Authored by Tim Penny QC, Wilberforce Chambers
GETTING AT TRUST ASSETS
In a series of recent cases, the English courts have grappled with whether the scope of a (usually worldwide) freezing order (WFO) extends to cover assets held in trust, and further whether there is jurisdiction to require someone who claims that he/she is no more than a beneficiary under a discretionary trust to disclose the trust assets, trust deeds and other details relating to the trust and those who control the trust even before a WFO is granted against those assets.
In recent years, the definition of the word "assets" in the standard form WFO has been extended to include the following provisions (emphasis added): "Paragraph [x] applies to all the defendant's assets whether or not they are in their own name, whether they are solely or jointly owned and whether the defendants are interested in them legally, beneficially or otherwise. For the purposes of this order, the defendants' assets include any asset which they have the power, directly or indirectly, to dispose of or deal with as if it were their own. The defendants are to be regarded as having such a power if a third party holds or controls the assets in accordance with their direct or indirect instructions."
In JSC BTA Bank v Ablyazov (no.10)1, the Supreme Court held2 that the last 2 sentences of this extended asset definition includes things not in the defendant's ownership, including, in that case, the defendant's unfettered right/power to draw down loans under a loan agreement with a bank under which the bank was contractually obliged to make funds available to the defendant. "The last two sentences... are designed to catch assets which are not owned legally or beneficially, but over which the defendant has control... the focus of the second sentence... is not on assets which the defendant owns (whether legally or beneficially) but on assets which he does not own but which he has the power to dispose of or deal with as if he did".3
It would appear therefore, that in a situation where the facts suggest that a defendant exerts de facto control over trust assets and that the defendant may have been the settlor of the trust, a WFO could extend to freeze the assets of that trust. This was confirmed by the Court of Appeal in JSC BTA Bank v Solodchenko, in which Patten LJ stated "the final 2 sentences make it clear that "the respondent's assets" can include assets held by a foreign trust or a Liechtenstein Anstalt when the defendant retains beneficial ownership or effective control of the assets."
The challenge for the claimant in these cases is to persuade a Court that if judgment is given there will be some means by which that judgment may be enforced against assets held within an offshore trust structure. In Tasarruf v Merrill Lynch4 the Privy Council held that an equitable receiver could be appointed to the settlor/judgment debtor's power of revocation in an offshore trust, with the purpose of allowing the receiver to revoke the trust so as to re-vest the trust assets in the settlor/judgment debtor.
And in VTB Bank v Skurikhin5, a WFO was granted over the beneficial interest of the intended judgment debtor in 2 English LLPs where his interest was held through a discretionary Liechtenstein Foundation; in the second judgment, the Court enforced a Russian judgment in England and Wales by appointing an equitable receiver to these LLP membership interests and an administrator was then appointed to the LLPs. The Court focused on the de facto control of the judgment debtor over the assets in question.
There may be cases however, where the Court cannot be satisfied at the outset on the limited evidence available that there is "good reason to suppose"6 that the assets within an offshore trust structure could be the subject of some post-judgment enforcement action. In Pugachev7, the Court of Appeal held that, following a WFO against the defendant but prior to an application for a WFO being made against trustees in respect of the trust assets, the Court may make a disclosure order against a defendant who claims that he is no more than a beneficiary under a discretionary trust, for disclosure of the identity of the settlor, trustees, protector, beneficiary, trust assets and for copies of the trust deeds, declarations of trust and other trust documents. The purpose was twofold: to police the existing WFO and also to ascertain whether there were grounds to make a WFO application against the trustees. The jurisdiction is a freestanding one under CPR r25.1(1)(g), and the test is essentially whether there is a real prospect of a WFO application being made.
So we can see that the English Court is developing ways to ensure that its judgments are not thwarted by sophisticated and wily defendants using ostensibly bona fide offshore structures that could not properly be regarded as a "sham".
PIERCING THE CORPORATE VEIL
One of the first cases learnt by students of English law is Salomon v A Salomon and Co Ltd8, where the House of Lords held that "a legally incorporated company must be treated like any other independent person with its rights and liabilities appropriate to itself."
"Piercing the corporate veil" refers to the process of looking beyond the separate personality of a company in order to fix liability on the shareholders. The doctrine operates as a rare exception to the rule in Salomon v Salomon, on the premise that English law views legal relationships between legal persons on the fundamental assumption that their dealings are honest, but if they are not, "fraud unravels everything."9
In the Supreme Court ruling in Prest v Petrodel Resources Ltd,10 Lord Sumption concluded that "there is a limited principle of English law which applies where a person is under an existing legal obligation or liability... which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality."11
One of the key points to note about this judgment is the reference to attempts to frustrate an existing legal obligation. Where the liability that is being evaded is a future liability, the Court will not intervene.12
Such matters are different in an insolvency context. Under s423 Insolvency Act 1986 a transaction entered into for insufficient or no consideration can be set aside if the Court is satisfied that the transaction was entered into "for the purpose of putting assets beyond the reach of a person who is making, or may at some time make [emphasis added] a claim against13" the transferor. This is in marked contrast not only to the doctrine for piercing the corporate veil but also to most offshore jurisdictions which limit the effectiveness of their equivalent provisions to s423 by stating that the debt must be in existence at the time of the transfer sought to be impugned. An example of this provision in action is Sands v Clitheroe14, in which a solicitor and his wife sold a jointly owned house and, with the proceeds, purchased a property in the wife's name only. The solicitor was subsequently made bankrupt and, in explaining the transaction, admitted that the new house was solely in his wife's name so as to put it beyond the reach of any (non-identified) future creditors of the firm in which he was a partner. The Court ruled that the transfer of the solicitor's share of the sale proceeds to his wife was a gift and therefore a transaction defrauding creditors within the meaning of s423.
Note that in Prest v Petrodel, on the facts the Court declined to pierce the corporate veil. This was a divorce case - Michael and Yasmin Prest's marriage broke up and the dispute concerned whether, as part of the relief to which Yasmin was therefore entitled, properties, owned by companies ultimately owned by Michael, should be transferred to Yasmin. Lord Sumption noted that the companies came to own the properties before the marriage ended thereby allowing the conclusion that "whatever the husband's reasons for organising things in that way, there was no evidence that he was seeking to avoid any [existing] obligation"15. Instead Michael appears to have been motivated by wealth protection and tax avoidance.
However, Yasmin still won because the Supreme Court ruled that the companies held the properties on trust for Michael. These assets had been acquired by the companies from Michael either for no consideration; or for proper consideration in circumstances where the companies carried out no commercial activity. It was therefore inferred that Michael gave the companies the money to acquire the properties; and that the arrangements were a sham to conceal Michael's beneficial ownership. Lord Sumption described this process as "lifting", as opposed to piercing, the corporate veil. Whilst piercing the corporate veil involves disregarding a company's separate legal personality, lifting the veil concerns situations in which the controller of the company can be held to be personally liable whilst the company's separate legal personality remains intact.
This idea of lifting the corporate veil was followed in JSC BTA Bank v Solodchenko & Others.16 BTA obtained a US $2 billion judgment against Mr Zharimbetov and was seeking to enforce it. BTA identified three desirable properties, each owned by a BVI registered company that was in turn ultimately owned by Mr Zharimbetov. The Court concluded that each of the properties were purchased by Mr Zharimbetov or from a source that provided the monies on his behalf. Again, none of the companies carried out any commercial activity. The Court held that the purchase of the properties was designed to disguise Mr Zharimbetov's ownership of them in circumstances where there were substantial claims against him. The properties were therefore held on resulting trust by the companies for Mr Zharimbetov.
Footnotes
1 [2015] 1 WLR 4754, Supreme Court
2 At paragraph 43
3 At paragraphs 46-48
4 [2012] 1 WLR 1721, Privy Council
5 [2012] EWHC 3916 (Comm), [2015] EWHC 21316 This being the test identified in Algosaibi v
Saad (2011) 1 CILR 178, Sir John Chadwick P sitting in the Cayman Islands Court of Appeal,
at paragraph 33 7 [2015] EWCA Civ 139, Court of Appeal
8 [1897] AC 22
9 Lazarus Estates Ltd v Beasley [1956] 1 QB 702
10 [2013] UKSC 34
11 Ibid, para 35
12 See for example Adams v Cape Industries plc [1990] Ch 433
13 s423(3) Insolvency Act 1986
14 [2006] BPIR 1000
15 Prest v Petrodel Resources [2013] UKSC 34, paragraph 36 16 [2015] EWHC 3680
Originally published in Funding In Focus, Issue 4: 2017
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.
