Kea Trust Company Ltd v Pugachev
[2015] NZHC 1960
•18 August 2015
THIS JUDGMENT HAS BEEN REDACTED TO DEAL WITH CONFIDENTIALITY CONCERNS BUT MAY BE PUBLISHED IN THIS FORM.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2015-404-1753 [2015] NZHC 1960
BETWEEN KEA TRUST COMPANY LTD,
FINETREE COMPANY LTD, BRAMERTON COMPANY LTD, AND BLUERING COMPANY LTD Applicants
AND
SERGEI VICTOROVICH PUGACHEV, ALEXANDRA TOLSTOY AND VICTOR SERGEYOVICH PUGACHEV First Respondents
MARU LIMITED, HAPORI LTD, AROTAU LTD and MIHARO LTD Second Respondents
Hearing: 17 August 2015 Counsel:
R B Stewart QC and W J Blennerhassett for Applicants
No appearance by or on behalf of First Respondents
D A Campbell and G R Nicholson for Second RespondentsJudgment:
18 August 2015
JUDGMENT OF HEATH J
This judgment was delivered by me on 18 August 2015 at 3.00pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Kensington Swan, Auckland MinterEllisonRudd Watts, Auckland Counsel:
R B Stewart QC, Auckland
KEA TRUST COMPANY LTD v PUGACHEV [2015] NZHC 1960 [18 August 2015]
The application
[1] As a result of orders made by the Chancery Division of the High Court of Justice of England and Wales (the Chancery Court) and an appellate decision of the Court of Appeal, a worldwide freezing order has been made against property said to be owned or controlled by Mr Sergei Pugachev. The property to which the orders attach include interests as a discretionary beneficiary in five New Zealand based trusts (the New Zealand Trusts).
[2] The New Zealand Trusts are known as the London Residence Trust, the Kea Three Trust, the Wiltshire Residence Trust, the Riviera Trust and the Green Trust. Before 24 July 2015, there was no dispute that the trustees were Kea Trust Company Ltd, Fine Tree Company Ltd, Bramerton Company Ltd and Bluering Company Ltd. The directors of each of those companies are two solicitors based in Auckland, Mr William Patterson and Ms Robyn Hopkins. I shall refer to those companies as the “original trustees”.
[3] On 24 July 2015, interests associated with Mr Pugachev purported to remove the original trustees and to replace them with Maru Ltd, Hapori Ltd, Arotau Ltd and Miharo Ltd, all of which were incorporated in New Zealand. The directors of those companies are Ms Dozortseva, Mr Willem Smit and an Auckland based solicitor, Mr Ben Lenihan. I shall refer to these companies as the “replacement trustees”.
[4] On 31 July 2015, the original trustees applied to this Court for directions. While taking a neutral stance, they wished to obtain a Court ruling on whether they had been validly removed, before handing over trust assets to the replacement trustees.1 Given the orders obtained in the Chancery Court, the directors of the original trustees are understandably concerned to protect their exposure to third parties. They also seek authority from this Court to withdraw funds held by the New
Zealand Trusts to meet fees and disbursements payable for professional services in relation to this proceeding, including those to be incurred as a consequence of
complying with terms of the worldwide freezing order.
1 See para [24] below.
[5] To understand the circumstances in which the proceeding was issued I must set out the background. In doing so, I acknowledge that the summary will necessarily be selective and incomplete.
Background
[6] On 23 April 2015, JSC Mezhdunarodniy Promyshlenniy Bank (Mezhprom) and State Corporate “Deposit Insurance Agency” (State Corporation) obtained judgment against Mr 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.
[7] Mezhprom had been placed in liquidation in Russia, and State Corporation was appointed as its liquidator. The liquidation order was recognised in England and Wales on 11 July 2014.2 On the same day, in aid of the proceedings brought in Moscow, Henderson J made a worldwide freezing order against assets of Mr Pugachev. At the same time, His Lordship ordered Mr Pugachev to disclose his assets. A schedule was served on 23 July 2014. That schedule revealed that Mr Pugachev was a discretionary beneficiary of the New Zealand Trusts.
[8] Additional directions were made on 25 July 2014 to obtain better information about the New Zealand Trusts, including the identity of trustees, settlors, protectors and beneficiaries, and details of the assets (the trust disclosure order). Concerns were raised about the quality of the information provided. That led to an application by the original trustees to the Chancery Court to discharge the trust disclosure order. That was dismissed by David Richards J on 30 October 2014.3 On
27 February 2015, the Court of Appeal dismissed appeals from those decisions.
Delivering the judgment of the Court, Lewison LJ, with whom Arden and Christopher Clarke LJJ agreed, held that Mr Pugachev’s interest as a beneficiary under a discretionary trust was sufficient to make assets held by trustees amenable to
a freezing order.4
2 Under the Cross-border Insolvency Regulations 2006.
3 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2014] EWHC 3547 (ChD).
4 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139 at paras [13] and
[15].
[9] Following other decisions to which I need not presently refer, Mezhprom and State Corporation applied to bring the trust assets within the scope of the worldwide freezing order. That application was refused by Rose J, in an oral judgment given on
30 June 2015. However, her decision was reversed by the Court of Appeal as recently as last Friday, 14 August 2015.5 The New Zealand Trusts are now subject to the worldwide freezing order.
[10] The last confirmed sighting of Mr Pugachev in the United Kingdom was on
23 June 2015. He is now believed to be in France. The documents purportedly signed by Mr Pugachev to remove the original trustees suggest that they were executed and witnessed in Nice.
The New Zealand trusts
[11] [Redacted]. The assets from which the original trustees seek payment of costs6 are located both in New Zealand and England. They comprise funds held in the trust account of Patterson Hopkins, solicitors Auckland, totalling about £86,000 and approximately £67,000 in the trust account of Farrer & Co, solicitors London.
[12] The original trustees were incorporated in New Zealand and are governed by New Zealand law. Together, Mr Patterson and Ms Hopkins hold 100% of the shares in each of the trustee companies. A third person, Natalia Dozortseva, was a director of three of the companies, Kea, Bramerton and Bluering, until 14 July 2015. At that time, she was removed by Mr Patterson and Ms Hopkins, acting as shareholders of each of them.
[13] On 24 July 2015, notices of removal of the trustees of the New Zealand based trusts were received by Mr Patterson and Ms Hopkins. The removal notices were signed by Mr Pugachev, and his son Victor. There is little information about the replacement trustees. From the recent decision of the Court of Appeal, it appears that the directors of each of them are Mr Ben Lenihan, a solicitor in Auckland, Mr
Willem Smit and Ms Dozortseva. Quoting from the judgment of Rose J under
5 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 906.
6 See para [4] above.
appeal, the Court of Appeal said, in relation to Mr Smit, that he was someone “about whom no one has been able to find out anything for the time being”.7
[14] I infer that Ms Dozortseva was appointed as a director of the replacement trustees on or before 24 July 2015, a date that is in close proximity to her removal as a director of the original trustees, on 14 July 2015. [Redacted]
[15] Mr Pugachev is named as the “first Protector” of each of the New Zealand Trusts. The original trustees have received advice [… Redacted] that Mr Pugachev ceased to hold that office on the making of the worldwide freezing order on 29 July
2014. That may have an impact on the lawfulness of the decisions to remove the original trustees.
[16] The discretionary beneficiaries of the New Zealand Trusts are Mr Pugachev, Ms Alexandra Tolstoy (his partner) and children of their relationship, all of whom are minors. Mr Pugachev’s adult son from a previous relationship, Victor, is also a named discretionary beneficiary.
The New Zealand proceedings
[17] Substantively, the original trustees each apply for directions from this Court to determine whether:
(a) the original trustees have been validly removed
(b)if the instruments of removal are formally valid, they are vitiated because they were made for an improper purpose, or in breach of a fiduciary obligation
(c) if the original trustees have been validly removed, they can transfer assets of the trusts to the replacement trustees without the sanction of a Court order to protect them against inadvertent breach of the
worldwide freezing order.
7 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 906 at para 32.
[18] The original trustees also seek directions to enable their costs of and incidental to the present application, including those incurred by solicitors and counsel instructed in London, to be paid out of funds held by Patterson Hopkins.
[19] At the time the application was made, on 31 July 2015, the worldwide freezing order did not extend to the New Zealand Trusts. That occurred following delivery of the Court of Appeal’s decision of 14 August 2015. To that extent, there has been a change in circumstances since the application was made.
[20] A number of procedural orders were also sought. Some were made by Muir J
on 10 August 2015, when the application was first called. They included:
(a) An order that the Court record not be searched, copied or inspected by a third party without leave of a Judge on an application made on notice to the parties.
(b)An order for substituted service of the proceedings on Mr Pugachev, Ms Tolstoy and Mr Victor Pugachev; service was to be effected on the firm of solicitors instructed to act for the replacement trustees, Kensington Swan of Auckland.
(c) A direction that the infant beneficiaries were to be represented in the first instance by their parents, with that question to be reviewed by the Court once Mr Pugachev and Ms Tolstoy had taken steps in the proceeding.
[21] There were two contentious issues that required determination following the directions given by Muir J. One was the question whether Mezhprom and State Corporation should be served with the application. The second was whether the orders for costs sought by the original trustees should be made at this time. Although the Judge contemplated that the question of infant representation would be determined on 17 August 2015, I consider it is premature to do that until the Court apprised of the stance to be taken by Mr Pugachev and Ms Tolstoy. [Redacted]
The issues
[22] When the application came before me yesterday, it became clear that there were three issues that required immediate attention. As I had had limited time to consider the information before the Court, I reserved my judgment on the points that were argued.
[23] The issues with which I now deal are:
(a) Should an order for costs be made in favour of the original trustees at this time?
(b) Should service of the application be made on Mezhprom and State
Corporation?
(c) What further orders are required to ready the substantive application for hearing?
Costs
[24] Mr Stewart QC, for the original trustees, referred me to a passage from the most recent edition of Lewin on Trusts,8 at which it is stated:
27-194 If a trustee is purportedly removed from office under an express power or [statutory authority] on some specified ground for removal, for instance unfitness, and the trustee challenges the ground for removal, we consider that costs will normally follow the event. Difficulty arises where an express power of removal is conferred on the settlor, a beneficiary or a third party and does not specify grounds for removal though, being a fiduciary power, it can be exercised only for the benefit of the beneficiaries as a whole, and the trustee purportedly removed has a real and reasonable concern whether the power was so exercised. In such a case, in our view, unless the matter can be resolved by agreement with the beneficiaries being of full age and capacity, the trustee purportedly removed might properly, indeed should, apply to the court for directions, without being at personal risk as to costs, whether he ought to act on the purported removal and cause or allow the trust assets to become vested in or placed under the control of a new trustee purportedly appointed in his place. For that purpose, he should in his witness statement set out the material facts and the
8 Lewin on Trusts (19th ed, Sweet & Maxwell 2014) at para 27-194.
result of his consultation with adult beneficiaries, and explain the nature of and reason for his concern. But he should not run an active case challenging the validity of his removal unless so directed by the court, for instance because beneficiaries adversely affected by the removal are minors or unborn; and he will be at personal risk as to costs if does so unsuccessfully.
(Emphasis added; footnotes omitted)
[25] This is not a case in which all beneficiaries are of full age. Accepting, for present purposes, the correctness of the statement in Lewin, that “consent can only be given where all beneficiaries are of full age and capacity”, it would appear that the original trustees are acting properly and prudently in seeking directions; particularly having regard to the circumstances in which purported removal has been effected
and the advice they have received from senior counsel.9 As a result, Mr Stewart
submits that this is a proper case to make an advance order to enable the original trustees to be indemnified out of assets of the New Zealand Trusts for legal costs incurred both in New Zealand and England.
[26] Mr Campbell and Mr Nicholson, for the replacement trustees, submitted that an order is premature. They contend that costs should follow the event. Mr Campbell cites Re O’Donoghue,10 for the proposition that professional trustees should not unreasonably and unnecessarily abdicate their responsibilities by asking the Court to make decisions for them at an unjustifiable cost to the trust beneficiaries. While Hammond J did not express that proposition in those terms, it is
fair to say that the Judge emphasised the need for indemnity to attach to expenses properly and reasonably incurred by a trustee.11 For present purposes, I need go no further than that.
[27] Mr Campbell also referred to Re Beddoe; Downes v Cottam.12 He submitted that a Beddoe order should only be made in hostile litigation, something that was not presently apparent. Mr Campbell contended that the characterisation to be given to the litigation could only be assessed once the stance to be taken by Mr Pugachev, his
son and Ms Tolstoy was known.
9 See paras [13]–[15] above.
10 Re O’Donoghue [1998] 1 NZLR 116 (HC).
11 Ibid, at 120–122.
12 Re Beddoe; Downes v Cottam [1893] 1 Ch 547 (CA).
[28] There is some merit in the submission made by Mr Campbell in relation to historical events involving the current proceeding. If there were no hostility, the trustees would be entitled to indemnity for proper steps taken in any event. While, I suspect, the substantive application is likely to be opposed by the adult beneficiaries, no harm will be done if the question of historical costs is deferred until the next hearing at which time the position of the adult beneficiaries will be known. The same position applies in relation to the future conduct of this proceeding.
[29] A complication has arisen due to the orders made by the Court of Appeal in London on 14 August 2015. As a result of that judgment, both the original and replacement trustees are required to report to the solicitors for Mezhprom and State Corporation. Clause 12(1) of the worldwide freezing order relevantly provides:
PROVISION OF INFORMATION
12.
(1) …, each of [the original trustees] … must at the latest by 5pm (London time) on the third working day after the day of service of this order, and each of [the replacement trustees] must at the latest by 5pm (London time) on the seventh working day after the day of service of this order, and in each case to the best of their respective abilities (and having made all reasonable inquiries), inform [Mezhprom’s and State Corporation’s] solicitors of:
(a) all its assets worldwide exceeding £10,000 in value as at the time this order is served whether in its own name or not and whether solely or jointly owned, giving the value, location and details of all such assets;
(b) all assets with a value exceeding £10,000 which have at any time since 11 July 2014 been administered by the [original and replacement trustees] or dealt with in accordance with [their] direct or indirect instructions, giving the value, location and details of all such assets and the manner in which [any particular original or replacement trustee] has administered or dealt with the same.
[30] The worldwide freezing order also includes a provision dealing with legal costs incurred by the original and replacement trustees. Clause 14(1) provides:
EXCEPTIONS TO THIS ORDER
14.
(1) This order does not prohibit … [each of the original and replacement trustees] from spending a reasonable sum on legal advice and representation. But before spending any money the … [particular original or replacement
trustee] must tell [Mezhprom’s and State Corporation’s] legal representatives where the money is to come from.
[31] The legal representatives of Mezhprom and State Corporation to whom such advice must be given are Hogan Lovells International LLP (Hogan Lovells), a firm of solicitors in London.
[32] At the time the appeal from Rose J’s judgment was allowed, the Court of Appeal was aware of the present application.13 Delivering the principal judgment of the Court of Appeal, with whom Jackson and Ryder LJJ agreed, Bean LJ said:
21.In the meantime there had been a development which led to the present hearing. The original trustees of the trusts, the second to fifth respondents, are four New Zealand trust companies. They were represented in this jurisdiction by Farrer & Co LLP. On 24 July 2015
Farrers sent a letter to the Court copied to the claimants stating that the original trustees had been given notice by Mr [Sergei] Pugachev
and his son Victor of their removal and replacement as trustees by
four newly incorporated New Zealand companies, the 6th to 9th respondents.
…
37.The judge held that it would be “inexpedient” within the terms of section 25(2) of the Civil Jurisdiction and Judgments Act 1982 to grant an injunction against the original trustees and the new trustees because to do so might conflict with whatever the New Zealand court orders. It appears that the information given to Rose J that the New Zealand court was to rule on an application by the trustees on the 30th July 2015 turned out to be incorrect; there was a first hearing on 10 August 2015 and a return date has been set for 17
August 2015. In my view the appropriate way to deal with the possibility of discord between this jurisdiction and any order which
may be made in New Zealand is to give the usual liberty to all parties (including the original and new trustees) to apply on notice to
a judge of the Chancery Division to vary the order.
[33] I am satisfied that cl 14(1) of the worldwide freezing order does not prevent the original trustees from exercising their right of indemnity for payment of legal costs incurred in complying with the disclosure requirements imposed by cl 12(1) of the order. They may do so as long as they advise Hogan Lovells of the source from which the moneys come in advance. I do not read cl 14(1) of the order as creating a
right for Mezhprom and State Corporation to veto payment of the costs. At present,
13 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 906 at paras [21] and
[37].
all I am being asked to do is to sanction payment of particular costs to protect the original trustees. That is a jurisdiction I am entitled to exercise in New Zealand.
[34] I do have concerns about the limited information available to me about the costs to be incurred and the source of the funds from which they are to be paid. The memorandum filed by Mr Stewart on 17 August 2015, while referring to the amounts held in the trust accounts of the New Zealand and English solicitors,14 does not identify, by reference to a particular trust, the owner of the funds. That information must be conveyed to Hogan Lovells, as part of the disclosure requirement. On that
basis, I authorise payment of costs of compliance with cl 12(1) of the order from the funds held by Patterson Hopkins. Before they are drawn upon, advice shall be given to Hogan Lovells about the source and the ownership of the particular fund.15
[35] I am told that professional fees totalling about $20,000 will be incurred. I authorise a sum of up to $25,000 to be drawn down from the trust account of Patterson Hopkins in respect solely of legal costs and expenses incurred to enable compliance with the order. Advice must be given to Hogan Lovells of the proposed drawdown before funds are applied to payment of legal costs. Specific directions are given later.16
Service on Mezhprom and State Corporation
[36] Mr Campbell submitted that Mezhprom and State Corporation should not be offered an opportunity to participate in this proceeding having taken no steps to date. He stressed that this was a point on which the beneficiaries should be entitled to be heard. In any event, he submits that due to the sensitive nature of the proceeding, the only document that should be served, at this time, is the notice of application.
[37] Plainly, it is desirable that the present application be heard and determined promptly. Unless an order was made requiring any application to intervene to be
made by a particular date, it would be open to Mezhprom and State Corporation to
14 See para [11] above.
15 See para [43](a)(ii) below.
16 See para [43](a) below.
seek to do so at any time up to the hearing. If a late application were to be made there would be a risk that the substantive hearing may be unnecessarily delayed.
[38] In my view, service should be effected on Mezhprom and State Corporation and a limited time given to each to apply to intervene. Any application could be considered at the next call, possibly with argument on it. In any event, a prompt disposal of any opposed application would be possible. It is appropriate to provide a strict and limited time within which such an application could be made. Mezhprom
and State Corporation are aware that this proceeding is on foot.17
[39] In my view Mezhprom and State Corporation should be served. I shall direct that they be served by substituted service on their New Zealand based solicitors. The applicable directions are set out later.18
Substantive hearing
[40] Subject to the need to deal separately with any application to intervene, I
indicate that the substantive hearing will take place at 10.00am on 28 September
2015, with one day allocated. Timetabling orders to enable documents to be filed and served in anticipation for that hearing will be made on 26 August 2015.
[41] Before the applications are ready for determination, it will be necessary for the Court to hear submissions on whether independent counsel should be appointed to represent the minor beneficiaries. There may also be merit in the parties considering whether an application should be made to the Chancery Court for a variation to the worldwide freezing order to make it clear that this Court will be determining the question whether the original or replacement trustees should have stewardship of the assets of the New Zealand Trusts.
[42] The parties may wish to consider whether the need for a substantive hearing can be avoided by the resignation (or removal) of the original and replacement trustees and the appointment of new trustees by this Court. As the worldwide
freezing order is now in place, compliance with its terms will be required of any
17 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 906 at para 21.
18 See para [43](b) below.
trustees. The appointment of independent trustees to supervise the affairs of the New Zealand Trusts and to report to this Court pending determination of the proceedings in the Chancery Court may have benefits to all concerned.
Result
[43] I make the following orders: (a) Costs
(i)The original trustees have authority to drawdown from funds held in the trust account of Patterson Hopkins a sum of not more than $25,000 to meet legal costs and expenses incurred in connection with their compliance with the reporting requirements of cl 12(1) of the worldwide freezing order.
(ii)Prior to drawing down any of those funds, the original trustees shall notify Hogan Lovells of the account from which the moneys are to be drawn and the particular New Zealand Trust (or Trusts) on whose behalf the funds are held.
(iii) The original trustees’ application for costs in relation to the
application generally is adjourned for further consideration on
26 August 2015, when it is likely to be determined. (b) Service of Mezhprom and State Corporation
(i)I order substituted service of the notice of originating application (but not supporting documents) on Russell McVeagh, solicitors Auckland (for the attention of Mr M Kersey) on behalf of Mezhprom and State Corporation. Service shall be effected by email by 5.00pm today, 18 August
2015.
(ii)Any application to intervene, together with any affidavits in support, shall be filed and served by 3.00pm on 21 August
2015.
(iii)Any notice of opposition and affidavits in opposition shall be filed and served by 10.00am on 25 August 2015.
(iv)If time were available on 26 August 2015, any application could be argued then.
(c) Further directions
(i)By midday on 25 August 2015, the original trustees and the replacement trustees shall file and serve copies of the disclosure documents provided to Hogan Lovells in terms of cl 12(1) of the worldwide freezing order.
(ii)Directions made by Muir J on 10 August 2015 that have been rendered moot or are otherwise inconsistent with these directions are discharged.
(iii) The application is adjourned for further hearing before me at
9.00am on 26 August 2015, at which time further directions will be made.
(iv)The Court file in relation to this application shall not be searched, copied or inspected without leave of a Judge, on an application made on notice to all parties.
(v) Costs reserved.
[44] The substantive application will be heard at 10.00am on 28 September 2015. [45] The Registrar is directed not to distribute this judgment beyond counsel and
the parties pending further order of the Court. I will reconsider this direction on
26 August 2015. My provisional view is that the judgment can be released publicly as there is nothing contained in it that is not already in the public domain as a result of publication of a number of the English decisions. If counsel wish to contend for
an extension of that period, I will hear argument on 26 August 2015.
P R Heath J
Delivered at 3.00pm on 18 August 2015
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