JSC Mezhdunarodniy Promyshlenniy Bank & Anor v Pugachev & Ors

As I say, I think I personally would rather deal with it sooner, rather than later, and I will deal with the questions of construction now, just to get them out of the way. The questions of construction which have been raised are those on the current WFO2, which is found in the order of Mr. Justice Snowden of 27^th August 2015. No question is now sought to be argued on para.8(1). It is accepted that that is limited to spending money on legal advice and representation for the relevant WFO Respondent; that is the trustees. No question arises on para.8(2), which deals with tax, and is expressly limited to tax due and payable by the WFO Respondents. A question has been raised on para.8(3), which reads as follows:

“This order does not prohibit the WFO Respondent from dealing with or disposing of any of its assets in the ordinary and proper course of any trading business carried on by it or any bodies corporate referred to para. 3 (4) above, provided that (i) no sums may be paid or assets transferred to the Defendant or to any company which is directly or indirectly and/or controlled by the Defendant and (ii) before doing so in respect of any asset or assets comprising part of a single transaction which has an aggregate value of more than £5,000, the WFO Respondent must give the Applicants’ legal representatives 24 hours’ written notice”.

Mr. Auld, while accepting that “trading business” would normally connote a business by way of some commercial activity, and that what trustees usually do, and what these trustees do, would not normally fall within that, has suggested that, in the context of this order made for these trusts, “trading business” must be given a wider meaning and he suggested that it meant the ordinary activities of the trust, which he suggested included the various things which he asks that his clients should be able to do, including making distributions or loans to beneficiaries to meet living expenses or legal costs, and including entering into the arrangement for the $800,000 payment under the funding arrangements.

In my judgment, “trading business” is not to be given anything other than its normal meaning. It is not irrelevant that the words, “ordinary and proper course of business”, form a standard part of freezing orders; the addition of “trading” must be intended to add something. Although, of course, the construction of every document in the end turns on the circumstances surrounding that particular document, the law places a high value on giving the same words the same meaning wherever possible, because it leads to a more predictable outcome of disputes. I do not see that the fact that what was involved here were the assets of trusts as leading to the court adopting any abnormal or wider meaning of the words “trading business” than they would normally bear.

It is certainly the case that some trusts do engage in commercial activities, but it is also the case that the normal activities of trusts, which are investing assets and distributing assets to beneficiaries, do not, in my judgment, form any part of a trading business. Nor do I regard loans or distributions to beneficiaries as any part of a trading business. Nor do I regard the funding arrangements, which are said to have taken place, as being in the ordinary and proper course of any trading business which the trusts are shown to have been engaged in. They are said to have been by way of an investment, and that does not, in my judgment, form part of a trading business. On the evidence before me, none of these trusts have had or have any trading business within the meaning of para.8(3) of this order.

The other point of construction that was raised is on para.8(4) of the order, which reads as follows:

“This order does not prohibit any of the WFO Respondents or bodies corporate referred to in para.3(4) above from dealing with or disposing of their assets in the ordinary and proper course of their day-to-day expenditure, including, without limitation, towards the upkeep, running and maintenance of their respective assets and to directors, employees, suppliers and service providers”.

That is then followed by two provisos which are in the same form as the provisos to para.8(3). Mr. Auld suggested that the activities of the trusts in making loans to the beneficiaries for the purposes of paying legal costs and in making payments to beneficiaries for the purpose of living expenses were part of day-to-day expenditure within the meaning of that paragraph. Again, I do not accept that submission. This paragraph when read as a whole seems to me to be fairly plainly directed at expenditure of the trustees on the administration of the trusts as opposed to distributions to beneficiaries.

The word “expenditure” suggests the spending of money on what would be regarded as trustees’ expenses; and the distinction between the administration of a trust in exercise of administrative powers, and distributions under the dispositive powers of a trust is a well-established distinction and this paragraph seems to me to be directed at the former. Mr. Auld suggested that “service providers” included lawyers who provide services and that that indicated that it was wide enough to include the provision of money to beneficiaries in order for them to secure legal representation or, as he suggested, payment direct to those lawyers. Again, that does not seem to me to be right. “Suppliers and service providers” seem to me to be words that should be read together and are in context to be confined to those who supply or provide services to the trustees in their capacity as trustees and not to extend to the payment of those who supply or provide services to beneficiaries, which is a form of distribution.

In the light of that, I do not think it necessary to go on to consider whether the proviso which prevents any assets being transferred to the Defendant would be infringed by payments to King & Spalding directly, although I have a considerable degree of sympathy with Mr. Smith’s submission that payment to Mr. Pugachev’s lawyers is a species of payment to him. I am reinforced in the view I have taken of para.8(4) by the fact that under para.9 of the same order the Defendant (that is Mr. Pugachev) and the Eleventh Respondent (that is his son, Victor Pugachev) were restrained from exercising any power, whether in their capacity as protector or otherwise, under the five declarations of trust and those declarations of trust, which I am told are all in the same form, contain in clause 4.5 provisions preventing the trustees from exercising certain powers without the prior written consent of the protector, one of which is by 4.5(b) a distribution of income and/or capital of the trust fund. That is reinforced by clause 5.2 which contains the main dispositive power of the trust under which the Trustees:

“shall stand possessed of the trust fund upon trust … at any time or times prior to the Date of Distribution with the prior written consent of the Protector to apply or vest or transfer such part or parts of the income arising from the Trust Fund or of the capital of the Trust Fund as it thinks fit for or towards the maintenance, education, advancement or benefit of such of them the Discretionary Beneficiaries as are from time to time living or in existence or any one or more of them to the exclusion of the others or other of them, in such shares and proportions and generally in such manner as the Trustee thinks fit and regardless of whether there is any other fund available for the purpose.”

It does seem to me, and I have been shown part of the transcript of the hearing before the Court of Appeal which suggests that this was not inadvertent but was part of the material put before the Court of Appeal, that that order has the effect of preventing the trustees, so long as it remains in place, from exercising any powers under 5.2 to distribute income or capital, because they can only do it with the consent of the protectors and the protectors are restrained from exercising their powers. That reinforces the conclusion I have already come to that para.8(4) is limited to administrative expenses and does not extend to dispositions under dispositive powers.

It is not clear to me if Mr. Auld was still pursuing the suggestion that the $800,000 was “day-to-day expenditure” within the meaning of para. 8(4), but, in my judgment, it does not come within this paragraph either. I do not regard expenditure of that type as being day-to-day expenditure. In any event, as Mr. Smith pointed out, it has to be in the “ordinary and proper course” of their day to day expenditure and although I have not seen the funding arrangements, the description of it by Mr. Smit includes a description whereby the trustees, in return for agreeing to make that sum and possibly other sums available for payment of Mr. Pugachev’s legal costs, took an assignment of a share (unspecified) of the proceeds of the BIT arbitration claim, something which on the face of it would appear to be in breach itself of the freezing order made against Mr. Pugachev. I am not persuaded that the payment of the $800,000 was in the ordinary and proper course of day-to-day expenditure.

I believe that those are the only construction issues which have been pursued before me by Mr. Auld, but I am sure he will tell me if I am wrong.