01 October, 2018
The High Court ruling in Mezhprom Bank v Pugachev  EWHC 2426 held that Sergei Pugachev the Russian oligarch and founder of the Russian bank, Mezhprom, was a settlor, "protector" and discretionary beneficiary of five discretionary trusts worth approximately US$95m; and ultimately that the trusts were sham trusts and the court should not give effect to the trust instruments.
What is a sham trust?
A sham is a pretence, it is a transaction which in legal reality is one thing, but is dressed up to pretend to be something else. Often assets are put into sham trusts to put assets out of reach of creditors, or to make an individual to appear to be poorer than they actually (which is often an issue in divorce proceedings for example).
Examples of sham trusts include:
Broadly speaking in order to prove a sham trust it must be shown that there was an intention to mislead third parties by all the parties to the trust.
Consequences of a sham trust
The sham trust is likely to be held void. This essentially means that the trust property will be available to third party claimants against the settlor.
Reducing chances of an attack
There are a number of ways to avoid an attack on the validity of a trust. Having independent trustees, who will exercise independent judgment and act in accordance with the trust document (as opposed to acting on the wishes of the beneficiaries) is a key attribute of a sound trust.