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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> JSC Mezhdunarodniy Promyshlenniy Bank & Anor v Pugachev & Ors  EWHC 2426 (Ch) (11 October 2017)
Cite as:  EWHC 2426 (Ch)
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Rolls Building, Fetter Lane,
London, EC4A 1NL
B e f o r e :
| (1) JSC MEZHDUNARODNIY PROMYSHLENNIY BANK
(2) STATE CORPORATION "DEPOSIT INSURANCE AGENCY"
|- and -
|(1) SERGEI VIKTOROVICH PUGACHEV
(2) KEA TRUST COMPANY LIMITED
(3) FINETREE COMPANY LIMITED
(4) BRAMERTON COMPANY LIMITED
(5) BLUERING COMPANY LIMITED
(7) HAPORI LIMITED
(9) AROTAU LIMITED
(10) LUXURY CONSULTING LIMITED
(11) VICTOR SERGEYEVITCH PUGACHEV
(12) ALEXIS SERGEEVICH PUGACHEV
(13) IVAN SERGEEVICH PUGACHEV
(14) MARIA SERGEEVNA PUGACHEV
(The 12th, 13th and 14th Defendants by their litigation friend ALEXANDRA TOLSTOY)
HODGE MALEK QC and PAUL BURTON (instructed by DEVONSHIRES SOLICITORS LLP) appeared on behalf of the Twelfth to Fourteenth Defendants.
Hearing dates: 4th, 5th, 10th - 13th, 28th 31st July
Crown Copyright ©
Mr Justice Birss:
|Introduction and narrative||1|
|The terms of the trust deeds||103|
|Discretionary trusts, protectors and fiduciaries||173|
|The involvement of Victor and his father as sources of assets||204|
|The True Effect of the Trusts claim||212|
|Preliminary general points||214|
|Exclusion and indemnity clauses||216|
|The position of Protector||222|
|What if the Protector's powers are personal?||234|
|Are the Protector's powers purely personal?||248|
|The nature and scope of the Protector's powers – conclusion||265|
|The Sham claim||279|
|The subsidiary characters – Ms Hopkins and Mr Pugachev's lieutenants||283|
|Mr Patterson as a witness||308|
|Dealings with trust assets without Mr Patterson's knowledge and agreement||312|
|and (c) Mr Pugachev as settlor||325|
|Not aware of any basis for the trusts being shams||336|
|Only link to the OPK trusts was as corporate administrator||341|
|Mr Patterson's trust law article||347|
|No distributions to Mr Pugachev from the trusts before the freezing order||350|
|Mr Pugachev exercising control via Ms Dozortseva||353|
|Mr Patterson as a witness - conclusion||357|
|The establishment of the trusts||359|
|The operation of the trusts||381|
|Trust and non-trust assets administered interchangeably||384|
|Administration did not change after property put into trusts||392|
|Mr Patterson's involvement was limited to formalities||401|
|Mr Pugachev referred to as beneficial owner after transfers into the trusts||403|
|Operation of the trusts - conclusion||407|
|The loans and the appointment of the New Trustees||410|
|Considering sham as a whole||422|
|Sham and the true effect of the trusts||438|
|The s423 claim||443|
|Summary of conclusions||453|
Introduction and narrative
"However, of greater concern is the possibility that you choose to disclose only those assets believed to be identifiable and recorded in the public domain. If it is proven that you have wilfully withheld information, your opposing party may appeal to have you held in contempt of court. If such an appeal was upheld you may lose the ability to defend the action, regardless of the strength of the initial case against you."
Proceedings start in London
The trustees seek directions from the New Zealand court
Further proceedings in London and in Russia
Replacement of the original trustees with new trustees
Committal of Mr Pugachev for contempt of court
Further events in 2016
"US$700 million of a US$1 billion bail-out handed to the Bank by the Central Bank of Russia (almost certainly necessitated by earlier thefts from the Bank by Mr Pugachev) was swiftly moved in December 2008 to the Swiss bank account of a newly incorporated Cypriot company, Safelight Enterprises Limited, whose director was Alexander Pugachev, Mr Pugachev's then 21-year old son."
"123 In December 2008 and January 2009, very shortly following the receipt of the Central Bank funds, RUR 28,810,800,000 (then equivalent to approximately US$ 900 million) was withdrawn from an account at the Bank in the name of CJSC OPK Development ("OPK Development"), which formed part of the OPK Group (MGR2/29-30). I shall refer to the funds as the "OPK Deposit". (I understand that the Investigative Committee has concluded that the OPK Deposit never in fact truly existed and that the relevant deposit agreements were forged to facilitate the theft of the monies from the Bank by the creation of a book entry falsely showing a credit balance in favour of OPK Development.)
"it became clear that at least a significant proportion of those monies had been channelled into (or through) a number of Mr Pugachev's other assets and overseas business interests, including the Villa that is now in the Riviera Residence Trust, Hediard SA and OPK Biotech, and large unexplained amounts had apparently been transferred to his eldest son, Victor."
The Tolstoy family
The terms of the trust deeds
"The trustee wishes to declare this trust and has accordingly transferred and irrevocably settled the sum of TEN DOLLARS ($10) upon the trustee to be held by the trustee upon the trusts and with the powers, authorities and discretions declared in this deed or conferred on the trustee by the law."
"(i) SERGEI VICTOROVITCH PUGACHEV;
(ii)VICTOR SERGEYEVITCH PUGACHEV and ALEXANDER SERGEYEVICH PUGACHEV the sons of SERGEI VICTOROVITCH PUGACHEV;
(iii) ALEXANDRA TOLSTOY the partner of SERGEI VICTOROVITCH PUGACHEV;
(iv) ALEXIS SERGEIVICH PUGACHEV and IVAN SERGEIVICH PUGACHEV the children of SERGEI VICTOROVITCH PUGACHEV and ALEXANDRA TOLSTOY;
(v) The children of Sergei Victorovitch Pugachev hereafter born or adopted;
(vi) The grandchildren and remoter issue of Sergei Victorovitch Pugachev;
(vii) Such other person or person, charitable trust, foundation, institution or other body corporate or unincorporated (whether now in existence or established hereafter) established exclusively for any objects or purposes recognised as charitable by the laws of New Zealand as the Protector shall before the Date of Distribution either revocably or irrevocably appoint by deed PROVIDED THAT the Protector shall have no power to appoint the Trustee as a Discretionary Beneficiary;
BUT shall not include any person whether previously a Discretionary Beneficiary or not who has been declared pursuant to clause 12.1 to have ceased to be or not to be capable of being a Discretionary Beneficiary."
"Protector" means the person or persons from time to time acting as Protector and the "First Protector" means Sergei Victorovitch Pugachev.
"in relation to any person means any event of happening which renders the person temporarily or permanently incapable of exercising free will and includes imprisonment or other form of involuntary detention, being subject to coercion or duress whether physical or mental, including coercion by operation of law, and suffering from mental disorder as defined in the Mental Health (Compulsory Assessment and Treatment) Act 1992 or any enactment amending or replacing that Act (as to which a certificate in writing given to the Trustee by a duly qualified medical practitioner shall be conclusive and binding) AND a person shall be deemed to be Under a Disability if the person has disappeared or otherwise not been heard from despite the best endeavours of the Trustee to contact the person over a period of not less than 2 months."
"3.1 The Trustee shall stand possessed of the Trust Fund upon the terms contained in this Deed.
3.2 The Trustee shall be at liberty prior to the Date of Distribution to accept on trust any money, investments or other property of whatsoever nature and wheresoever situation from any person, or by will or by the provisions of any other trust or otherwise. Such money, investments or other property shall be held by the Trustee as an accretion of the Trust Fund.
3.3 The Trust is irrevocable."
4.1 The Protector shall be:
(a) Sergei Victorovitch Pugachev while he is living and not Under a Disability and after death of Sergei Victorovitch Pugachev or while he is Under a Disability Victor Sergeyevitch Pugachev;
(b) Subject as above such person as the Protector for the time being may appoint in writing, revocably or irrevocably;
(c) If there is no Protector for the time being such person as the Trustee may appoint in writing, revocably or irrevocably.
4.2 Resignation and Disability
Any Protector may resign by notice in writing to the Trustee, If any Protector being a natural person is Under Disability or is bankrupt or being a body corporate is in receivership or liquidation, that Protector shall automatically and immediately cease to serve as a Protector.
The Protector shall have the right to request information from the Trustee and such requests shall not be unreasonably refused.
The Protector shall be entitled to reimbursement of reasonable expenses incurred as part of their role as Protector and any such remuneration fir their services as may be reasonable having regard to their duties and responsibilities as Protector.
4.5 Protector's Consent Required
Notwithstanding any provision in this deed conferring an absolute or uncontrolled discretion on the Trustee, the following powers and discretions which are vested in the Trustee by the provisions of this deed, shall only be exercisable after the Protector has been given fourteen (14) days prior written notice and the Trustee has received the prior written consent of the Protector:
(a) Specification of a Date of Distribution that is earlier than eighty (80) years (clause 1.1(b));
(b) Distribution of income and/or capital of the Trust Fund (clauses 5.2, 5.3, 5.4 and 5.5);
(c) Investment of the Trust Fund (clause 9);
(d) Declaring that any person shall cease to be a Discretionary Beneficiary and/or shall not be capable of being a Discretionary Beneficiary (clause 12);
(e) Variation of this trust deed (clause 13.1); and
(f) Releasing and revoking any power conferred on the Trustee by this deed (clause 14.1).
4.6 Power for Protector to direct sale of residential property
(a) The First Protector may by written instruction to the Trustee direct the Trustee to sell the residential property forming part of the Trust Fund on such terms and conditions as the Protector shall direct and the Trustee shall act in accordance with such direction. The net proceeds of sale shall then be held upon the trusts declared in clauses 5.2-5.5 of the Trust Deed (but with power thereafter with the written consent of the Protector to purchase a further residential property).
(b) If the First Protector has died or is Under a Disability the Protector for the time being may also instruct the Trustee in writing to sell the residential property PROVIDED
(i) such instruction may only be given if all the children born to Alexandra Tolstoy and the First Protector have attained the age of 21 years or subclause (d) applies; and
(ii) The Trustee has pursuant to clause 1.1(b) of the Trust Deed (with the written consent of the Protector) declared an earlier Date of Distribution of the Trust Fund TO THE INTENT that the net proceeds of sale of the residential property will be distributed pursuant to clause 5.5 of the Trust Deed.
(c) The Protector may also exercise the power conferred by clause 4.6(a) above if he is satisfied that Alexandra Tolstoy and her children are in financial distress and that it is desirable that the residential property be sold so that clauses 5.2-5.4 of the Trust Deed can take effect.
(d) The provisions of clause 4.6(b) also apply if more than two thirds of the trust beneficiaries (being those beneficiaries named or described in clause 1.1(c) of the Trust Deed) advise the Trustee in writing that they wish the residential property to be sold. If a trust beneficiary is under the age of 18 years the Trustee may accept written instruction signed on behalf of such beneficiary by its legal guardian."
"5 The Trustee shall stand possessed of the Trust Fund upon trust as follows:
5.1 In respect of any residential property (subject to clause 4.6|)
(a) to permit SERGEI VICTOROVITCH PUGACHEV together with such other persons as he may from time to time permit personally to reside in the residential property and to use and enjoy the furniture and household effects in the residential property free of rent and otherwise subject to such reasonable terms and conditions as the Trustee may think fit including if the Trustee thinks it fit keeping the residential property insured against such risks as the Trustee may require to its full insurable value and paying all rates and taxes and other outgoings payable in respect of the residential property and keeping it in the same state of repair as it was in at the date on which it became an asset of the Trust Fund fair wear and tear damage by fire flood tempest earthquake and other inevitable accident excepted PROVIDED THAT if at any time SERGEI VICTOROVITCH PUGACHEV does not wish to reside in the residential property he may require the Trustee to lease the same on such terms as the Trustee thinks fit and the net rentals shall be treated as income arising under clause 5.2; and
(b) After the death of SERGEI VICTOROVITCH PUGACHEV or if he is Under a Disability to permit his partner ALEXANDRA TOLSTOY to have a similar right of residence until all children she has had with SERGEI VICTOROVITCH PUGACHEV have reached the age of 21 years or sooner died"
"At any time prior to the Date of Distribution with the prior written consent of the Protector to pay apply, vest or transfer such part or parts of the income arising from the Trust Fund or of the capital of the Trust Fund as [the trustee] 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 of 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."
"5.4 Notwithstanding any of the foregoing provisions of this clause 5 until the Date of Distribution the Trustee with the prior written consent of the Protector shall have the following additional powers:
(a) by irrevocable deed to vest in any Discretionary Beneficiary the whole or such part of the Trust Fund as the Trustee in its absolute discretion thinks fit whether or not it is otherwise probable that such person would have become entitled pursuant to the provisions of this deed to any part of the Trust Fund.
The minimum number of Trustees of this trust shall be one PROVIDED that at all times one trustee is not a person who is for the time being a Discretionary Beneficiary. The power of appointment of new Trustees shall be vested in the Protector."
"the Protector shall also have the following powers namely
(a) to remove any existing Trustee with or without cause,
(b) to appoint at any time or times an additional Trustee or additional Trustees of this Trust
(c) upon the retirement of the Trustee of this Trust to appoint a new Trustee or Trustees".
"When a Trustee resigns, retires is removed or stops acting as Trustee for any other reason, that Trustee shall duly surrender or transfer all Trust property (including written or electronic documentation) in his possession or under his control to the remaining or successor Trustee or Trustees AND such Trustee ("the Retiring Trustee") is deemed to irrevocably appoint the Protector on behalf of the Retiring Trustee and in the Retiring Trustee's name or otherwise to do all things and execute all documents as are necessary to vest the Trust Fund or any part of the Trust Fund in the continuing or any new Trustees of the Trust Fund and no person shall be concerned to enquire into the validity of such a vesting."
"The Trustee shall not be liable for and shall be indemnified by and out of the Trust Fund in respect of any loss or liability which may be sustained or incurred by reason of the exercise of any of the powers of investment herein conferred".
"11.1 The Trustee shall not be liable for and shall be indemnified by and out of the Trust Fund in respect of any loss or liability which may be sustained or incurred by reason of the exercise, the mode of exercise, or the non-exercise of any of the powers, authorities, or discretions hereby or by law conferred upon it AND no Trustee shall be liable for:
(a) Any loss not attributed to dishonesty or to the wilful commission or omission by the Trustee of an act known to the Trustee to be a breach of trust.
(b) The neglect or default of any solicitor, bank accountant, auditor, stockbroker, investment advisor or other agent employed in good faith by the Trustee.
(c) Any claim made against the Trustee by any beneficiary or any creditor or any other person having any claim whatsoever against the Trust Fund which cannot be satisfied because of any resettlement or other distribution of any or all of the Trust Fund to or for the benefit of any Discretionary Beneficiary
AND in particular no Trustee shall be bound to take any proceedings against a co-Trustee or former Trustee for any breach or alleged breach of trust committed by such co-Trustee or former Trustee."
"12.1 Not withstanding the foregoing provisions of this deed IT IS DECLARED that the Trustee with the prior written consent of the Protector may at any time or times prior to the Date of Distribution by deed revocable or irrevocable declare that the Discretionary Beneficiaries shall cease to include any person or persons named or described in such deed or that any person or persons named or described in such deed shall not as from the date such deed comes into effect and while such deed is in effect be capable of being a Discretionary Beneficiary."
"13.1 Prerequisite: The Trustee may vary or amend any of the provisions contained in this deed with the prior written consent of the Protector."
The other trust deeds
i) In all four of the other trusts the named or described Discretionary Beneficiaries do not include Victor or Alexander Pugachev nor do they include Ms Tolstoy. The definitions name Mr Pugachev and his children by Ms Tolstoy. Like the London Residence Trust they also include after born children of Mr Pugachev (nb not necessarily by Ms Tolstoy). In the other trusts the clause about grandchildren and remoter issue is limited to Mr Pugachev and Ms Tolstoy, unlike the drafting of the London Residence Trust.
ii) There are no residence terms in the other four deeds equivalent to the one in the London Residence Trust.
"identify the meaning of the relevant words (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known and assumed by the party or parties at the time of execution of the document, and (v) common sense, but (b) ignoring subjective evidence of the parties' intentions."
Underhill & Hayton Art 8.1(2)
ii) Illusory trusts
iii) Discretionary trusts, protectors and fiduciaries
"...it is I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived".
"The two situations (valid trust and sham trust) do not fall into combination. The finding that the purported trust is void as a sham does not amount to an invalidation of a trust. It is not the trust as such which is a sham. There is no trust to be a sham. It is the trust documentation that is the sham
"The test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties."
"a sham transaction will still remain a sham transaction even if one of the parties to it merely went along with the "shammer" not either knowing or caring about what he or she was signing." (p245 g-h)
i) A finding of sham requires careful analysis of the facts. External evidence is relevant. The fact that an arrangement is artificial is not the same as saying it is a sham. The fact that parties subsequently depart from an agreement does not necessarily mean they never intended the agreement to be effective. (para 33, all these matters derive from Hitch v Stone);
ii) The unilateral intentions of the settlor are not enough to establish a sham (para 34-40);
iii) For a sham there must be a common intention (para 52);
iv) Reckless indifference will be taken to constitute a common intention. That is the way to interpret the point made in Midland Bank about a person "going along with" the shammer neither knowing or caring about what he or she is signing (para 49-52);
v) A trust which is not initially a sham cannot subsequently become one (para 42);
vi) A finding of sham is a serious matter (para 53) especially for professional trustees (para 54).
"the concatenation of rights and powers in the settlor, when coupled with the fact that he was the sole trustee at the time of the constitution of the trusts, rendered this trust illusory during his lifetime…the cumulative effect of the trust documents, when taken with the de facto situation, means that the settlor as trustee could not effectively be called to account in his lifetime."
"We agree with the Court of Appeal that, if Mr Clayton had a non-fiduciary power as Principal Family Member to make himself the sole beneficiary under the VRPT deed, the effect of the exercise of that power would be analogous to the revocation of the VRPT, justifying the application of the same analysis as in TMSF. [….]"
"The concept of "illusory trust" was described by Rodney Hansen J as a trust under which the trustee retains such control that the proper construction is that he did not intend to give or part with control over the property sufficient to create a trust. The essence of the concept appears to be that the trust as constituted has the attributes of a trust, including the imposition on the Trustee of the obligation to act honestly and in good faith; but the powers given to the Trustee and, we would add in this case, the Principal Family Member, given that Mr Clayton had both roles, are so broad that the Trustee can 'basically … do whatever he wants with the property'."
"We will come back later to the distinction between a sham and an illusory trust. For the present we observe that a finding that a trust deed is not a sham does not seem to us to preclude a finding that the attempt to create a trust failed and that no valid trust has come into existence. That would lead to a finding that the trust is illusory, to use the terminology adopted in the Courts below. For our part we do not see any value in using the "illusory" label: if there is no valid trust, that is all that needs to be said."
"In the present case, Mr Clayton intended to create a trust on the terms recorded in the VRPT deed. The issue would be whether the powers held by Mr Clayton are so broad that what he intended to be a trust was not, in fact, a trust. As already noted, we are not determining that issue."
The irreducible core
"there is an irreducible core of obligations owed by trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts."
Discretionary trusts, protectors and fiduciaries
"13. A beneficiary under a discretionary trust has a right to be considered as a potential recipient of benefit by the trustees. That is an interest which equity will protect. The trustees must apply some objective criterion in deciding whether or not to exercise their discretion in favour of a particular beneficiary; so that each beneficiary has more than a mere hope. But that right is not a proprietary interest in the assets held by the trustees, although it can be described as an interest of sorts: Gartside v IRC  AC 553, 617-8. In some areas of the law, such as matrimonial finance, legislation is drawn widely enough to enable the court to take into account the likelihood that trustees will exercise their discretion in favour of a particular beneficiary in deciding what provision to make for a former spouse on divorce: Whaley v Whaley  EWCA Civ 611. But even then the trust assets are not owned by the beneficiary spouse."
15. On the face of it assets held by the trustees of a discretionary trust would not be amenable to execution if judgment is entered against one of the class of potential beneficiaries at the suit of a third party. The trustees might in such circumstances decide to confer a benefit on the beneficiary to save him from bankruptcy; but that would be a matter for them. If they did exercise their discretion in favour of a particular beneficiary the amount of the benefit would thereupon cease to be a trust asset and would become the asset of the beneficiary. It would then truly be his asset."
Textbooks and other articles
"Finally, it is fair at this juncture to refer to the existence of what might be regarded as a different approach to the role of protectors from that favoured above. The cornerstone proposition of the approach favoured above ('the wide view') is that although a protector may be in a fiduciary position, this is not necessarily the case: it all depends upon the circumstances. The alternative school of thought ('the narrow view') views the protector as the holder of a fiduciary office. By definition classified as a fiduciary, the protector, according to the narrow view, has an irreducible core of duties imposed upon him. It is submitted that the distinction between the wide and narrow views is largely semantic. For it cannot, surely, be disputed that it is possible to nominate a person with a non-fiduciary watchdog role under the express terms of a trust deed. If this is not the case, the expectations of many settlors and their advisers will be disappointed. To say that a person is a fiduciary is (as Frankfurter J once observed) the beginning, not the end, of analysis to which we would add that to say that a person is not a fiduciary is not the end of the analysis. It should not, in our view, be supposed that the courts will be powerless to review the actions of a protector simply because he is not in a fiduciary position. The court's general jurisdiction to secure the good administration of trusts should, in principle, enable the court to intervene even if, for example, the trust instrument in terms lays down that the protector is to owe no fiduciary duties."
"1.86 … if [a settlor] is a discretionary object of a trust or power and has a personal power (expressed to be unchallengeable in the courts in every respect unless its exercise contravenes the fraud on a power principle) from time to time to replace the current trustee with a new one, there is a danger that the trustee will be regarded as in his thrall, so that the trust is in substance a bare trust for the settlor….
71.7 Where a power to remove trustees by replacing them with new trustees is vested in a beneficiary who is the primary object of the settlor's bounty and whose power is not restricted to a few specified eventualities, the obvious inference is that the power has been conferred on the beneficiary to look after his own personal interests and not those of the beneficiaries as a whole…"
Judgments in England
"55. Assuming that the protectorship regime was validly introduced, the protectors have four principal functions to perform in relation to the administration of the trusts. First, they have power to give or withhold consent to any exercise by the Trustees of their beneficial powers of appointment, or revocation of earlier appointments, from time to time. Secondly, they have power to remove any trustee from office, with or without cause, provided that there will still remain a minimum number of trustees. Thirdly, they have a contingent power to appoint new trustees which will be exercisable only after the death or incapacity of both Settlors. Finally, the protectors may together appoint new protectors. These powers are fiduciary, and they must be exercised in the interests of the beneficiaries. The protectors do not, however, have a general power or duty to supervise the administration of the Settlements, and they may only apply to the court for relief which relates to the proper exercise of their own powers.
56. I would provisionally accept these submissions, which appear to me firmly based on general principles of trust law and to reflect the limited nature of the powers conferred on the Protector by the 2003 Deeds. In the light of these principles, I can now examine the main forms of relief sought by Mr Haringman."
"Collectively, these authorities establish that the right to nominate a trustee, even when it resides with a beneficiary, is likely to impose fiduciary obligations. That will not always be the case. Everything depends upon the intentions of the settlor and the surrounding circumstances."
" The debate about whether, in any given case, a protector exercises a fiduciary or personal power may be arid because of the need, in either event, for the power to be exercised for proper purposes. The doctrine of fraud on a power is equally applicable to both types of power. The inquiry focuses on whether the power has been exercised for a purpose, or with an intention, that goes beyond the scope of or is not justified by the instrument creating the power."
" Whether, in this case, the Protector is or is not labelled a fiduciary is unlikely to affect the duty cast upon the Protector to exercise powers to promote the objects of the trust. There is nothing in the Declaration to suggest that the basic duty of loyalty to beneficiaries has in any way been compromised its terms. As Matthew Conaglen and Elizabeth Weaver have said:
'The paramount consideration is the settlor's intention, as derived from construction of the trust documentation. Not only will that determine whether the protector is a fiduciary, but also what sort of a fiduciary role the protector has. As we have shown, the fiduciary label can cover a number of situations and fiduciary and personal powers can co-exist in the hands of a protector. Where the purpose and intention of the settlor was that the protector was also to be able to benefit under the trusts, the courts will usually respect that intention and not find fiduciary obligations which would disable the protector from acting in his own interest, although they might still hold that the protector owes limited or qualified fiduciary duties to consider the exercise of his powers on a regular basis. On the other hand, the cases show that powers which impinge upon the trustees' position as 'ultimate guardians of the trust' are likely to be treated as fiduciary, to some degree at least, so that the court can retain a supervisory jurisdiction. We suggest that it is unlikely that the court will allow that supervision to be avoided by language purporting to free the protector from any fiduciary obligations, but, again the touchstone is always the settlor's objectively determined intention.'
Protectors and fiduciaries – conclusion
i) What matters is whether or not a power given to a protector is purely personal, in the sense that it can be exercised in the protector's own selfish interests. A power will not be purely personal if it must be exercised for a purpose, such as having regard to the interests of the Discretionary Beneficiaries as a whole or in order to promote the objects of the trust. In that case the exercise of the power will be subject to the court's supervision.
ii) In this case there is no need to make a distinction between a power conferred for a purpose which takes into account the interests of the Discretionary Beneficiaries as a class and a fiduciary power. Even if they differ in other cases, they do not differ in this case. So I will use the terms "fiduciary" and "purely personal" to draw the distinction which matters in this case.
iii) The task of determining the scope and nature of a power conferred in the deed is one of construction of the deed, taking into account all relevant circumstances (which do not include the subjective intentions of the settlor). A relevant consideration is whether the donee of the power also has other roles such as trustee, discretionary beneficiary and/or settlor. Also relevant will be the actual powers conferred and their effect both individually and together. The task of construction is to consider objectively what the purpose is for which the power has been conferred. Putting it another way, the question is: for whose benefit, as a matter of construction of the trust deed, has the power been given?
The involvement of Victor and his father as sources of assets
London Residence Trust
i) Victor transferred £12.5 million into Kea Trust Company Ltd's bank account on 5th December 2011 to fund the purchase of Old Battersea House on 6th December. The London Residence Trust was declared on the 6th.
ii) Victor transferred further sums into the London Residence Trust in late 2013. Mr Patterson's understanding was that these were to fund the renovation of the Old Battersea House and he prepared a number of deeds of gift relating to these payments. There was one in October 2013 for $8.8 million, one on 22nd November for $5 million. The defendants interpret the $8.8 million as going into the Kea Three Trust rather than the London Residence Trust (the two trusts have the same trustee although they appear to have had distinct accounts run by Oakhill Management in 2013) although Mr Patterson's evidence relates this payment to the London Residence Trust.
Kea Three Trust
iii) Mr Pugachev himself had provided £4.125 million to Redflame in July 2010 as a loan to purchase 53 Glebe Place. When 54 Glebe Place was bought, the money came from Victor as another loan to Redflame of £4.2 million in July 2011, although later accounting documents show the lender as Mr Pugachev and include a loan agreement executed by Mr Pugachev and Redflame.
iv) The key trust asset in the Kea Three Trust is the shareholding in Redflame. The shares were transferred to the trustee company by Mr Pugachev on 8th August 2013 under a deed of gift.
v) The $8.8 million from Victor mentioned above may have been for this trust instead (see above).
Riviera Residence Trust
vi) The two key assets of this trust are the shareholdings of two Luxembourg companies called Topaze Funds SA and Romy Finance SA.
vii) The Sand Club property in St Barths is held by an entity called Sand Club SCI. Topaze owns 0.1% of Sand Club SCI directly and wholly owns a Belgian company called Notting Hill Invest SA which in turn holds the other 99.9% of Sand Club SCI.
viii) Romy Finance holds the Swiss watch factory (apparently valued at CHF 2.74 million in 2014) and two companies – Hediard Monaco and Delare LLC (a Delaware company). Hediard Monaco apparently has no assets and did not hold anything relating to the Hediard group. Delare owns about 35% of an entity called Eleven Street Associates which in turn owns a property at 11 Hurley Street, Cambridge, Massachusetts, USA.
ix) Mr Pugachev transferred the shares in Topaze SA to the third defendant (now called Finetree) on 9th August 2013, recorded in a deed of gift. Mr Pugachev transferred the shares in Romy Finance on 16th December 2013, also recorded in a deed of gift.
Wiltshire Residence Trust
x) The price agreed in August 2013 for the purchase of Doves House in Wiltshire had been £4.2 million. Deeds of gift seem to show that Victor transferring two sums to Bramerton as trustee of this trust. The money was paid into Oakhill's Bramerton account held at Barclays Bank in London. The deeds show sums of $5 million on 1st December 2013, and $6 million on 16th December. Since the purchase did not proceed that money remained on deposit. However it seems that the total paid into the trust was in fact only US$4.5 million.
Green Residence Trust
xi) The deed for this trust declares the primary investment as shares in Lenux Group Ltd. This is a BVI company. It holds a Russian company called Korporatsiva Obligaz LLC which in turn holds land in Russia (Gorki-10). The original trustee of this trust was Bluering.
xii) On 1st December 2013 Victor transferred the shares in Lenux to Bluering, recorded in a deed of gift. Prior to that the sole shareholder of Lenux was Hearnville Properties Ltd, which was beneficially owned by Victor.
The True Effect of the Trusts claim
Preliminary general points
Exclusion and indemnity clauses
i) Clauses of this general form are commonplace because the trust is not a separate legal entity and any contract between the trust and a third party must be with the trustees. Their contractual and tortious liability is prima facie unlimited and so it is not surprising trustees would always insist on clauses of this kind.
ii) The opening lines of clause 11 do not exonerate the trustees if they do something which is not an exercise of their powers at all. In other words, if the trustees simply steal the money, that would be neither an exercise of their powers nor a non-exercise of them and therefore is not excluded or indemnified.
iii) Although the opening words are unqualified, clause 11.1(a) acts to significantly limit the exclusion or indemnity by expressly providing that losses attributable to dishonesty or wilful action or inaction are not (my emphasis) excluded.
iv) If the complete clause is construed as a whole, liability for fraud is not excluded nor will the trustees receive protection if they have acted dishonestly and in fact they will be liable for any wilful commission or omission they know to be a breach of trust. A breach which is merely negligent will be covered by the indemnity but that is all. That is less protection for a trustee than is contemplated by the decision in Armitage v Nurse.
v) Clause 11.1(b) is ordinary and not criticised by the claimants.
vi) Clause 11.1(c) is misconstrued by the claimants and is in fact a common provision and its absence would seriously hamper trustees in advancing income or capital. The clause is directed to claims made by a person such as a creditor of the trust whose claim cannot be satisfied because the trust fund has already been distributed. The words "having any claim …against the Trust Fund" mean claims against the trust. Without such a clause trustees would have to try and second guess whether claims might be made against the trust in future and retain sufficient assets in the fund to deal with them. In that case the trustees would be reluctant to appoint property out of the trust.
The position of the Protector
i) The Protector could have been given much wider powers, such as to change beneficiaries, or the deed could have stated that the Protector's power were purely personal. The majority of the powers are vested in the trustees and they must act in the best interests of the beneficiaries as a whole. The provision about the Protector's consent cannot change that. The trustees have ultimate control over when and how the powers are exercised, not the Protector.
ii) If the Protector withholds consent the trustees can apply to the court.
iii) If the Protector sought to exercise his powers dishonestly or in bad faith then there can be no doubt this can be challenged in court.
What if the Protector's powers are personal?
Are the Protector's powers purely personal?
(i) The Protector is an office
(ii) The Court could remove the Protector
(iii) Belize law
(iv) The New Zealand decision of Heath J dated 2nd October 2015
"While I have not attempted an exhaustive summary of the rights and powers of the Protector under the Declaration, the ones I have mentioned provide relevant context for a determination to be made about whether certain powers are to be regarded as fiduciary or personal in nature."
"Mr Patterson's fundamental concern was that, if the Court were to take the view that the Protector's power to remove trustees was a fiduciary power that had been exercised improperly in the circumstances, removal may have been ineffective for that reason."
" There is nothing in the evidence to establish that the Pugachev interests have sought to influence or control Ms Dozortseva's activities, directly or indirectly. Ms Dozortseva's removal as a director was seen, as Mr Sergei Pugachev put it:
'As an "unwarranted and impulsive course of action by Mr Patterson", as a result of which he had "lost confidence in Mr Patterson and his ability to act appropriately as a director" of the original trustees.'"
" I have also received affidavit evidence from the three persons appointed as directors of the replacement trustees; Mr Smit, Ms Dozortseva and Mr Lenihan. On the face of it, all are qualified persons to act as directors of the replacement trustees and, except for the concerns expressed by Mr Patterson in relation to Ms Dozortseva's involvement, do not appear to be under the influence of Mr Sergei Pugachev.
 I must accept the affidavit evidence of the witnesses to whom I have referred. They have not been cross-examined on their affidavits and there is nothing to suggest that there is anything inherently implausible about their evidence. Whether or not a different conclusion might have been reached if their evidence had been tested by cross-examination, I cannot say."
The nature and scope of the Protector's powers – conclusion
The Sham claim
i) The express basis for establishing the Trusts.
ii) Only Mr Pugachev's intentions matter.
iii) Mr Pugachev's character.
iv) The timing of the establishment of the Trusts.
v) The operation of the trusts.
vi) The false evidence given by those involved in the administration of the trusts.
vii) The appointment of the New Trustees to do Mr Pugachev's bidding.
viii) The role of Victor.
i) The subsidiary characters –Ms Hopkins and Mr Pugachev's associates
ii) Mr Pugachev
iii) Mr Patterson
iv) The establishment of the trusts
v) The operation of the trusts
vi) The loans and the appointment of the New Trustees
(i) The subsidiary characters –Ms Hopkins and Mr Pugachev's associates
(ii) Mr Pugachev
"You have no conscience. … Why are you so dishonest not telling me the truth, and behind my back doing completely different to what you say to me. … You're such a coward that you always force me to be between you and your debts. I'm ashamed how dishonestly you act. My parents brought me up not to lie and cheat. … "
(iii) Mr Patterson
Mr Patterson as a witness
(a) Dealings in trust assets without Mr Patterson's knowledge and agreement
"2.3 Each of the five Trusts is a discretionary trust domiciled in New Zealand and governed by New Zealand law. The Trustees are all New Zealand incorporated companies. The sole shareholders of each of the Trustee companies are me and Ms Hopkins. I am also a director of each of the Trustees companies. In one of the Trustee companies Ms Hopkins is my codirector, in two of the Trustee companies Ms Natalia Dozortseva is my co-director, and in another of the Trustee companies my co-directors are both Ms Dozortseva and Ms Hopkins. It is consequently not possible for the Trust assets to be dealt with without my knowledge and agreement."
(b) and (c) Mr Pugachev as settlor
First Witness Statement
"2.4 The Defendant is one of a number of discretionary beneficiaries of each of the Trusts. As such, the Defendant has no proprietary interest in the Trust assets under the law of New Zealand. I understand the claimants have suggested in correspondence that the Defendant is the Protector of each of the Trusts. That is not now correct. The Trustees sought and obtained advice from leading counsel in New Zealand (the privilege in which is not waived) the effect of which is that the Defendant has ceased to be Protector of the Trusts as a result of the Orders made in these proceedings. The claimants have also I understand asserted that the Defendant is probably the settlor of each of the Trusts. That is also incorrect. Each trust was constituted by a declaration of trust by the trustee. Assets were placed into the Trusts."
Second Witness Statement
"45. Mr Roberts states (at paragraph 50 of his statement) that the claimants do not accept my explanation of why the suggestion that Mr Pugachev is probably the settlor of each of the Trusts is incorrect, and further states that the it is the claimants' position that, if the Trustees made declarations of trust following which assets were gifted into the Trusts, the Trusts Disclosure must identify who gifted the assets to the Trusts, i.e. the source of the assets subject to the Trusts. It may assist if I make clear that, when I was stating that Mr Pugachev is not the settlor of each of the Trusts, my reference to the settlor was intended to refer not only to the person or persons who declared the Trusts, but also those who placed assets into the Trusts."
"Mr Patterson states that Mr Pugachev was not the settlor of any of the trusts which were constituted by declarations of trust by the trustees. He states that assets were placed into the trusts and in his second witness statement, he states that Mr Pugachev did not place any assets in the trusts."
(d) Not aware of any basis for the trusts being shams
"It is important that we keep in mind that the trustee has responsibilities that effectively are those of the directors. It will not help us defend the sham trust argument if we are seen not to be acting independently."
(e) only link to the OPK trusts was as corporate administrator
While the trustee is properly appointed as trustee of the deed effective control of the actions of the trustee is held by the protector through the powers referred to above. In this respect the protector has ultimate control of the trust."
"We were running into this problem of banks wanting to know who the ultimate beneficial owners were, even though it was just a nonsense."; and
"It was apparently required because there had to be some statement that the protector had ultimate control and he may well have."; and
"It depends on context, because I don't believe that statement was necessarily correct in all respects. I didn't – I was asked to do it. I had no knowledge of what control Mr Pugachev – there's a reference at (f) above, but if you're asking me to say that that also applies to the trustee that – the current trustees and trustees – the answer would be no."
Mr Patterson's trust law article
About this time too, increasing attention was given to the way offshore trust deeds were drafted for use in tax havens that did not have some of the more limiting rules that applied in most common law jurisdictions. Thus the term "protector" came into vogue. An interesting discussion of the development of the "protector" concept is found in an article by Professor Donovan Waters' "The Protector, New Wine in Old Bottles" in A J Oakley (ed) Trends in Contemporary Trust Law, Clarendon, Oxford 1996 pp63-122. In New Zealand the term "appointor'' was usually used. This power was usually limited to appointment (and removal) of trustees and, if appropriate, beneficiaries. It was not usually a power given to trustees but rather to the settlor client in a separate and non-fiduciary capacity."
(f) no distributions to Mr Pugachev from the trusts before the freezing order
"39. Mr Roberts' assumption that the Trusts have been a significant, if not the principal or sole, source of income for Mr Pugachev for some time prior to the ex parte injunction being served is wrong. Prior to the granting of the ex parte injunction, no distributions had been made from any of the Trusts to Mr Pugachev.
5. I now confirm that, prior to the granting of the ex parte injunction on 11 July 2014, no loans or distributions were made from any of the Trusts to [Mr Pugachev]."
(g) Mr Pugachev exercising control via Ms Dozortseva
"If Mr Roberts is seeking to suggest that, through Ms Dozortseva, Mr Pugachev controls the Trusts, that is a suggestion I wholly reject and it does not accord with my experience of operating the Trusts."
Conclusion on Mr Patterson as a witness
(iv) The establishment of the trusts
"Lussato: How easy is it to retroactively change the trust document in case we want to fine tune it later?
Patterson: Very easy. Cl 13 gives a total power to rewrite the deed with Protector consent."
"On the trust it is a conventional family trust to own the house with both S & V (inter alia) as trust beneficiaries & with S then V as Protector with power to change the trustee, negative consent powers in relation to other acts of the trustees etc. "
"Lussato: Hi just re-read this as well. As you explained Sergei can always decide to change this after the fact but at least we have a document that reflects his current desires. Thanks for all your assistance …
Patterson: Thanks. Pleased we got there. …"
"Attached is the trust deed that reflects the conversation we had. You can change this document at anytime and Bill (the lawyer) tells us you can basically do anything you want later but this is a good basis for the trust. Please can you have a quick read through especially clause 4 and 5. Bill has signed the deed already so that you can complete the purchase tomorrow, let me know if you have comments on the attached documents, if not we will proceed on the current basis."
Finalising the London Residence Trust
After the London Residence Trust was set up
Setting up the 2013 trusts
(v) The operation of the trusts
i) Mr Pugachev repeatedly gave instructions in relation to the management and administration of the Trusts' assets and even on the most minor matters;
ii) The individuals responsible for administering the Trusts' assets would not take any decisions without Mr Pugachev's approval;
iii) The assets were administered by Mr Liechti, Ms Semina and Ms Dozortseva from offices in London without reference to Mr Patterson;
iv) Mr Patterson's role was akin to that of a corporate services provider. He drafted resolutions and prepared formal documents but did not make decisions in relation to the Trusts' assets;
v) Although there was an effort made after the grant of the freezing order to involve Mr Patterson in decisions and to seek formal "trustee approval", in reality the Trusts continued to be administered from London by Mr Liechti and Ms Dozortseva, on instructions from Mr Pugachev. That was despite the Original Trustees' having received legal advice that Mr Pugachev was "under a disability" such that he was automatically disabled from acting as protector of the Trusts;
Trust and non-trust assets administered interchangeably
Administration did not change after property put into trusts
Mr Patterson's involvement was limited to formalities
i) There was an argument about the "minute book" for each trust referred to in the deed. The claimant said no such book had been produced but Mr Patterson explained the minute book in each case was a folder which he did have but which the disclosure exercise seemed to have taken apart. He did not agree there was no minute book. I accept that.
ii) The claimants contend there was no due diligence before the (ultimately aborted) acquisition of Doves House or before the acceptance of the St Barth's Villa or Gorki Property or US or Swiss real estate into the relevant trusts. The argument as I understand it is based on treating these trusts as "pilot trusts" – in other words as being declared over NZ$10 - and then suggesting that the trustees needed to turn their minds to whether any further transfers in should be accepted. That is unreal. Although formally these trusts were declared over $10, in substance these trusts were set up to receive the property they did.
Mr Pugachev referred to as beneficial owner after transfer into the trusts
Operation of the trusts - conclusion
(vi) The loans and the appointment of the New Trustees
The replacement of the trustees
Considering sham as a whole
Sham and the true effect of the trusts
"Professor Mario Franzosi likens a patentee to an Angora cat. When validity is challenged, the patentee says his patent is very small: the cat with its fur smoothed down, cuddly and sleepy. But when the patentee goes on the attack, the fur bristles, the cat is twice the size with teeth bared and eyes ablaze."
The s423 claim
Summary of conclusions