Once known as “Putin’s Banker”, Sergei Pugachev, a former Russian Billionaire, will be content following the recent High Court decision of Kea Trust Company Limited v Pugachev. Pugachev was the co-founder of Russia’s Mezhprombank, which previously had billions of dollars worth of assets under its control.
He once boasted in a Financial Times interview that he was personally behind President Vladimir Putin’s rise to power, however he fell out of favour with the Russian Government and they subsequently seized his giant business empire.
November 2010 saw a Moscow Court declare Mezhprombank insolvent and Russian authorities later beginning a criminal investigation into the bank. He recently eluded the reach of Russian authorities and some alleged death threats in London by escaping to the balmy weather and sinuous urban promenade of Nice, which is quite agreeable as far as exiles go. Although, he now claims he is broke or at least by his own standards, “I’m down to my last $70m”. The Court appointed liquidators of his failed bank, the Russian State Corporation Deposit Insurance Agency.
It is alleged Pugachev carried out a scheme designed to extract money from the bank, after it received recapitalisation loans from the Russian central bank. Pugachev denied the allegations and fought a worldwide freezing order, which was placed over his assets last year by a UK Court. When Pugachev disclosed details of US$70 million (NZD$110.3 million) of assets to the liquidators to comply with this freezing order, he revealed he was a beneficiary of five New Zealand-based trusts.
The trustees of these entities were Kiwi firms directed by Auckland lawyers Bill Patterson and Robyn Hopkins. Subsequent documents apparently signed by Pugachev purported to remove those trustees and replace them with four other local companies. Pugachev, according to the judge, saw Dozortseva's removal as an "unwarranted and impulsive course of action" by Patterson and as a result he had lost confidence in the lawyer's ability to act appropriately as a director of the original trustees.
The original trustees applied to the New Zealand Court seeking a direction on whether they were validly removed and if so, whether trust assets could be transferred to their replacements without breaching the worldwide freezing order. The crucial question before the Court was whether powers conferred on a protector (in this case Mr. Pugachev) should be regarded as fiduciary in nature. While “protectors” are not a common feature of New Zealand trusts, they are not entirely unheard of.
A protector might be described as a hybrid of a trustee and an appointor. This is a fairly inelegant statement of the term, but hopefully it gets the idea across. In Kea the Declaration of Trust gave the protector the power to “remove any existing trustee with or without cause.” In this case the protector had lost faith in the trustee and the Court found that in removing the trustee, the protector “cannot be regarded as having been exercised for an improper purpose. If the Protector had been a third party at arm’s length from the Pugachev family who had diverted trust assets for his or her own benefit, the position would undoubtedly be different.” Justice Heath said exercising the power to remove trustees and appoint others, in circumstances where there has been a loss of trust and confidence in those responsible for directing the original trustees, cannot be regarded as having been done for an improper purpose.
If the Protector had been a third party at arm’s length from the Pugachev family who had diverted trust assets for his or her own benefit, the position would undoubtedly be different.” Justice Heath said exercising the power to remove trustees and appoint others, in circumstances where there has been a loss of trust and confidence in those responsible for directing the original trustees, cannot be regarded as having been done for an improper purpose. Kea Trust Company Limited v Pugachev, while turning on its own facts, provides some useful guidance as to the role of protector and the extent of fiduciary obligations a protector can owe.
By Chris Patterson