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Trusteeship under the microscope

1 November 2017

The integrity of trusts that are used to protect assets from the hands of creditors has been challenged in a decision of the Chancery Division of the UK Courts. There is a direct connection with New Zealand as it concerns five New Zealand trusts and a New Zealand incorporated trustee company which could well be a persuasive precedent for NZ judges to consider.

The background to the case is quite astonishing and involves significant assets spread around the world and even suggests links to Putin. That background revolves mainly around Russian oligarch Sergei Pugachev, an extremely wealthy Russian banker who founded Mezhprom Bank in 1992. His partner was a direct descendant of Leo Tolstoy and the mother of three of his children. Mr Pugachev also had children from a previous relationship. Things took a turn for the worse at the time of the global financial crisis, and at the same time, Mr Pugachev’s relationship began to crumble. With his world falling apart, Mr Pugachev set up five New Zealand trusts to retain ownership of his assets and later fled Russia for France after tracking devices were found on his cars.

The trusts were set up so that Mr Pugachev’s children and partner were named as discretionary beneficiaries with Mr Pugachev as First Protector, followed by his eldest son. As First Protector, he had considerable powers in relation to the trust, including the power to remove trustees ‘’with or without cause’’. Although the trusts were established by way of declaration, the judge looked through and determined Mr Pugachev was in fact the settlor.

The UK judge reviewed the New Zealand Supreme Court decision in Clayton v Clayton, which found that the bundle of rights held by Mr Clayton as principal family member, trustee, and discretionary beneficiary gave him such power the rights should be construed as property for the purposes of Section 2 of the Property Relationships Act. This decision essentially defeated Mr Clayton’s attempt to keep the trust assets outside his relationship property settlement with Mrs Clayton.

In the Pugachev case, the creditors of Mr Pugachev wanted to get access to the assets held in the five New Zealand trusts. The conclusion reached by the UK judge, although through a somewhat different path to that in Clayton, lead him to find that control over the trusts rested in the hands of Mr Pugachev and not with his independent trustees. The UK judge found the trustees didn’t start acting as a true trustee until such time as they knew the trusts were under the microscope. And prior to that point, they had had little knowledge of the assets owned by the trust. In some instances, they had been acting on the instruction of Mr Pugachev. These facts, coupled with the powers as First Protector, undermined the integrity of the trust.

This case is a very good lesson for all trustees. Even though the facts are quite surreal, it’s quite clear that with cases like this and the much anticipated new Trusts Act trustees will come under more and more scrutiny. It would be relatively easy for creditors to put any trust under the microscope. Trustees should review their trust deed and ensure that not only does the trust have at least one truly independent trustee but also that the trust itself is structured in a way to ensure that independence cannot be compromised. Perhaps, the time for having an independent trustee is no longer a matter of choice.

Source: Agent Brief December 2017

Author: Sarah Leppard

Agent Brief December 2017

For more information, please contact Wayne Pearson