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From Russia with Love (And Trust) Russian Oligarch Fails to Conceal Assets in New Zealand Trust Structure

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From Russia with Love (And Trust) Russian Oligarch Fails to Conceal Assets in New Zealand Trust Structure TRUSTS · UPDATE UPDATE TRUSTS From Russia with Love (and Trust) Russian oligarch fails to conceal assets in New Zealand trust structure BY SALLY MORRIS AND GEORGIA ANGUS requiring asset disclosure, four • Could veto all major decisions of In the recent decision JSC MEZHDUNARODNIY further New Zealand trusts were the trustees, including investment, Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch), settled between July and November distribution of income or capital Birss J of the High Court of England and Wales held that 2013. The value of the assets settled and variation of the trust deed. the settlor of five New Zealand foreign trusts retained on the five trusts by Mr Pugachev The court considered two claims in beneficial ownership of the trust assets, leaving those was over US$95 million. relation to the trusts. The first was assets open to a claim by creditors. There have been numerous pro- whether the trust deeds created ceedings around the world relating to a trust divesting Mr Pugachev of Who is Sergei Pugachev? Mezhprom Bank’s collapse, including control of the assets or whether Sergei Pugachev was a Russian oligarch. He founded a without notice worldwide asset the beneficial title to the assets Mezhprom Bank in 1992 and developed it into one of freezing injunction against Mr remained with Mr Pugachev. This Russia’s largest private banks. Mr Pugachev was involved Pugachev in July 2014. This par- was referred to as the “true effect in Russian politics and was elected as a Senator of ticular proceeding was brought by of the trusts claim”. Alternatively, the Russian Federation in 2001. Birss J noted that Mr Mezhprom Bank and its liquidator the court considered whether the Pugachev “initially found favour with the ruling regime in the High Court of England and trusts were shams. and assisted President Putin’s rise to power”. Wales. The basis of their claim was Mr Pugachev was extremely wealthy. In 2008, he that the beneficial interest in the True effect of the was worth around US$15 billion. His assets included assets held by the five New Zealand trusts claim the largest shipyard in Russia, the second largest coking trusts belonged to Mr Pugachev. The Birss J relied on the New Zealand coal mine in the world, the French retail chain Hediard, claimants sought an order vesting Supreme Court’s decision in Clayton the French national newspaper France Soir, a chateau the trust assets in them. v Clayton [2016] NZSC 29 in rela- in the South of France, three yachts – one of which was tion to the true effect of the trusts worth US$35 million – two private jets and a helicopter. The New Zealand trusts claim. Birss J gave two reasons for Following the 2008 global financial crisis, Mezhprom The New Zealand trusts were all dealing with the Clayton decision at Bank was struggling. The Russian Central Bank supported discretionary. Mr Pugachev, his some length in his judgment. First, Mezhprom Bank but this ultimately failed. The bank’s partner, Alexandra Tolstoy, and his because it is a decision from the licence was revoked and the Russian Court declared the children were among the discretion- Supreme Court of New Zealand. His bank insolvent. When the bank entered into liquidation, ary beneficiaries. The trustee of each Honour stated that such decisions the deficiency in its assets was approximately US$2.2 trust was a New Zealand company. are authoritative but particularly in billion. Around that time, Mr Pugachev was also losing Mr Pugachev was the protector of this case as it involves New Zealand standing with the Russian ruling elite. In early 2011, he each trust. The trust deeds gave the trusts. Second, Birss J considered fled Russia just after criminal investigations were opened protector a wide range of powers and that the decision in Clayton illumi- relating to Mezhprom Bank’s collapse. control. In particular, the protector: nates some important principles A New Zealand trust was settled in December 2011 • Had a right to information from relating to the analysis of trusts. to hold Mr Pugachev’s property in London. By 2012, the the trustees, He noted that the fact the Supreme pressure on Mr Pugachev from Russia was increasing and • Had the power to appoint new Court applied those findings to the there were Russian press reports that London proceed- discretionary beneficiaries, New Zealand relationship property ings were being contemplated to trace Mr Pugachev’s • Had the power to appoint trustees regime does not diminish the rele- assets held outside Russia. After receiving advice on and remove trustees “without vance of that analysis. the risk of an ex parte asset freezing order and an order cause”, and His Honour was of the view that 30 UPDATE · TRUSTS Honour found that Mr Pugachev has two important characteristics: that he is not a person who would lightly relinquish control of anything and he is a person willing to lie and put forward false statements if it would suit his purpose. Birss J found that Mr Pugachev’s intention in settling the trusts was to retain control of the assets but use the trusts to mislead third parties by hiding his control. His Honour considered that the whole scheme in this case was set up to facilitate a pretence about ownership, or rather its absence, should the need arise. In conclusion, Birss J held that if his interpretation of the true effect of the trust deeds was wrong and Mr Pugachev was not the beneficial owner of the assets, the trust deeds were shams. Warning to solicitors His Honour was also critical in his decision of the solici- tor who acted in relation to the New Zealand trusts. The solicitor was a shareholder and director of the trustee the Clayton decision shows “when ownership of the assets he trans- companies. He drafted the trust deeds and set up the considering what powers a person ferred into the trusts”. On that basis, trusts and trust companies. He looked after all the actually has as a result of the trust his Honour held the trusts were not paperwork concerning the administration of the trusts. deed, the court is entitled to con- shams. However, his Honour went Although the solicitor’s evidence was that he did not strue the powers and duties as a on to consider the sham claim in know what Mr Pugachev’s intentions actually were, Birss whole and work out what is going case the proper construction of the J did not accept that the solicitor did, in fact, infer that on, as a matter of substance”. trust deeds was that the protector’s Mr Pugachev wanted to relinquish control. If he wanted Birss J observed that Mr powers were fiduciary. to find out what Mr Pugachev’s actual intentions were, Pugachev’s position differed to Mr he could have asked, but he did not. His Honour held Clayton’s as Mr Pugachev could not Sham claim that the best that could be said about the solicitor’s directly remove a discretionary ben- The claimants argued the trusts actions were that he prepared and signed the trust deeds eficiary. However, as protector, Mr were shams as it was the intention entirely recklessly as to the settlor’s true intentions. This Pugachev could veto distributions, of the parties that the assets should statement serves as a warning to solicitors to ensure remove a trustee who refused to continue to belong to Mr Pugachev. they understand why a client wants to settle a trust distribute trust assets to him and As a starting point, Birss J noted and not to turn a blind eye to the reality of a client’s appoint a trustee who would. that there is no such thing as a instructions. Based on the true construction “sham trust”. Rather, what may be of the trust deeds in this case, his a sham are the documents or acts Conclusion Honour held that Mr Pugachev’s that purport to set up the trust. In In this case, the court ultimately found that the assets powers as protector were personal, considering whether a document is were held on bare trust for Mr Pugachev. None of the rather than fiduciary. That is, Mr a sham, the focus is on the inten- protector’s wide powers in the deeds were fiduciary. Pugachev was free to exercise tions of the relevant parties. This is They were purely personal powers that Mr Pugachev these powers for his own benefit, a subjective test. As held by Arden could exercise selfishly. The true effect of the deeds was without considering the interests LJ in Hitch v Stone [2001] STC 214: to leave Mr Pugachev in control of the assets. of the discretionary beneficiaries. “The parties must have intended This is another reminder to settlors of the risks of Birss J’s fundamental reason for to create different rights and obli- seeking to retain control over trust assets. The process reaching this conclusion was the gations from those appearing from of establishing a valid trust is more than just a box extensive nature of the protector’s (say) the relevant document, and in ticking exercise. The courts will look to the substance powers combined with the fact that addition they must have intended of a purported trust in order to be satisfied that the Mr Pugachev, as the first protector, to give a false impression of those necessary incidents of a trust are met. Unfortunately was also the settlor of the assets and rights and obligations to third for Mr Pugachev, the “trust” structure did not amount to one of the discretionary beneficiar- parties.” a valid trust and therefore was not effective to remove ies.
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