In the recent case of JSC Mezhdunarodniy Promyshlenniy Bank and another v Pugachev and others  EWCA Civ 906, the English Court of Appeal has confirmed the English courts' willingness to use freezing injunctions flexibly to prevent trusts being used to assist international fraud.
In December 2013, the liquidator of a Russian bank commenced proceedings in Moscow against one of the founders of the bank, Mr Pugachev, alleging that he had defrauded the bank out of c USD 2.2 billion.
In July 2014 and in aid of those proceedings, the Chancery Division granted a worldwide freezing order against Mr Pugachev's assets pursuant to which he was required to inform the liquidator of his worldwide assets including "any interest under any trust or similar entity including any interest which may arise by virtue of the exercise of any power of appointment, discretion or otherwise howsoever".
In compliance with that order, Mr Pugachev disclosed the existence of a number of New Zealand based trusts under which he had discretionary beneficial interests but gave no further information.
The application for a trusts disclosure order
In response, the liquidator obtained a disclosure order from the Chancery Division requiring Mr Pugachev to identify the trustees, settlor, protector and beneficiaries of the trusts, provide details of the assets subject to those trusts and provide copies of the trust deeds. Mr Pugachev and the trustees appealed against this decision.
In considering the lower court's decision, the Court of Appeal confirmed that prima facie assets held by the trustees of a discretionary trust would not be amenable to execution if judgment is entered against one of the class of potential beneficiaries at the suit of a third party. However, it was a question of interpretation of the scope of the specific freezing order which had to be considered in light of the nature of the interest of the potential beneficiary under a discretionary trust and the purpose of making freezing orders. The Court of Appeal referred to three guiding principles:
- The enforcement principle – the purpose of a freezing order is to stop the defendant disposing of property which could be the subject of enforcement if the claimant wins;
- The flexibility principle – the jurisdiction to make a freezing order should be exercised in a flexible manner to deal with new ways sophisticated defendants attempt to evade effect enforcement of those orders; and
- The strict interpretation principle – due to the serious consequences of breaching a freezing order, the terms should be clear and unequivocal and strictly construed.
The Court of Appeal held that the critical point was that, whilst Mr Pugachev's interests in the trusts were within the scope of the freezing order given the specific wording of the freezing order in this case, the assets of the trusts themselves were not within its scope. However, there was a dispute between the liquidator and Mr Pugachev as to whether in reality Mr Pugachev was in effective control of the trust assets.
Whilst the Court of Appeal held that it was not in a position to reach a view on this, the principle of flexibility came into play and the courts had jurisdiction to make any ancillary order necessary to ensure the effectiveness of a freezing order.
The fact that the threshold test for including the trust assets within the scope of the freezing order was not met did not therefore mean that the Court was powerless. The Court could enable the liquidator to test its assertion that Mr Pugachev was in effective control of the trust assets by granting the trusts disclosure order. In the event that assertion turned out to be correct, the liquidator might then be in a position apply for the scope of the freezing order to be widened.
Accordingly, the Court of Appeal upheld the trusts disclosure order stating "...the court's concern that sophisticated and wily operators should not be able to make themselves immune to the courts' orders militates against denying the [liquidator] that opportunity. As Robert Walker J put it in International Credit and Investment Co (Overseas) Ltd v Adham  BCC 134, 136:
"...the court will, on appropriate occasions, take drastic action and will not allow its orders to be evaded by the manipulation of shadowy offshore trusts and companies formed in jurisdictions where secrecy is highly prized and official regulation is at a low level.""
The application to extend the freezing order to the trusts
Subsequently, in July 2015, the liquidator applied on a without notice basis to extend the worldwide freezing order to the trustees on the basis inter alia that there was a 'good arguable case' that the assets held by the trusts were in reality the assets of, or under the control of, Mr Pugachev.
Whilst the Chancery Division dismissed the application, in August 2015 the Court of Appeal disagreed and extended the freezing order to expressly cover the trusts.
In support of its decision, the Court of Appeal referred to the courts' jurisdiction to make an order against a third party who is holding assets on behalf of a defendant against whom an injunction has been granted including where there is a good arguable case that the assets are under the defendant's control (the courts' so-called 'Chabra' jurisdiction). If there is a real risk that the third party will deal with assets in such a way as to prevent the claimant from obtaining recourse to them to enforce any judgment given against the defendant then a Chabra order will be made.
On the basis of the evidence provided by the liquidator, the Court of Appeal held that there was at least a good arguable case that Mr Pugachev was taking every possible step to keep his assets out of the reach of the Court including taking steps to replace the original trustees of the trusts with four newly incorporated New Zealand companies.
Accordingly, the freezing order was extended to expressly cover the trusts.
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