UK: Getting At Trust Assets And Piercing The Corporate Veil

Last Updated: 9 November 2017
Article by Vannin Capital

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions