or a substitute residence of his choosing, for life (or so long as he wished, which amounts to the same thing), his life partner (and the mother of three of his children) to have the like right, if he lost capacity or died before directing a sale and subjecting the proceeds to the ordinary trusts over capital and income, for so long as their children might reasonably be expected still to be living at home; thereafter, he gave discretion to his trustee, subject in each case to Protector consent,13 (i) to continue to allow benefit in specie to one or more of the discretionary class, (ii) to benefit them otherwise through sale of the property and use of the discretionary powers over capital and income, or (iii) to bring forward the Date of Distribution and trigger the default vesting provisions. All of that seems an intention both lawful and laudable. Birss J's conclusion amounts to saying that it cannot be achieved in English law or, at least, that it cannot be achieved in the way adopted by the draftsman in this case, Mr Patterson. It is respectfully submitted that that is not right as a matter of English law.

In Re Denley's Trust Deed,14 (Reginald) Goff J upheld a trust of land to be used during a validly specified perpetuity period as a sports ground for the employees of a company with a gift over to charity (a hospital) at the end of the perpetuity period or earlier failure of the trust. The trust for the employees could not qualify as charitable (for want of public benefit) and one of the questions for Goff J was whether the trust was an invalid non-charitable purpose trust. Much has been written about the decision but it has a narrow and perfectly orthodox justification. Counsel for the hospital, one Gavin Lightman, submitted that

It is perfectly competent for a settlor to specify the manner in which a beneficiary is to be benefited or a trust asset is to be used and enjoyed. Thus, trusts permitting user and enjoyment of chattels e.g. heirlooms, and houses are upheld without question (380F).

Goff J clearly, if implicitly, accepted that submission, as he was (with respect) right to do, when, in discussing

the case of a trust to permit a number of persons—for example, all the unmarried children of a testator or settlor—to use or occupy a house or to have use of certain chattels" he commented "no one would suggest, I fancy, that such a trust would be void (388C).

The reason such trusts are valid, if it needs spelling out, is that use and enjoyment of an asset is one way of enjoying its income aspect and there is no objection, therefore, to a trustee's accepting an obligation to hold an asset for a period not exceeding the perpetuity period to provide income for, or to allow use of the asset by, a class of persons at the trustee's discretion. That was how Vinelott J analysed Re Denley when he said, in Re Grant's Will Trusts,15

I can see no distinction in principle between a trust to permit a class defined by reference to employment to use and enjoy land in accordance with rules to be made at the discretion of trustees on the one hand, and, on the other hand, a trust to distribute income at the discretion of trustees amongst a class, defined by reference to, for example, relationship to the settlor. In both cases the benefit to be taken by any member of the class is at the discretion of the trustees, but any member of the class can apply to the court to compel the trustees to administer the trust in accordance with its terms.16

Further, if the discretionary objects are a class fluctuating over time,17 the members of the class at any one point in time will not generally, even if all of full capacity and having the agreement of those interested in the capital, be able to exercise Saunders v Vautier18 rights to call for, or direct, a transfer of title and the gift over on termination (whether to charity or to persons then in existence as yet unascertained and possibly unborn), whenever occurring, ousts any presumption of resulting trust such that the settlor retains no capital interest in the property at any point.19

It is to be noted, however, that where the trust that is accepted is to allow use of a specific asset, the obligation implies not merely an endowment (ie a restriction on expenditure of capital) but an endowment in specie (ie preventing any disposition of the asset inconsistent with continued enjoyment by the discretionary objects) since, if the asset is disposed of, it cannot be used or enjoyed in the way contemplated by the settlor.

Mr Pugachev, of course, intended himself to be the primary user and enjoyer of Old Battersea House. But even if the rather complicated residence provision set out in the LRT amounted to nothing more than the reservation of a life interest on the part of Mr Pugachev (which may well be its proper construction since Alexandra's 'right' to reside seems entirely precarious and dependent on Mr Pugachev not having previously directed liquidation of the asset), it goes without saying that would not, of itself, make the LRT trust a bare trust for Mr Pugachev.

Nor, it is submitted, did reservation of power to veto exercise of the dispositive or investment powers have that effect. It is, at a bare minimum, perfectly (if not uniquely) reasonable to assume that the draftsman afforded Mr Pugachev this comprehensive veto, in order to give him comfort that the purpose of the trust (to hold title to a specific house for use and enjoyment by him for life or so long as he wished) could not be frustrated. On the basis of the foregoing analysis of Re Denley, it might be said that the veto was not strictly necessary, at least in relation to Old Battersea House. But, as the judge found, the extra US$5 million added to the trust was intended for the renovation of the family's intended residence and some kind of restriction on trustee action would be needed in order to prevent the trustee exercising its dispositive discretions in relation to the cash balance in a way that could be said to frustrate the purpose of the LRT. If that is a plausible interpretation of the objectively ascertainable intention behind the LRT, then the power to direct a sale and the purchase of a substitute property tends to confirm the intention to create a trust in specie (as opposed to a trust of a fund simpliciter) and the powers either to direct a letting during any period when the property, or any substitute property, was not needed as a residence or to direct a sale and a holding of the proceeds of sale as a fund simpliciter do no more than preserve flexibility in the event of a change in family circumstances (as happened).

In other words, Mr Pugachev could not have achieved all that he wanted to achieve simply by doing what Mr Denley did but his overall objective, so far as objectively ascertainable and summarized above, was perfectly legitimate and it is hard to see how a draftsperson could better have achieved that objective under English (or, assuming it is the same, New Zealand) law than Mr Patterson did with the LRT20 given the non-availability of something like the Cayman Islands STAR21 trust in English (and, it seems, New Zealand) law.22 At a bare minimum, the powers conferred on the Protector serve a proper, even necessary, purpose and it is not at all strange, and even less suspicious, that Mr Pugachev should have had himself appointed as First Protector and his son Victor to act in his place during Disability or after his death. But this does suggest that the Protector's powers were conferred for a purpose and were very arguably not, contrary to the judge's construction of them, 'personal powers conferred to give the Protector the ability to act in his own interests'23 which was the fundamental reason for his conclusion on the 'True Effects' claim.

Some other considerations

There are, quite apart from the foregoing, a number of ways of testing the judge's conclusion that the totality of powers reserved to Mr Pugachev as First Protector means that 'the deeds allow Mr Pugachev to retain his beneficial ownership of the assets'.24

The first is to posit a plausible scenario that does not involve any suggestion of sham in which the question of the construction of the LRT is engaged. The judge himself acknowledged at paragraph 212 of the judgment that the factual matrix in the case before him was 'tangled up with the question of sham' but he, importantly, added: 'For the purposes of analysis I wish to keep these things separate.' Suppose, therefore, a month or a year after the establishment of the LRT, Mr Pugachev directs the trustee in writing to convey title to Old Battersea House, and any cash balance in the trust, to him forthwith. He has fallen out with Alexandra. The trustee, prompted by the claims of Alexandra, on behalf of her children more than anything else, that they will be entirely without provision from Mr Pugachev if it does so (albeit, she reluctantly accepts, that he can, while alive and not under a Disability, stop them living at Old Battersea House), seeks the determination of the court whether it is obliged to comply with the direction (it not being minded, if not, to exercise any dispositive powers over the fund in Mr Pugachev's favour).

How plausible would Mr Pugachev's argument be that, upon the true construction of the LRT, he had reserved rights that were akin to full ownership in equity and that, even though his construction 'renders quite a lot of the text superfluous',25 he was entitled to get his property back on demand because what had been established was a bare trust for him alone? The short answer to his claim would be that, strictly, his construction would render superfluous every single word of the text other than those at the beginning of Clause 5, namely, 'The Trustee shall stand possessed of the Trust Fund upon trust ... [for] Sergei Victorovich Pugachev', and the definitions of the capitalized terms therein. He having, no doubt deliberately, failed to reserve either a general power of appointment or a power of revocation (under either of which he could have given himself ownership of the fund26), why should Mr Pugachev be regarded as having any beneficial interest in the fund more than (and at most) entitlement to use and enjoyment of Old Battersea House, or any substitute property, for life and otherwise as a purely discretionary object?

Another way to test the judge's conclusion about the effect of the powers reserved by Mr Pugachev is to ask, following the logic of the Privy Council in TMSF v Merril LyncH27: if Mr Pugachev, motivated by a desire to get a judgment creditor off his back, were to delegate all his delegable powers under the LRT to a judgment creditor, what could the judgment creditor do with them? Quite clearly, and unlike the judgment creditor in the TMSF case, it could not exercise any of the powers singly to effect a transfer of any part of the fund to itself since none of them, singly, allows that. The most it could hope to do is, by exercise of some of the powers in combination, to direct a sale of the property, direct that the proceeds be held as a fund for the benefit of the Discretionary Beneficiaries and to apply for a distribution. But that, as the judgment creditor would be only too aware, would not amount to ownership of the fund, or any part of it, unless and until a distribution were made. Nor is it made any more like ownership, from the judgment creditor's point of view, that it could change the trustee without having to show cause since, if the new trustee is a true trustee rather than a mere cipher (a matter which the other Discretionary Beneficiaries could have judicially reviewed), the judgment creditor's position is not improved: it might, or might not, obtain a distribution. If the delegate stands in the shoes of the delegator, the quality and quantity of powers reserved to Mr Pugachev under the LRT did not make him absolute owner of its assets and his entitlement, on top of that, to reside rent-free at Old Battersea House, or a substitute property of his choosing, for life if he so wished, cannot change that conclusion.

The other trusts

Birss J did not think, the residence clause in the LRT apart, that there was any significant difference between the five trusts. What all the trusts had in common is that they concerned, principally, residential property. The properties in the other four trusts, however, were held through underlying companies, incorporated in various jurisdictions, as is extremely common in the offshore world. In fact, this does change things in some ways. The beneficial ownership of assets held under the companies, for example, is that of the companies, not the beneficiaries, and corporate rather than trust rules determine the character of receipts in the trustee's hands (a trap for the unwary in relation, for example, to dividends in specie of a company's assets that, in the company's ownership may appear on the balance sheet but which, in the trust account, must be accounted as income). But the other trusts conferred substantially identical powers of veto over dispositive and investment powers over the shares of the companies and the same points as may be made in relation to the LRT may be made in relation to the other trusts. Birss J was, with respect, therefore, right to treat them all as materially alike. If the argument in relation to the LRT is good, however, the claimants should have failed on the True Effects claim in relation to those trusts also.

Birss J on anti-Bartlett clauses

Although this article does not examine the sham claim, it is worth mentioning one aspect of Birss J's treatment of it that may be of some interest to the offshore trust lawyer. As part of his general rejection of Mr Patterson's evidence,28 Birss J said in relation to one of the other trusts:

At one stage Mr Patterson sought to rely on the fact that strictly speaking the trust assets were just the shares in companies which ultimately held the property. That will not do. It does not reflect the manner in which Mr Patterson actually undertook his duties at the time, no doubt because the deeds do not in include a (sic) "anti-Bartlett clause" to oust the trustee's duty to enquire into the affairs of trust-owned companies .... (emphasis added)

It is submitted that that is a fair criticism of Mr Patterson only if the judge was of the view that an anti-Bartlett clause would have made a difference. Whether or not that is right, it is hard to read the italicized words without concluding that the judge did indeed hold the view that anti-Bartlett clauses have the effect of ousting a duty of enquiry.


1. [2017] EWHC 2426 (Ch), as yet unreported.

2. Some of the assets were in fact contributed by Mr Pugachev's son Victor but Birss J found him to have acted as his father's nominee throughout and his involvement is, therefore, ignored in this analysis.

3. The parties and the judge treated New Zealand and English trust law as identical in all material respects as, save where otherwise appears, does this analysis.

4. The beneficial class varied slightly as between the five trusts but the differences are not material to this analysis and are, therefore, ignored.

5. The claimants had called this head of claim the 'Illusory Trusts' claim but Birss J rejected that terminology in favour of his own which is taken in this analysis merely to refer to the true construction of the trusts.

6. The judge found that the £12 million was provided to the trustee on 5 December 2011 and the LRT declared over a nominal sum on 6 December 2011 –see paras 105 and 204 (i). He also found, however (para 105) that, the trustee was 'already the owner' of the property 'by that date'. If that amounts to a finding of fact that the purchase price was paid and completion took place on 5 December 2011, then the trustee's (equitable) interest in the property on 5 December 2011 must have been held for Mr Pugachev exclusively on the basis of some kind of resulting trust. How Mr Pugachev can have disposed of his interest thereunder to the beneficial class of the LRT, in light of s 53 (1)(c) Law of Property Act 1925, without writing signed by him or by his agent authorized in writing (or, if applicable, in light of s 25 (1) (b) and (c) of the New Zealand Property Law Act 2007 without writing signed by him simpliciter) is not clear. Much would depend on whether the decision of the English Court of Appeal in Re Vandervell's Trusts (No 2) [1974] Ch 269 would survive a challenge before the Supreme Court.

7. There was a question whether a further US$8.8 million was also added to the LRT or to another of the five trusts but the judge does not appear to have resolved that evidential question.

8. See para 411 of the judgment.

9. That is, established exclusively for charitable purposes under New Zealand law.

10. A term defined to extend to temporary inability to exercise free will, including through 'coercion by operation of law'.

11. Eighty years after establishment or such earlier date declared by the trustee subject to written Protector consent.

12. In fact, Clause 5.1 was the first of the substantive dispositive provisions and was introduced with the words '5. The Trustee shall stand possessed of the Trust Fund upon trust as follows: 5.1 In respect of any residential property (subject to Clause 4.6) (a) to permit [Mr Pugachev] together with such other persons as he may from time to time permit personally to reside in the residential property ... .' 'Residential property' was defined to refer to Old Battersea House or any substitute property and Clause 4.6 purported to confer on the Protector a right to direct a sale of the residential property, the proceeds (unless directed by the Protector to be invested in a substitute property) to be held on the trusts of capital and income set out in Clause 5 other than in Clause 5.1.

13. The Protector, at that point, would be Victor or some person other than Mr Pugachev, by definition.

14. [1969] 1Ch 373.

15. [1980] 1 WLR 360, 370H.

16. Vinelott J then quoted the passage from Goff J's judgment at [1969] 1 Ch 373 at 388C, cited above.

17. As was the case in Re Denley and also with Mr Pugachev's trusts.

18. (1841) 4 Beav 115.

19. It is these characteristics of the disposition which makes this kind of trust suitable for asset protection purposes, subject to insolvency and creditor protection legislation: the capital interest is entirely alienated and the interest in income, if truly discretionary, is not transmissible and will not, therefore, vest in a trustee in bankruptcy which is the very assumption made by s 33 of the Trustee Act 1925 in allowing for protective trusts. Whether Mr Pugachev's interest in income was truly discretionary, however, is another matter—see the text above at lines 19–29.

20. Save that he may have created a vested interest in income and, if so, perhaps unintentionally.

21. A special trust may be established under what is now Part VIII of the Cayman Islands Trusts Law (2017 Revision) with persons or purposes, including non-charitable purposes, as objects the right or duty to enforce which may be given to an enforcer rather than any beneficiary per se.

22. While land in the Cayman Islands may not be held in a STAR trust, there is no prohibition under Cayman Islands law on English land being so held and the Recognition of Trusts Act 1987 would appear to require an English court to recognize a STAR trust of English land if appropriately drafted to avoid any question of 'manifest incompatibility with public policy' under art 18 of the Schedule to that Act. It is unlikely, perhaps, that this possibility was considered.

23. Birss J, para 267.

24. ibid 278.

25. Birss J's description of the effect of his own construction, para 266.

26. But equally, if asset protection was an objective, either would have been fatal.

27. [2011] UKPC. Obviously, the logic of that decision only applies if the power in question is akin to ownership and the point of the example is to show that they are not.

28. At para 332 Birss J said '...I doubt I can rely on anything Mr Patterson says unless it is supported by the documents'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.