The Pugachev Problem: when is a trust not a trust

Article

01 October, 2018

The High Court ruling in Mezhprom Bank v Pugachev [2017] 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:

  • Midland Bank v Wyatt [1995] - A man made a declaration of trust in favour of his wife and children and put the relevant instrument away in his safe. The judge concluded that the man did not intend to benefit his wife and children, but was simply creating a "trust" in case it should be needed in the event of a rainy day (ie a claim by creditors). The trust was held void as a sham.
  • Minwalla v Minwalla [2005] - a trust company held two letters of wishes of identical date both signed by the husband, one of which stated that the husband was a beneficiary and one of which did not. In reality the husband retained complete control over the trust assets. The trust was held void and a sham.

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.

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