CL-2022-000456 - [2025] EWHC 1938 (Comm)

The Syria FAQ document explains the criteria of ownership as follows:

“Ownership

When assessing whether a legal person or entity is owned by another person or entity, the relevant criterion is the possession, directly or indirectly of all or almost all of the share capital. Where the share capital is entirely owned by the listed entity, this will suffice to establish ownership and this applies even if there are intermediary companies. In instances where there is a lesser shareholding, it will be necessary to examine the factual situation to see whether there is control.”

The Claimants argued that “ownership” in this context is limited to direct, legal ownership. If correct, this would be surprising, because it is obvious that such a restricted approach to “ownership” would effectively neuter Article 269 entirely, and so would frustrate its purpose.

On the question whether direct ownership is required, I have already set out the explanation in the Syria FAQ document, which states that indirect possession of share capital is sufficient. That document cites the decision of the European Court of Justice in Melli Bank v Council C-380/09P (ECLI:EU:C:2012:137), but a clearer judgment of that court is that in HTTS Hanseatic Trade Trust & Shipping GmbH v Council Case C-123/18P (ECLI:EU:C:2019:173; EU:C:2019:694). (Footnote: ⁷) In the context of sanctions under a different EU Regulation, intended to prevent nuclear proliferation, the Court said at [69]-[71]:

“[69] The use by Regulation No 961/2010 of the terms “owned” and “controlled” reflects the need to enable the Council to adopt executive measures against all persons, entities or bodies linked to companies involved in nuclear proliferation. It follows that the ownership or control may be direct or indirect. If that link had to be established solely on the basis of the direct ownership or control of those persons, the measures could be circumvented by numerous contractual or de facto possibilities of control, possibilities which would confer on a company opportunities to exert influence over other entities that are as extensive as in the case of direct ownership or control.

[70] Thus, as the General Court pointed out in para 55 of the judgment under appeal, the concept of a company owned or controlled does not have, in the area of restrictive measures, the same meaning as it generally has in company law, where it serves to ascertain the commercial liability of a company which is legally subject to the control, as regards decision-making, of another commercial entity.

[71] In para 56 of the judgment under appeal, the General Court held that, in the context of assessing the legality of a restrictive measure, what is contemplated by that concept is a situation in which the natural or legal person involved in nuclear proliferation is able to influence the commercial decisions of another person with which it has a commercial relationship, even in the absence of any legal tie between the two economic entities, or any link in terms of ownership or equity participation.”

This illustrates how the purpose of the Regulation affects the interpretation of “ownership”, and indeed of “control”. A broad meaning is required.

As regards the question whether beneficial ownership will suffice, I note that the Italian courts’ requests for preliminary rulings specifically address the position of a beneficiary under a trust, including a discretionary beneficiary, and suggest that such a person may be said to “hold” the relevant asset or entity within the meaning of Article 2(1). In relation to a conventional, bare beneficial interest, this must be correct, although I would add that such an interest would also fall within the words “belonging to”.

In fact, the Claimants’ arguments on ownership largely focussed on the fact that Mr and Mrs Melnichenko have only ever been discretionary beneficiaries. They said that a beneficiary of a discretionary trust has no proprietary interest in the assets of the trust, but only the right to have the trustees administer the trust according to its terms. They cited Gartside v IRC [1968] A.C. 553, at p. 607; Pearson v IRC [1981] AC 753, at p.773.

I accept that a discretionary beneficiary does not have a proprietary interest, as a matter of English law – at any rate, subject to JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch), which I consider in Section XXXIV below. I also accept that the same position applies as a matter of Bermudian law, which governs the Firstline Trust Deed. It may follow that a discretionary beneficiary cannot be said to be the “owner” of the trust property, as a matter of English law or Bermudian law.

However, that is not the right question. It cannot be assumed that the test to be applied under Article 2(1) (or Article 2(2)) is the same as under English law or Bermudian law.

Whether an entity that is indirectly subject to a discretionary trust can be said to be owned by the discretionary beneficiary of that trust – or to belong to or be held by that discretionary beneficiary – will presumably be addressed by the preliminary rulings requested by the Italian courts. However, at least in a general sense, this question has in fact already been answered by the General Court, in the context of the case brought by Mr Melnichenko, T-271/22, and the further case brought by Mrs Melnichenko, T-498/22. I note that the decisions of the General Court in these cases both post-date the requests lodged by the Italian courts, which is why they were not taken into account in those requests.

In T-271/22, one of Mr Melnichenko’s main arguments was that he had neither owned nor controlled the EuroChem group or the SUEK group since 2016, when the original Firstline Trust had been established; he also relied on his retirement as discretionary beneficiary in March 2022. He said that, because he had neither owned nor controlled the groups at any relevant time, he could not be considered a “leading Russian businessman” and so should not have been designated.

These arguments were rejected by the General Court at [70]-[71] and [73]:

“[70] In the present case, it should be noted that the trust FirstLine Trust was created, as the applicant acknowledges, in order to protect and safeguard his substantial wealth. It is common ground that, in 2006, the applicant transferred to the trustees of that trust all his shares in SUEK and EuroChem which enabled him to control those two companies, and that he became the first beneficiary of the trust. Thus, between 2006 and 8 March 2022, the applicant was both the settlor and the first beneficiary of FirstLine Trust which is, according to Annex A.10 produced by the applicant, the owner, through two companies established in Cyprus, of a portfolio of majority shareholdings in EuroChem and SUEK.

[71] Therefore, by setting up the trust and designating himself as its beneficiary, the applicant retained, through the companies and intermediate structures referred to in paragraph 70 above, economic interests in EuroChem and SUEK. The fact that the appellant used an intermediate legal structure, such as a trust, is not such as to prevent it from being regarded as the holder of the shareholdings managed by that trust for the purposes of the application of criterion (g). It follows that it may be considered that the applicant, in his capacity as settlor and beneficiary of FirstLine Trust, continued to hold, from an economic point of view, shareholdings in EuroChem and SUEK.”

“[73] Therefore, since the applicant was the settlor and beneficiary of the trust which manages his shareholdings in EuroChem and SUEK, the Council did not make an error of assessment in considering, in the grounds for the initial acts, that he was the owner of those two companies.”

Similar reasoning was repeated at [97], again resulting in the conclusion that Mr Melnichenko was (or had been, prior to March 2022) “the holder of the shareholdings” managed by the Firstline Trust.

Then at [106]-[107] the General Court considered a legal opinion concerning the Firstline Trust, which was produced and relied on by Mr Melnichenko. I have not seen this opinion, but I have no doubt that it explained the nature of the trust in similar terms to those relied on before me by the Claimants – i.e., that a discretionary beneficiary does not have a proprietary interest, and cannot be said to be the “owner” of the trust property, as a matter of English law or Bermudian law. The General Court did not accept this, saying at [107]:

“[107] Moreover, it is apparent from the analysis set out in that document that the concept of ownership in a formal sense is discussed, without considering whether the fact that the applicant was designated as the first beneficiary of the trust may indicate that his economic interests in the companies concerned remain.”

The General Court also dismissed the arguments relating to Mr Melnichenko’s retirement as discretionary beneficiary, in March 2022; see in particular at [74], [98] and [102], where the General Court queried the timing of the retirement and effectively treated Mrs Melnichenko as her husband’s proxy.

The judgment of the General Court in T-498/22 does not seem to me to advance matters greatly, but it is consistent with the General Court’s earlier judgment in T-271/22.

I acknowledge that in neither case was the General Court required to focus on Article 2(1) of Regulation 269. Nevertheless, in T-271/22 it clearly stated, in the general context of the Regulation and with the purpose of that Regulation firmly in its mind, that Mr Melnichenko still was the “holder” of the Firstline Trust’s indirect shareholding in the EuroChem group, and was its “owner”. It seems to me likely that the European Court of Justice will adopt this reasoning when it provides the preliminary rulings requested by the Italian courts.

The Claimants referred me to the Best Practices guidance at paragraph 63, which states as follows:

“63.

The criterion to be taken into account when assessing whether a legal person or entity is owned by another person or entity is the possession of 50% or more of the proprietary rights of an entity or having majority interest in it. If this criterion is satisfied, it is considered that the legal person or entity is owned by another person or entity.”

It seems unlikely that this was written with trust issues in mind, and especially not the English/Bermudian law analysis of the rights of a discretionary beneficiary. Furthermore, while informative, it does not have the status of a judgment of the General Court (and, especially, one that post-dates it). In any event, to focus only on black-letter textual points such as the words “proprietary rights”, rather than considering the purpose of the Regulation, would be precisely the wrong approach to interpreting Article 2.

I therefore do not accept the Claimants’ case on “ownership”, for the purposes of Article 2. A beneficiary under a discretionary trust is the owner of the trust assets (alternatively, is the person to whom the assets belong or is their holder), for the purposes of Article 2, even if not as a matter of English or Bermudian law.