JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017]

JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch) is one of the most important modern English cases on sham trusts, settlor control, and asset protection structures, and it comes up constantly in offshore and private wealth planning.

The case concerned Sergei Pugachev, a Russian businessman who had fallen into very substantial liabilities to a Russian bank, JSC Mezhdunarodniy Promyshlenniy Bank. Before enforcement action began, he settled several valuable assets, including London property and other investments, into a series of discretionary trusts established in New Zealand. On paper, the structures looked orthodox. Professional trustees were appointed and the trusts were expressed to be discretionary, with Pugachev listed merely as one of a class of potential beneficiaries rather than as owner. Formally, therefore, legal title lay with the trustees and beneficial enjoyment was to be subject to trustee discretion.

However, when the High Court examined the documents closely, it discovered that Pugachev had retained extremely extensive powers. These included powers to appoint and remove trustees at will, powers effectively to control investment decisions, powers to veto distributions, and powers to add or remove beneficiaries, including himself. In substance, the trustees could not act independently because they could be dismissed immediately if they failed to follow his wishes. Although the trust deeds used the language of discretion and fiduciary control, the practical reality was that Pugachev remained the person who truly controlled everything.

Birss J focused on the fundamental requirement of a trust under English law, which is a genuine separation between legal ownership and beneficial control accompanied by real fiduciary obligations. He emphasised that trustees must exercise independent judgment. If a settlor structures matters so that the trustees are effectively puppets or nominees, then the supposed division between legal and equitable ownership is illusory. Equity looks to substance, not labels.

The court held that these trusts were not effective to remove the assets from Pugachev’s control. The judge described the arrangement as either illusory or a sham. First, on an orthodox analysis, the trusts were “illusory” because the trustees’ powers were so constrained that they had no meaningful discretion. Second, even if legally drafted as trusts, the evidence showed that the parties never intended the trustees to exercise genuine fiduciary responsibility. The structure was designed to give the appearance of separation while allowing Pugachev to keep full control. That fits squarely within the concept of a sham, namely an arrangement intended to mislead third parties about the true legal position.

As a result, the court treated the assets as still effectively belonging to Pugachev and therefore available to satisfy the bank’s claims. The trust structure failed to protect him. The case shows that simply appointing professional trustees and using standard trust language is not enough if, in reality, the settlor keeps the steering wheel.