IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV 2015-404-1753
[2015] NZHC 2412
BETWEEN

KEA TRUST CO LTD, FINETREE CO
LTD, BRAMERTON CO LTD AND
BLUERING CO LTD
Applicants

AND

SERGEI VIKTOROVICH PUGACHEV,
ALEXANDRA TOLSTOY AND VICTOR
SERGEYOVICH PUGACHEV
First Respondents
MARU LTD, HAPORI LTD, AROTAU
LTD and MIHARO LTD
Second Respondents

Hearing:

28 September 2015

Counsel:

R B Stewart QC and W K Blennerhassett for Applicants
I M Gault and K M Venning for First Respondent
J Billington QC and G R Nicholson for Second Respondents

Judgment:

2 October 2015

JUDGMENT (NO. 3) OF HEATH J

This judgment was delivered by me on 2 October 2015 at 3.00pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Kensington Swan, Auckland
Bell Gully, Auckland
MinterEllisonRudd Watts, Auckland
Counsel:
R B Stewart QC, Auckland
J Billington QC, Auckland

KEA TRUST CO LTD v PUGACHEV [2015] NZHC 2412 [2 October 2015]

 CONTENTS
The application
Background
The Chancery Court proceedings
Was the removal of the original trustees valid?
(i)
The Declarations of Trust
(ii)
The removal instruments
(iii) The original trustees’ concerns
(iv)
Analysis
Costs
Result

[1]
[7]
[12]
[18]
[26]
[27]
[39]
[54]
[55]

The application
[1]

The original trustees1 of the London Residence Trust, the Kea Three Trust,

the Wiltshire Residence Trust, the Riviera Trust and the Green Trust (the New
Zealand Trusts) seek directions from this Court under s 66 of the Trustee Act 1956.
[2]

The first respondents are three of the beneficiaries of the New Zealand

Trusts; Mr Sergei Pugachev, his wife Ms Alexandra Tolstoy, and his adult son,
Mr Victor Pugachev. Together, I refer to them as the “Pugachev interests”. The
second respondents are the replacement trustees.2

The original trustees seek

directions to determine whether or not they have been validly removed as trustees of
the New Zealand Trusts and whether they are required to transfer assets of each of
them to the replacement trustees.
[3]

An order is also sought to authorise the original trustees to deduct, from

assets of the New Zealand Trusts, fees and expenses that they have incurred, both in
promoting the present application and responding to orders made by the High Court
of Justice of England and Wales (the Chancery Court) in a freezing order proceeding
in that jurisdiction.3
[4]

Directions have not been sought about whether the replacement trustees have

been validly appointed. I proceed on the agreed position that, if the original trustees
were validly removed, the replacement trustees were validly appointed.

1
2
3

Defined in para [8] below.
Defined in para [9] below.
The Chancery Court proceeding is described in paras [12]–[16] below.

 [5]

Although they have brought the current application, the original trustees

abide the decision of the Court. By the time the application came on for hearing, a
measure of agreement had been reached between the original trustees and the
respondents. While I am prepared to act on the agreement reached in relation to
costs, I take the view that I should consider the validity of the removal
independently. Any order is likely to be used as a shield to protect the original
trustees against future potential claims, possibly by persons other than the
respondents.
[6]

Initially, one of the grounds on which the applications were opposed was that

there was no jurisdiction for this Court to make directions on the application of
former trustees. That objection has not been pursued. It is difficult to see why
jurisdiction should be ousted in circumstances where a genuine dispute has arisen
over the removal of a trustee and that person might be at risk of action against him or
her personally if assets were transferred to new trustees. I proceed on the basis that
jurisdiction does exist.
Background
[7]

As a result of orders made by the Chancery Court, and a decision of the Court

of Appeal, a worldwide freezing order was made against property said to be owned
or controlled by Mr Sergei Pugachev.4 The property to which the orders attach
includes interests as a discretionary beneficiary in the five New Zealand Trusts.
[8]

Before 24 July 2015, the trustees of the New Zealand Trusts were Kea Trust

Company Ltd, Finetree Company Ltd, Bramerton Company Ltd and Bluering
Company Ltd. All of those companies were incorporated in New Zealand. The
directors of each are two solicitors based in Auckland, Mr William Patterson and
Ms Robyn Hopkins. I refer to those companies as the “original trustees”.
[9]

On 24 July 2015, instruments were signed (the removal instruments) that

purported to remove the original trustees of the New Zealand Trusts. The removal
instruments were executed by Messrs Sergei and Victor Pugachev. Each asserted the
4

The background to the various orders is most conveniently found in JSC Mezhdunarodniy
Promyshlenniy Bank v Pugachev [2015] EWCA Civ 906.

 power to do so as the Protector of the New Zealand Trusts.5 On the same day, deeds
were executed to appoint four other New Zealand companies (Maru Ltd, Hapori Ltd,
Arotau Ltd and Miharo Ltd) as trustees of the New Zealand Trusts. I refer to those
companies as the “replacement trustees”.

Their directors are Mr Ben Lenihan,

Ms Natalie Dozortseva and Mr Willem Smit, who are resident in Auckland, Nice and
London respectively.
[10]

I heard the application at 10am on 28 September 2015. I was told that

another hearing in the Chancery Court was scheduled to take place at about 10.30pm
on the same day, New Zealand time. The Chancery Court was being asked to
consider an application by the replacement trustees to vary the worldwide freezing
order. I was invited to give a prompt decision, as questions of standing were likely
to arise in London.
[11]

I advised counsel that I would give judgment no later than 4pm on 2 October

2015, subject only to sworn copies of affidavits from Mr Sergei Pugachev and
Ms Alexandra Tolstoy being filed prior to delivery of the judgment.6 They have been
filed. I have been advised that the adjourned Chancery Court hearing will take place
in London on 2 October 2015.
The Chancery Court proceedings
[12]

On 23 April 2015, JSC Mezhdunarodniy Promyshlenniy Bank (Mezhprom)

and State Corporation “Deposit Insurance Agency” (State Corporation) obtained
judgment against Mr Sergei Pugachev in the Moscow Arbitrazh Court in the sum of
RUR75.6 billion, approximately US$1.5 billion.

An application to appeal that

decision was dismissed on 18 June 2015.
[13]

Mezhprom was placed in liquidation in Russia.

State Corporation was

appointed as its liquidator. The liquidation order was recognised in England and
Wales on 11 July 2014.7 On the same day, in aid of the Moscow proceedings,
5
6
7

The definition of the term “Protector” and the role of that person are set out at paras [21]–[25]
below.
Understandably, because of the need for expedition, copies of those affidavits (which were
sworn in Nice) had not been filed at the time of the hearing.
Under the Cross-border Insolvency Regulations 2006.

 Henderson J made a worldwide freezing order against assets of Mr Sergei Pugachev,
and an order requiring him to disclose his assets. Subsequently, a schedule of assets
was served on 23 July 2014. That schedule revealed that Mr Sergei Pugachev was a
discretionary beneficiary of the New Zealand Trusts.
[14]

The Chancery Court made additional directions on 25 July 2014 to obtain

better information about the New Zealand Trusts (the trust disclosure order). The
information sought included the identity of the trustees, settlors, protectors and
beneficiaries of the New Zealand Trusts, as well as details of their assets.
[15]

Subsequently, the original trustees applied to the Chancery Court to discharge

the trust disclosure order. On 30 October 2014, that application was dismissed by
David Richards J.8 On 27 February 2015, the Court of Appeal dismissed appeals
against both the trust disclosure order and dismissal of the application to discharge it.
Delivering the judgment of the Court, Lewison LJ (with whom Arden and
Christopher Clarke LJJ agreed) held that Mr Sergei Pugachev’s interest as a
discretionary beneficiary under the New Zealand Trusts was sufficient to make the
original trustees amenable to the trust disclosure order.9
[16]

Following further decisions of the Chancery Court to which I need not refer,

Mezhprom and State Corporation applied to bring the assets of the New Zealand
Trusts within the scope of the worldwide freezing order. That application was
refused by Rose J. On 14 August 2015, Her Ladyship’s decision was reversed by the
Court of Appeal.10 The assets of the New Zealand Trusts remain subject to the
worldwide freezing order.
[17]

The original trustees’ application for directions first came before me on

17 August 2015. In a judgment given the following day,11 despite opposition from
the replacement trustees,12 I made an order for substituted service of the application
on solicitors in Auckland who had been instructed by Mezhprom and State
8
9
10
11
12

JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2014] EWHC 3547 (ChD).
JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139 at paras [13] and
[15].
JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 906.
Kea Trust Company Ltd v Pugachev [2015] NZHC 1960.
Messrs Sergei and Victor Pugachev and Ms Tolstoy had not taken any steps in the proceeding at
that time.

 Corporation. After service was effected, Mezhprom and State Corporation elected
not to participate in the proceeding; presumably, because they did not wish to submit
to the jurisdiction of this Court.
Was the removal of the original trustees valid?
(i)

The Declarations of Trust

[18]

The deeds establishing each of the New Zealand Trusts are in identical terms.

For convenience, I restrict my analysis to the London Residence Trust, of which Kea
Trust Company Ltd (Kea) is the original trustee, and Arotau Ltd, its replacement.
[19]

The London Residence Trust was established by a Declaration of Trust (the

Declaration) made on 6 December 2011. No settlor is named. The preamble to the
Declaration states that Kea “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 Trust’s (sic), set out in the Deed, or conferred upon
the Trustee by law”.
[20]

The “Discretionary Beneficiaries” of the New Zealand Trusts are defined 13 as

including Mr Sergei Pugachev, Mr Victor Pugachev (Mr Sergei Pugachev’s adult son
from an earlier relationship) and Ms Tolstoy, as well as the children of Mr Sergei
Pugachev and Ms Tolstoy. While both of the children are minors, for the purposes of
this proceeding I allowed their parents to represent them.14 More generally, the
Protector may extend the class of persons to benefit under the London Residence
Trust to members of Mr Sergei Pugachev’s wider family, and specified types of
institutions associated with him.15
[21]

The term “Protector” is defined by cl 1.1(e) of the Declaration:
“Protector” means the person or persons from time to time acting as
Protector and the “First Protector” means Sergei Viktorovitch Pugachev.

13
14
15

Declaration of Trust cl 1.1(c).
Kea Trust Company Ltd v Pugachev [2015] NZHC 2218, at para [4].
Declaration of Trust, cl 1.1(c)(vii).

 [22]

Clause 4 of the Declaration identifies and specifies the powers of the

Protector. Relevantly, cls 4.1, 4.2 and 4.3 provide:
4.1

4.2

The Protector shall be:
(a)

Sergei Victorovitch Pugachev while he is living and not
Under a Disability and after the 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.

Resignation and Disability
Any Protector may resign by notice in writing to the Trustee. If any
Protector being a natural person is Under a 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.

4.3

Information
The Protector shall have the right to request information from the
Trustee and such requests shall not be unreasonably refused.

(Emphasis added)

[23]

The term “Under a Disability” is defined by cl 1.1(i) of the Declaration of

Trust:
“Under a Disability” in relation to any person means any event or
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 a
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.
(Emphasis added)

[24]

The Protector is given the power to remove and replace trustees. Clauses 6.3,

6.4 and 6.5 of the Declaration state:

 6.3

[25]

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.

6.4

The appointment and the removal or replacement of Trustees shall
be made by the Protector by instrument in writing.

6.5

Save where the same would be contrary to or inconsistent with the
provisions of this deed all the provisions of Part IV of the Trustee
Act 1956 relating to the appointment and discharge of Trustees shall
be in addition to the provisions contained in this deed.

In addition to those powers, the Protector has the right to request information

from the trustee (and such requests must not be unreasonably refused), 16 may direct
the trustee to sell the residential property forming part of the trust17 and may exercise
a power of veto in respect of certain powers and discretions vested in the trustee.18
The power to direct sale of the residential property may (among other reasons) be
exercised if the Protector were satisfied that it was desirable to do so because
Ms Tolstoy and her children were in financial distress.19 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.
(ii)

The removal instruments

[26]

The removal instrument that purported to remove Kea as a trustee was

executed by both Mr Sergei and Mr Victor Pugachev. The instrument states:
Removal of Trustee
To:

16
17
18
19

Kea Trust Company Limited, registered company at Level 3, 149155 Parnell Road, Parnell, Auckland, New Zealand

Ibid, cl 4.3.
Ibid, cl 4.6(a).
Ibid, cl 4.5.
Ibid, cl 4.6(c).

 Sergei Victorovitch Pugachev, as the Protector of the Trust pursuant to the
powers vested in him under clause 6.3(a) of the Trust Deed of the Trust
bearing date 6 December 2011 hereby removes Kea Trust Company
Limited as the Trustee of the Trust with effect from the date of this
instrument.
and
Victor Sergeyevitch Pugachev, as the Protector of the Trust pursuant to the
powers vested in him under clause 6.3(a) of the Trust Deed of the Trust
bearing date 6 December 2011 hereby removes Kea Trust Company
Limited as the Trustee of the Trust with effect from the date of this
instrument.

(iii)

The original trustees’ concerns

[27]

In an affidavit sworn on 31 July 2015, Mr Patterson, in his capacity as a

director of each of the original trustees, accepted that the execution of the removal
instruments by both Messrs Sergei and Victor Pugachev suggested that, on their face,
they were valid and effective.20

If Mr Sergei Pugachev was not “Under a

Disability”,21 he had power to act as Protector. If he were under such a disability
Mr Victor Pugachev was authorised to do so.
[28]

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.
[29]

Until 14 July 2015, one of the directors of the original trustees was

Ms Natalia Dozortseva.

On that date, she was removed from that office.

Ms Dozortseva is qualified as a lawyer in Russia. She appears to have worked
closely with Mr Sergei Pugachev for some 20 years. After Mr Patterson and
Ms Hopkins became aware of the worldwide freezing order and that Mr Sergei
Pugachev had left the jurisdiction of the Chancery Court on or about 23 June 2015,
they learnt that Ms Dozortseva had also left England one day later.

20
21

See also paras [21] and [22] above and [42] and [50] below.
See para [23] above.

 [30]

After reading the judgment given by David Richards J on 30 October 2014,22

Mr Patterson and Ms Hopkins appreciated that the activities of the original trustees
would come “under intense scrutiny”. They sought legal advice about their position.
[31]

Mr Patterson and Ms Hopkins wished to take a cautious approach to the

administration of trust assets, in case any criticisms were expressed about their
performance. While they also wished to comply with obligations cast upon them by
the trust disclosure order, they felt that Ms Dozortseva was not assisting them to
obtain information from either Mr Sergei or Mr Victor Pugachev.
[32]

Notwithstanding their concerns, little in the way of correspondence seems to

have passed between Mr Patterson and Ms Dozortseva in the period leading up to
her removal as a director of the original trustees. The most relevant exchanges were
on 15 and 16 June 2015. Mr Sergei Pugachev sent an email to Mr Patterson,
Ms Hopkins and Ms Dozortseva requesting certain information in respect of each of
the New Zealand Trusts before 5pm on 19 June 2015. The information requested
comprised:
Full report of all actions undertaken by you as a director of trustees for a
period from the 11th of July 2014
Copies of all documentation signed by the trustees, including all contracts,
engagement letters, trustee resolutions and other documents
Full report of the expenses authorised by you and paid by the trustees,
including, but not limited to, info about payments to your firm and legal
expenses.

[33]

Mr Sergei Pugachev requested that information in his capacity as Protector of

all of the New Zealand Trusts. He said: “I’m entitled to the information from the
trustees and such request cannot be unreasonably refused”.23
[34]

Mr Patterson sent an email to Ms Dozortseva asking why the request had

been made and reiterating advice he had received from senior counsel in Auckland
that Mr Sergei Pugachev was no longer a Protector. Ms Dozortseva was coy in her
response, suggesting that it may relate to a renovation project for one of the
22
23

JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2014] EWHC 3547 (ChD).
Declaration of Trust, cl 4.3; see also para [25] above.

 properties. She made it clear that Mr Sergei Pugachev, despite that advice received
by Mr Patterson and Ms Hopkins, did not accept that he was no longer the Protector
of the New Zealand Trusts.
[35]

The advice from senior counsel in Auckland, to which Mr Patterson referred

in his email to Ms Dozortseva, was contained in a written opinion dated 29 August
2014. The worldwide freezing order had been made on 11 July 2014.24 The advice
was directed to Mr Patterson, as a partner of Patterson Hopkins, solicitors, Auckland,
who had instructed counsel to provide the opinion. The opinion was limited to Kea,
as trustee of the London Residence Trust. Counsel advised on the position of the
Protector.
[36]

Mr Patterson was advised that, notwithstanding the powers contained in the

Declaration in respect of the London Residence Trust, Mr Sergei Pugachev ceased to
hold office as Protector once the 11 July 2014 worldwide freezing order was made,
on the basis that, from that time, he “became afflicted by an event or happening that
rendered him ‘temporarily or permanently incapable of exercising free will’ within
the definition of ‘under a disability’ in clause 1.1(i) of” the Trust Deed.25
[37]

On the basis of their conclusion that Ms Dozortseva “had ceased to act

properly as a director [of the original trustees] and that she was acting” in the
interests of Mr Sergei Pugachev “to the potential detriment of the [New Zealand
Trusts’] beneficiaries as a whole”, Mr Patterson and Ms Hopkins resolved, on
14 July 2015, to exercise powers as shareholders of the original trustees to remove
Ms Dozortseva as a director of each. That left Mr Patterson and Ms Hopkins in
control of the original trustees.
[38]

The removal instruments were signed by the Protector on 24 July 2015. After

receiving notice of that, Mr Patterson and Ms Hopkins took further advice. In his
affidavit of 31 July 2015, Mr Patterson deposed:
61.

24
25

… I am concerned that the transfer of the [New Zealand Trusts’]
assets to the [replacement trustees] may expose [the original
trustees] to a claim by [Mezhprom and State Corporation] or other

See para [13] above.
The definition of the term “Under a Disability” is set out at para [23] above.

 third parties at a later stage. The fact that Mr Sergei Pugachev has a
Russian judgment against him for over US$1 billion, raises the very
real risk that he will be declared bankrupt at some point in the future
and that a subsequently appointed trustee in bankruptcy will look to
recover assets lost to Mr Pugachev’s estate.
62.

The position regarding the assets settled by Victor Pugachev … is in
the light of recent events less clear. It now seems increasingly likely
that [Mezhprom and State Corporation] will assert that he transferred
these at the direction of Mr Pugachev and they were in truth
Mr Pugachev’s assets (although I have not seen any evidence to
support any such assertion). … [Mezhprom and State Corporation]
are already aware from the Trusts’ disclosure that Victor Pugachev
settled some of these funds.

63.

Accordingly, this potential exposure has prompted the [original
trustees] to defer to the Court on the question of whether the assets
they hold can be transferred to [replacement trustees] as requested,
and if so, on what basis.

(iv)

Analysis

[39]

Both Mr Billington QC, for the replacement trustees, and Mr Gault, for the

Pugachev interests, accepted that the concerns expressed by Mr Patterson and
Ms Hopkins that led to their decision to remove Ms Dozortseva as a director of the
original trustees were genuinely held, based on information available to them at the
time.
[40]

Relying on affidavit evidence from Mr Sergei Pugachev, Mr Victor Pugachev,

Ms Dozortseva and Ms Tolstoy, Mr Billington and Mr Gault contended that Messrs
Sergei and Victor Pugachev had acted as they did because of a loss of trust and
confidence in Mr Patterson and Ms Hopkins, following the “unexpected” removal of
Ms Dozortseva as a director of the original trustees on 14 July 2015.

They

emphasised that, until her removal, the New Zealand Trusts had operated
satisfactorily from their settlement, on 6 December 2011. They also pointed to the
lack of consultation with Mr Sergei Pugachev before Mr Patterson and Ms Hopkins
took the step of removing Ms Dozortseva as a director.
[41]

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.

[42]

Mr Sergei Pugachev, supported by Victor, explained that the removal

instruments were signed by both of them because he was aware of the advice
obtained from senior counsel in Auckland that Mr Sergei Pugachev had ceased to be
a Protector of the New Zealand Trusts. As he puts it:
In order to ensure the removal could not be contested on the grounds that the
Instrument was improper, my son Victor (the second Protector of the [New
Zealand] Trusts) also signed the Instruments of Removal.

[43]

I have also received affidavit evidence from the three persons appointed as

directors of the replacement trustees; Mr Smit, Ms Dozortseva and Mr Lennihan. 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.
[44]

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.
[45]

The proposition advanced to justify the application for directions is based on

the premise that the Protector owed fiduciary obligations to beneficiaries of the trust
and that the power to remove the original trustees may have been exercised for
improper purposes. On the position taken by the original trustees, the first question
is whether a person holding the position of a Protector under the Declaration owes
fiduciary obligations.
[46]

The question whether powers conferred on a Protector should be regarded as

fiduciary in nature has been addressed in a number of overseas authorities. The
status of a Protector is something with which no New Zealand statute deals. The
nature of any duties assumed by a Protector will be determined by reference to the

 responsibilities undertaken in respect of a particular trust. The first port of call will
always be the words of the relevant trust instrument, and the objects of the trust that
can be gleaned from them and any relevant extrinsic evidence.
[47]

The authorities suggest that a protector may hold a particular power, either as

a fiduciary or in his or her personal capacity. A useful survey of relevant authorities
can be found in Re Bird Charitable Trust.26 The Royal Court of Jersey held that the
powers to appoint additional trustees and a successor protector were fiduciary in
nature and could only be exercised in good faith and in the best interests of the trust
and the beneficiaries as a whole.27 The Court rejected a claim of fraud on the power
even though the grounds supporting a decision to appoint a successor protector were
argued to have been made with an improper intention of removing assets from the
control of the courts in Jersey; in particular, to defeat anti-money laundering
legislation.28 The Deputy Bailiff, giving the judgment of the Court, held that the
power had been exercised in good faith and in the best interests of the beneficiaries
because it was believed their interests were promoted by an ability to deal freely
with assets of the trust, without having to seek consent from the police in Jersey.29
That was regarded as an intention that was “entirely consistent with the purposes for
which the powers were conferred”.30
[48]

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. 31

As Lord Parker of

Waddington said, in delivering the advice of the Privy Council in Vatcher v Paull,32 a
fraud on a power does not necessary involve conduct on the part of an appointor
26
27
28
29
30
31
32

Re Bird Charitable Trust [2008] JLR 1 (Deputy Bailiff Birt and Jurats Bullen and Liddiard) at
paras 82–92.
Ibid, at para 92.
See the discussion in Mark Hubbard, Protectors of Trusts (Oxford University Press 2013) at 85–
86.
Re Bird Charitable Trust [2008] JLR 1, at para 97.
Ibid, at para 98.
Vatcher v Paull [1915] AC 372 (PC) at 378.
Ibid.

 amounting to dishonesty or any other form of moral turpitude; rather, it means that
the power has been exercised for a purpose, or with an intention, beyond the scope
of, or not justified by, the instrument creating the power.
[49]

That view of the doctrine was adopted by a plurality of the Supreme Court in

Kain v Hutton.33

Tipping J observed, in a separate judgment, that a person

exercising a power (in that case of appointment) must act in terms of the mandate
granted by the donor of the power, and must stay within the bounds of that mandate.
If the exercise of a particular power is contemplated by the instrument under which
the power is granted, there will be no misuse.34 In Clayton v Clayton,35 a power of
appointment conferred on a person as a “Principal Family Member” was used by that
person to amend the terms of a trust so as to appoint himself as sole beneficiary. The
Court of Appeal held that did not amount to a fraud on a power.36
[50]

The Declaration confers powers on the Protector (among other things) to

“remove any existing Trustee with or without cause”. 37 That power was exercised.
As both Messrs Sergei and Victor Pugachev signed the removal instrument, the
question whether Mr Sergei Pugachev was “Under a Disability” becomes moot.38
For present purposes, I assume (without deciding) that Mr Sergei Pugachev was
entitled to exercise the power to remove a trustee under cl 6.3(a) of the Declaration,
and did so validly when executing the removal instrument.39
[51]

The beneficiaries of the New Zealand Trusts are members of the Pugachev

family.

Given the breadth of the powers conferred on the Protector to make

decisions in the best interests of those beneficiaries,40 the exercise of the power of
removal of trustees and the appointment of others, in circumstances where there has
been a loss of trust and confidence in those responsible for directing the original
33
34

35
36
37
38
39
40

Kain v Hutton [2008] 3 NZLR 589 (SC) at paras [18]–[20] (per Blanchard J for himself,
Elias CJ, McGrath and Anderson JJ).
Ibid, at paras [46] and [47], adding some additional comments on two points arising out of the
plurality judgment. See also, Matthew Conaglen, Fiduciary Loyalty: Protecting the Due
Performance of Non-Fiduciary Duties (Hart Publishing 2010) at 47–50.
Clayton v Clayton [2015] 3 NZLR 293 (CA). Leave to appeal to the Supreme Court has been
granted (Clayton v Clayton [2015] NZSC 84), argument has been heard and judgment reserved.
Ibid, at paras [86]–[92].
Clause 6.3(a) of the Declaration, set out at para [24] above.
See paras [27] and [42] above.
See para [26] above.
See para [24] and [25] above.

 trustees, 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.
[52]

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:41
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.

[53]

Based on the uncontested evidence of Messrs Sergei and Victor Pugachev,

there is no reason to suggest that the Protector’s power to remove the original
trustees was exercised improperly. As a result, I am prepared to make directions that
the original trustees have been validly removed and shall, once the Chancery Court
has made an order permitting the transfer of assets of the New Zealand Trusts to the
replacement trustees of each, execute such documents as are necessary to effect such
transfers.42

41
42

Matthew Conaglen and Elizabeth Weaver, Protectors as Fiduciaries: theory and practice (2012)
18(1) Trusts and Trustees 1 at 19.
See para [55](c) below.

 Costs
[54]

I am content to adopt the agreed position on costs, given that the beneficiaries

do not oppose. The effect of such an order is to allow the amounts claimed by the
original trustees to be deducted from funds held on behalf of the New Zealand
Trusts. My order follows the form of the draft submitted at the hearing on 28
September 2015.
Result
[55]

For those reasons, I direct that:
(a)

The original trustees were validly removed as trustees of the New
Zealand Trusts by the relevant removal instruments.

(b)

The original trustees were not removed as trustees of the New Zealand
Trusts for an improper purpose, or in breach of any fiduciary
obligation.

(c)

The original trustees shall transfer assets of the New Zealand Trusts to
the replacement trustees once the Chancery Court has made an order
varying the worldwide freezing order to enable that transfer to take
effect. Until such time as the original trustees are served with an
order to that effect, the assets of the New Zealand Trusts shall remain
in their names.

[56]

I order that all costs and disbursements incurred by the original trustees in

respect of these proceedings and those before the Chancery Court shall be paid out
of moneys held by Kea on behalf of the London Residence Trust, on the basis set out
in paras 5–9 (inclusive) of Mr Patterson’s affidavit of 24 September 2015.

In

particular:
(a)

The original trustees’ costs of and incidental to the present
application, being legal costs and expenses incurred through Patterson
Hopkins, Minter Ellison Rudd Watts and Mr R B Stewart QC, and any

 applicable court fees, (the New Zealand costs) are recoverable, to the
extent possible, from funds currently held by Patterson Hopkins on
behalf of the trustee of the London Residence Trust;
(b)

Payment of the New Zealand costs shall be made after notification has
been given to Hogan Lovells, pursuant to cl 14 of the worldwide
freezing order;

(c)

The original trustees’ costs of and incidental to the present
application, being legal costs and expenses incurred through Farrer &
Co and English counsel (the UK costs) are recoverable, to the extent
possible, from the funds held in trust by Farrer & Co on behalf of the
trustee of the London Residence Trust;

(d)

Payment of the UK costs shall be made after notification has been
given to Hogan Lovells, pursuant to cl 14 of the worldwide freezing
order.

[57]

Proper costs incurred by the replacement trustees will be chargeable against

trust assets. The Pugachev interests are content to let costs lie where they fall. I
make no order as to costs.
[58]

Leave to apply is reserved should any unexpected developments occur in the

Chancery Court proceedings that may require reconsideration of questions of costs in
New Zealand.
______________________________
P R Heath J
Delivered at 3.00pm on 2 October 2015