Trusts are used for a wide range of legitimate reasons, from family trusts to trust instruments used in banking structures. However, they can also be misused by fraudsters to conceal their ownership of assets, and so as to put assets beyond the reach of claimants who might otherwise execute a judgment against them. This email alert considers disclosure orders the English Court can make in fraud litigation in relation to trust assets.
Freezing assets
The most common orders requiring disclosure in fraud litigation are freezing orders. The purpose of a freezing order is to stop a defendant from dissipating his assets so as to avoid the eventual enforcement of a judgment. They normally also require the defendant to disclose his assets. However, freezing orders only catch assets which the defendant owns or controls.
As a result, the starting point is that freezing orders do not normally cover trust assets, unless the defendant is able to control them as though they were his own. Similarly, whilst freezing orders require a defendant to disclose his assets (including any interest in trusts), they do not require disclosure of the assets of the trust itself.
Ancillary injunctions in support of freezing orders – clarification from the Court of Appeal
When the English Courts grant freezing orders, they can grant other injunctions in support of them. In particular, they can make disclosure orders to support the freezing order. In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2016] 1 W.L.R 160, the English Court of Appeal clarified these powers in relation to trust assets.
In Pugachev, the claimants (the liquidators of a Russian bank) brought claims against Mr Pugachev in Russia. They then obtained an English worldwide freezing order in support of the Russian proceedings.
The order prohibited Mr Pugachev from disposing of his assets anywhere in the world up to the value of £1.1 billion. This prohibition extended to any interest under a trust and any asset which Mr Pugachev had the power to dispose of as if it were his own. The order said that the prohibition applied "if a third party holds or controls the asset in accordance with [Mr Pugachev's] direct or indirect instructions". The order also required Mr Pugachev to disclose details of his assets.
Mr Pugachev's asset disclosure revealed that he was one of a class of discretionary beneficiaries of five New Zealand trusts. The claimants believed that Mr Pugachev was the real owner of the assets held by those trusts. They therefore applied for an order that Mr Pugachev disclose further information about the trusts, including the identity of the trustees, settlors, protectors and beneficiaries of the trusts and information regarding the trusts' assets. The High Court granted the order.
The trustees and Mr Pugachev appealed against the order. The Court of Appeal accepted that Mr Pugachev could only be regarded as the owner of the trust assets for the purposes of the freezing order if either (a) the trusts were shams or (b) the trustees acted in accordance with Mr Pugachev's instructions.
On the evidence before it, the Court held that it could not conclude that the trustees "simply act at the behest of Mr Pugachev". The trust assets were therefore not covered by the freezing order. However, the Court of Appeal held that when a Court grants a freezing order, it also has the power to make any ancillary orders that are necessary to ensure that the freezing order is effective. Therefore, the Court of Appeal upheld the order of the High Court requiring Mr Pugachev to disclose information about the trusts, to enable the claimants to ascertain whether he exercised control over the trust assets.
Practical points
The decision in Pugachev means that where assets are held in a discretionary trust, a claimant may be able to obtain orders for disclosure about the trust and its assets even if the trust is not a sham. Whether such an order will be granted is heavily dependent on the facts of the case.
The Pugachev decision shows that the Courts are willing to take an expanding view of their powers to grant injunctions so as to ensure that freezing orders are effective. With global changes in technology and communications, which allow ever more complex corporate and financial structures, it is likely claimants will push the boundaries of this jurisdiction further so as not to allow defendants to misuse those structures.
Trustees should bear in mind that communications with settlors, protectors and beneficiaries could in the future have to be disclosed in litigation if an English freezing order is made against those parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
