Enforcement against assets held in discretionary trusts

February 4, 2016

 

 

 

 

Can I enforce my judgment against assets held in a discretionary trust? Can I freeze such assets before judgment?

 

Introduction

 

Litigators will be familiar with the phenomenon of a defendant, or judgment debtor, who maintains an apparently affluent lifestyle while simultaneously asserting that they have no assets against which judgment could ever be enforced. This paradoxical state of affairs (which is highly convenient for a judgment debtor) will often be the effect of a simple cause - the existence of a discretionary trust. This is because the beneficiary of a discretionary fund has no interest in the trust fund itself. The beneficiary can plausibly maintain that, no matter how generous the trustees may have been to them in the past, the current assets of the trust fund are nothing to do with them at all (see for example JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139), in which the defendant, although described as living a “lavish” lifestyle, had yet at the same time disclosed relatively few assets in his own name).

 

The rights of a beneficiary under a discretionary trust have been established law for many years. The only right of an object of a discretionary trust is to require the trustees to consider from time to time whether or not to apply the whole or some part trust fund for his or her benefit; and this right is not an interest in the trust fund or any part of it (Gartside v Inland Revenue Commissioners [1968] AC 553 HL). One consequence of this is that assets held by the trustees of a discretionary trust are not, on the face of things, amenable to execution if judgment is entered against a beneficiary

 

In recent years, the courts in England and Wales and other common law jurisdictions have come alive to the potential for injustice. As Lord Justice Lewison pointed out in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev case at [20]:

 

“It would, I think, be a matter of concern if a person could make himself judgment-proof merely by setting up discretionary trusts”

 

Modern developments in the law now permit the possibility of a positive answer to 2 questions which will be of great interest to potential claimants: (i) can I freeze assets even if they are purportedly held within a discretionary trust; and (ii) if I get judgment, will I be able to enforce against such assets? Obviously cases will turn on their particular circumstances, but it is now realistic to say that the answer to each of those questions (can I freeze? can I enforce?) may be “yes, you can”.

 

 

Can I freeze assets even if held in a discretionary trust?

 

There is now Court of Appeal authority that the wording of the form of Freezing Injunction set out at Appendix 5 to the Commercial Court Guide is effective to freeze assets even if they are held in what is prima facie a discretionary trust. The relevant operative words of the freezing injunction in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139 were:

 

“6. Paragraph 5 applies to all the Respondent’s assets whether or not they are in his own name and whether they are solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise. For the purposes of this order the Respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions.

 

7. This prohibition includes the following assets in particular:

(c) any interest under any trust or similar entity including any interest which may arise by virtue of the exercise of any power of appointment, discretion or otherwise howsoever ”

 

(Although the Court of Appeal described the above as “non-standard” wording, both relevant paragraphs, 6 and 7(c) are taken more or less verbatim from the Appendix 5 form of freezing injunction, which dates back to at least March 2013.)

 

Lord Justice Lewison was unambiguous (at [2015] EWCA Civ 139 paragraph [25]). The effect of the above wording in the freezing injunction was that:

 

“.......[the defendant’s] interests under the discretionary trusts are caught by the prohibition on dealing with assets.......”

 

In other words, a freezing injunction in those terms will bite on anything that falls within the description of “assets”, even if the position in law is that they are assets held on a discretionary trust.

 

Can I enforce my judgment against the assets held in a discretionary trust?

 

It is one thing to freeze assets held in a discretionary trust and quite another to enforce against them. But it is not impossible. The discretionary trust may be a sham; or it may constitute a transaction defrauding creditors; or it may be amenable to the appointment of a receiver by way of equitable execution.

 

If the trust is a sham

 

Some so-called discretionary trusts may be out-and-out shams. The settlor may intend to create the appearance of a trust, but retain the right of being able to deal with the trust assets as if they were still the settlor’s own. Like the settlor in the Jersey case of Abdel Rahman v Chase Bank (C.I.) Trust Co Ltd [1991] JLR 103, the purported settlor of a sham trust may retain complete control over the trust fund, the trust advisers and trustees merely lending their services to the attainment of the purported settlor’s wishes:

 

“The trust fund was so much retained by the settlor within his dominion and control that by letter, delegated instruction via Mr Nassar and others or telephone instruction later to be confirmed in writing, he could obtain distributions of capital or income at will, whether or not the distribution was to himself, gifts to others or loans by the trust and, in the latter case, there was no real consideration as to the quality of the security or the value of the investment, interest-bearing or otherwise. The wishes of the settlor were paramount at all times.”

 

(see [1991] JLR 155)

 

The generally accepted test for whether or not a trust is a sham is that set out originally by Mr Justice Rimer in Shalson v Russo [2003] EWHC 1637 (Ch); [2005] Ch 281: (i) did the settlor intend that assets (of which he or she had purportedly divested themself in favour of the trustee) were in fact to be treated the settlor’s own; and that the trustee was to accede to the settlor’s every request on demand; and (ii) was that intention shared by the trustee? To put it another way, was there a common intention to give a false impression? (This was the formulation adopted by the Jersey Court of Appeal in MacKinnon v Regent Trust Co [2005] JLR 198, )

 

A sham trust is void and unenforceable (Midland Bank Plc v Wyatt [1997] 1 BCLC 242 at 253A-B). The trust assets remain the assets of the settlor and, if the settlor is a judgment debtor, judgement may be enforced against them.

 

Section 423 of the Insolvency Act 1996

 

Most discretionary trusts are entirely valid and not shams. However, just because a trust is not a sham does not mean that it is invulnerable. The offshore (Guernsey) trust set up on behalf of the debtor in the case of  Hill v Spread Trustee Co Ltd [2007] EWCA Civ 542; [2007] 1 WLR 2005 CA was specifically found not to be a sham. Nevertheless, the settlement of the trust was still found to be a transaction defrauding creditors and was liable to be set aside under section 423 of the Insolvency Act 1986, the trustees of the settlement being liable to repay sums paid to them. Section 423 is a remarkable flexible remedy in the appropriate circumstances and, it is now clear, can have extra-territorial effect (Erste Group Bank AG v JSC VMZ Red October [2015] EWCA Civ 379, Lady Justice Gloster at  [116]).

 

Receiver by way of equitable execution

 

Since the judgment of the Court of Appeal in Masri v Consolidated Contractors (No 2) [2008] EWCA 303; [2009] QB 450, there has been a perceptible willingness by the courts to use the appointment of a receiver by way of equitable execution to assist judgment creditors in enforcement.

 

A receiver by way of equitable execution is a receiver appointed by the court as a form of discretionary equitable relief to enforce payment of a judgment debt. The court may grant this type of relief in the special circumstances of a particular case, if the recovery of the judgment debt by the more usual processes of execution or attachment of debts is not practicable (Bourne v. Colodense Ltd [1985] ICR 291). The receiver can be appointed over whatever is considered in equity to be assets (Masri). Because the order for an appointment of a receiver operates in personam, there is nothing preventing a receivership order being made in relation to foreign assets (and orders over foreign assets are made - eg  Cruz City 1 Mauritius Holdings v Unitech Limited [2014] EWHC 3131 (Comm); [2015] 1 All ER (Comm) 336).

 

TMSF v Merrill Lynch Bank and Trust Co Ltd

 

In the case of TMSF v Merrill Lynch Bank and Trust Co Ltd [2011] UKPC 17; [2012] 1 WLR 1721, the Privy Council held that a receiver by way of equitable execution could be used, in effect, to open up a discretionary trust which had reserved various powers to the settlor. In TMSF the defendant judgment debtor was bankrupt, but he had previously established 2 discretionary trusts in the Cayman Islands, of which he was a beneficiary. These were not sham trusts, but they were trusts where the settlor had attempted to retain a substantial degree of control over the settlement.

 

As stated at the beginning of this article, the conventional view of discretionary trusts is that the beneficiary of a discretionary trust has no interest in the trust fund or any part of it, until such time as the beneficiary actually receives the whole or some part of the trust fund. Until then, there is nothing that can he described as an asset of the beneficiary to enforce against.

 

However, the defendant judgment debtor in TMSF, when establishing his discretionary offshore trust, had reserved the right as settlor of the trust to revoke the trust at any time. This attempt to retain control over the trust was what made the settlement vulnerable to enforcement.

 

The Privy Council took the view that the defendant judgment debtor’s power to revoke the trust he had settled was a right “tantamount to ownership”. As something that was “owned”, there was a discretion to appoint receivers by way of equitable execution over the “property” that was owned  . The judgment debtor was ordered to delegate his power of revoking the discretionary trusts to the receivers, so they could exercise them, receive the former trust assets and make them available to creditors.

 

JSC VTB Bank v Skurikhin

 

Finally, in JSC VTB Bank v Skurikhin [2015] EWHC 2131 (Comm), the court significantly extended the circumstances in which a receiver by way of equitable execution could be appointed over the assets of a discretionary trust (in Skurikhin it was a Liechtenstein discretionary foundation). The court accepted the proposition that property subject to a trust or analogous foreign arrangements would be regarded in equity as assets of the judgment debtor if (i) he had the legal right to call for those assets to be transferred to him or to his order; or (ii) if he had de facto control of the trust assets in circumstances where no genuine discretion is exercised by the trustee over those assets. Note that a situation where the trustee exercises “no genuine discretion” is very close to being a sham trust, but there is no hint in Skurikhin that a trust must be a sham if a receiver is to be appointed over the assets.

 

 

Jonathan Miller

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