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Discretionary trust: Friend or Faux?

A recent case last month clarified some of the principles that the Courts will use to establish whether or not a trust is merely a sham arrangement.

In JSC v Pugachev 2017 (case name abridged), Mr Sergei Pugachev, a former oligarch and the owner of the largest private bank in Russia was sued by the Russian state authority and, now insolvent, bank, who obtained judgment in Russia as a result of Mr Pugachev helping himself to c.£1bn of the bank’s cash. The claimants sought to enforce the judgment in the English courts.

Mr Pugachev was a protector and potential beneficiary of a series of five discretionary trusts said to hold assets worth USD95m. The claimants alleged that those assets held in trust, in fact, belonged to Mr Pugachev.

The decision in this case is one of importance when conducting a ‘trust busting’ exercise on alleged faux discretionary trusts.

The court found that the trusts were a sham on 2 counts:

1. The court held that Mr Pugachev retained some ‘purely personal powers’ which he could exercise over the trusts and its assets to appease his own ‘selfish interests’. The extent of his powers were such that he retained control and ownership of the assets. Namely, Mr Pugachev could:

• refuse to consent to the trustees’ exercise of their powers and thereby negate the trust;

• he could dismiss the trustees “with or without cause”; and

• having removed the trustees, he could exercise a power of attorney to ensure the transfer of the trust property to newly appointed trustees.

These powers were too closely aligned to his own personal interests.  They allowed him to retain complete control over the assets he settled into the trusts and therefore constituted ‘illusionary trusts’.

2. Alternatively, if (on an objective interpretation of the trust documents), the protector’s powers were such that Mr Pugachev did not have unfettered control and ownership of the assets, then the trust deeds were still shams because it was the parties’ subjective intention that Mr Pugachev retain the sole beneficial interest in the assets.

The decision in this case may well provide creditors who are looking to recover assets from trusts with a new line of attack in order to look behind ‘sham trusts’ and thus access assets.

For further information or advice regarding these matters please contact Kellie Williams-Jauvel, Partner in our Dispute Resolution team on 0208 971 1031 or email [email protected].


Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.

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