Sham and Illusory Trusts - Back on the Agenda?

Transcription

1 STEP Cayman 18 January 2018 Sham and Illusory Trusts - Back on the Agenda? Where are we after the English decision in Pugachev? Shân Warnock-Smith QC and Andrew De La Rosa ICT Chambers 1

2 Prince Hamlet? He was an oligarch (1992 c. 2010) 2

3 Background: P founded Mezhprom private bank in 1992 On his own account worth US$15 billion in 2008 (when liaison with Alexandra Tolstoy began) But in 2008 bank thrown US$1.2 billion lifeline/bail-out by Russian Central Bank Alleged some US$700 million of bailout money went walkabout 2009 P becomes French citizen, flees Russia in January 2011 after criminal investigation begun Meanwhile, end November 2010, Russian court declares bank insolvent (estimated deficit US$2.2billion) July 2014 English proceedings against P commenced; by end June 2015 P fled England to reside in France By October 2015 Russian courts had found P liable for the equivalent of some GB 800 million 3

4 This action is about five New Zealand Trusts Established 12/11 and 7-11/13; P economic settlor of all five All discretionary with extensive Protector provisions; P first Protector, his eldest son nominated successor; principally held real property = visible assets P a discretionary beneficiary of all five trusts; other beneficiaries variously include his children and Ms Tolstoy NZ LR Comm. 4/02 report: Our hearts, it is suggested, should not bleed unduly if there are occasions when, as the result of the the appointment of a protector, a purported trust is denied that classification. Being too clever by half always carries its risks. 4

5 A few more points to note: Disclosure of P s status as beneficiary resulted from July 2014 English ex parte worldwide freezing order, including (non-standard) wording freezing any interest under any trust Trustees from inception down to July 2015 (when validly removed as held by NZ court court) were NZ companies and trusts NZ law-governed (assumed to be same as English law so no specific reserved powers or protector legislation) Although irrevocable discretionary trusts no letter of wishes Not a single citation to Lewin on Trusts in the judgment 5

6 The Issues: Were the trusts illusory? (Judge preferred to style this the True Effect of the Trusts issue) Were the trusts a sham? In the alternative to both of the above, section 423 of UK Insolvency Act 1986 (no detailed analysis but this may be the appeal-killing point) 6

7 Sham: the summary in A v A (Fam. Div.) Needs careful analysis of facts, external evidence relevant, departing from agreement does not mean not intended to be effective Settlor s intentions not enough must be common intention Reckless indifference enough: Midland Bank v Wyatt A non-sham cannot become one Finding of sham a serious matter especially for professional trustees 7

8 Mr Pugachev: No intention to cede control of assets Control freak (per Alexandra) Para. 359 of judgment: The first trust to be set up was the London Residence Trust in late Earlier in that year Mr Pugachev had fled Russia. After that he would have had every reason to try to disguise his control of visible assets in order to shield them from potential claims. 8

9 Poor Mr Patterson: Important was not what he thought about his position as trustee but what he thought about Mr Pugachev as Protector I was not convinced by his answers... I doubt I can rely on anything Mr Patterson says unless it is supported by the documents. (para. 332) Used term UBO to describe Mr Pugachev Wrote an article in 2009 supporting common intention doctrine and non-fiduciary powers of protectors 9

10 Mr Patterson s intention: did not know what Mr Pugachev s intentions were (i.e. to keep control) (per judge) he could have asked but didn t Best that can be said is that Mr Patterson signed these deeds entirely recklessly as to the Settlor s true intentions. 10

11 Footnote: In a statement published after the English court s decision, Mr Patterson noted: In fact I only met Mr Pugachev once for about 15 minutes in late 2013 and this was just a general introduction. He never issued or gave me any directions about the trusts. My witness statements... were prepared on the advice of the trustees legal advisors in London [and] were not intended to mislead. London counsel who approved the statements would never have contemplated such a thing. 11

12 True Effect One long series of suppositions about what an unscrupulous person might do under a discretionary trust and that the trust provisions were cleverly designed to facilitate abuse Central to judge s conclusions was his reading of the breadth of P s powers as Protector Many of the Protector s veto powers are deeply conventional e.g. as regards investments, distribution, variation. Even power to remove a trustee with or without cause is not wholly exceptional Also conventional powers to appoint in favour of one, some or all discretionary beneficiaries; judge was not addressed on any legitimate use - in restructuring for example 12

13 True ratio? Protector s powers not fiduciary or constrained by a requirement that the power be exercised to further a purpose of the trust to operate in the best interests of the beneficiaries as a class Disagreed with NZ court s decision on these very trusts that the Protector s power to remove trustee had to be exercised for proper purposes The fundamental reason for why I reach this conclusion is having regard to the extensive nature of the Protector s powers combined with the fact that the First Protector is the settlor of all the trust assets and is also one of the named Discretionary Beneficiaries 13

14 Judge s conclusions issues 1 and 2 When the Judge comes to deal with sham and the true effect of the trusts together (paras ), he refers to of all things - the Angora Cat Problem The canny professional who drafted the document can even salve their conscience by presenting two inconsistent but arguable interpretations on different occasions. The combination of circumstances here means that the court should not give an effect to these instruments that would result in the assets being regarded as outside Mr Pugachev s ultimate control. The whole scheme was set up to facilitate a pretence about ownership (or rather its absence) should the need arise. 14

15 Wider considerations There was nothing canny or excessively clever about this structure quite the opposite in fact No equivalent of sections of Trusts Law (2017 Revision) applicable; would not preclude finding of sham but could make all the difference to an issue of true effect However, the absence of any significant material showing the potential utility of reserved powers or any specific reason for them may be fatal 15

16 Recap: what was decided Mr Pugachev was the economic settlor of all five trusts All of the Protector s powers are purely personal which may be exercised selfishly When Mr Pugachev is Protector (and to the extent Mr Pugachev is under a disability, when his son is Protector) the true effect of all the trust deeds in this case is to leave Mr Pugachev in control of the trust assets. Mr Pugachev is the beneficial owner. They amount to a bare trust for Mr Pugachev. Mr Pugachev s intention in setting up all five trusts was to retain control of the assets but use them as a pretence to mislead third parties by hiding his control. No other natural person involved in setting up the trusts had an intention independent of Mr Pugachev s. Accordingly if the interpretation of the true effect of the deeds is wrong, such that they would have the effect in law of divesting Mr Pugachev of his beneficial ownership of the trust assets, then they are shams and should not be given effect to. 16

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