JSC Mezhdunarodniy Promyshlenniy Bank and Another v Sergei Viktorovich Pugachev and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Birss |
| Judgment Date | 11 October 2017 |
| Neutral Citation | [2017] EWHC 2426 (Ch) |
| Docket Number | Case No: HC-2014-000262 |
| Court | Chancery Division |
| Date | 11 October 2017 |
[2017] EWHC 2426 (Ch)
The Hon. Mr Justice Birss
Case No: HC-2014-000262
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building, Fetter Lane,
London, EC4A 1NL
Stephen Smith QC, Tim Akkouh and CHRISTOPHER LLOYD (instructed by HOGAN LOVELLS INTERNATIONAL LLP) appeared on behalf of the Claimants.
Hodge Malek QC and Paul Burton (instructed by DEVONSHIRES SOLICITORS LLP) appeared on behalf of the Twelfth to Fourteenth Defendants.
Hearing dates: 4th, 5th, 10th — 13th, 28th 31st July
| Introduction and narrative | 1 |
| The issues | 70 |
| The witnesses | 80 |
| The terms of the trust deeds | 103 |
| The law | 143 |
| Shams | 145 |
| Illusory trusts | 155 |
| Discretionary trusts, protectors and fiduciaries | 173 |
| Assessment | 204 |
| The involvement of Victor and his father as sources of assets | 204 |
| The True Effect of the Trusts claim | 212 |
| (i) Preliminary general points | 214 |
| (ii) Exclusion and indemnity clauses | 216 |
| (iii) The position of Protector | 222 |
| What if the Protector's powers are personal? | 234 |
| Are the Protector's powers purely personal? | 248 |
| The nature and scope of the Protector's powers – conclusion | 265 |
| The Sham claim | 279 |
| (i) The subsidiary characters – Ms Hopkins and Mr Pugachev's lieutenants | 283 |
| (ii) Mr Pugachev | 286 |
| (iii) Mr Patterson | 299 |
| Mr Patterson as a witness | 308 |
| (a) Dealings with trust assets without Mr Patterson's knowledge and agreement | 312 |
| (b) and (c) Mr Pugachev as settlor | 325 |
| (d) Not aware of any basis for the trusts being shams | 336 |
| (e) Only link to the OPK trusts was as corporate administrator | 341 |
| Mr Patterson's trust law article | 347 |
| (f) No distributions to Mr Pugachev from the trusts before the freezing order | 350 |
| (g) Mr Pugachev exercising control via Ms Dozortseva | 353 |
| Mr Patterson as a witness — conclusion | 357 |
| (iv) The establishment of the trusts | 359 |
| (v) The operation of the trusts | 381 |
| Trust and non-trust assets administered interchangeably | 384 |
| Administration did not change after property put into trusts | 392 |
| Mr Patterson's involvement was limited to formalities | 401 |
| Mr Pugachev referred to as beneficial owner after transfers into the trusts | 403 |
| Operation of the trusts — conclusion | 407 |
| (vi) The loans and the appointment of the New Trustees | 410 |
| Considering sham as a whole | 422 |
| Sham and the true effect of the trusts | 438 |
| The s423 claim | 443 |
| Relief | 449 |
| Summary of conclusions | 453 |
Introduction and narrative
This action is about five New Zealand trusts. It arises as follows.
The first claimant Mezhprom Bank is a Russian bank which entered into insolvent liquidation in Russia in late 2010. The second claimant, the Deposit Insurance Agency (DIA), is its liquidator. The claimants claim to be owed the sum of RUR 76.6 billion (in excess of US $1bn) by the first defendant, Mr Sergei Viktorovich Pugachev.
Mr Pugachev is a Russian. He was an oligarch. He currently lives in a chateau in France. Mr Pugachev founded Mezhprom Bank in 1992 and developed it in to one of Russia's largest private banks. He was active in Russian politics at the highest level and was elected as a Senator of the Russian Federation in 2001. He initially found favour with the ruling regime and assisted President Putin's rise to power.
By 2008 Mr Pugachev had two sons, Victor Pugachev (the eleventh defendant) and Alexander Pugachev. At that time they were young adults.
In 2008 Mr Pugachev started a relationship with Ms Alexandra Tolstoy. Ms Tolstoy is the daughter of Count Nikolai Tolstoy and Georgina Tolstoy. Count Tolstoy is the head of the Tolstoy family and a relative of Leo Tolstoy. Ms Tolstoy's paternal grandfather fled Russia at the time of the revolution and settled in England. Ms Tolstoy was born and educated in England.
When their relationship began, Ms Tolstoy's former marriage was breaking down and, while Mr Pugachev was married, he had been separated from his former wife for ten years.
At that time Mr Pugachev was a man of enormous wealth. He told Ms Tolstoy he was worth $15bn. As well as Mezhprom Bank, he told Ms Tolstoy he owned a number of other things. They included a huge property on Red Square in Moscow, the largest shipyard in Russia (in St Petersburg), the second largest coking coal mine in the world (in Tuva, Siberia), the French retail chain Hediard, the French national newspaper France Soir, a chateau in the south of France, three yachts (worth $35m, $25m and $5m), two private jets and a "massive" helicopter.
Mr Pugachev used a company called OPK to hold some of his major assets, such as Mezhprom Bank, the Red Square property, the shipyard and the coking coal mine.
In late 2008 in common with many banks all over the world the Mezhprom Bank was in difficulty. The bank received support from the Russian Central Bank but this ultimately failed. The bank's license was revoked and the Russian Court declared the bank was insolvent and appointed the DIA as liquidator. At the time the bank was collapsing so too was Mr Pugachev's standing with the Russian ruling elite. The claimants contend that Mr Pugachev misappropriated very large sums of money from the bank. On the other hand Mr Pugachev contends that the Russian state unlawfully expropriated his major Russian assets. He contends that the Red Square property was taken in 2009 and the shipyards were expropriated in 2010.
In 2009 and 2010 Ms Tolstoy and Mr Pugachev had two children, Alexis (born 20 th March 2009) and Ivan (born 21 st June 2010). With their sister Maria, who was born later, these children are the 12 th, 13 th and 14 th Defendants to these proceedings. They are represented by their mother acting as litigation friend.
When their relationship started Ms Tolstoy and Mr Pugachev lived in Russia in a property known as Gorki 2. Ms Tolstoy returned to London in 2009 to have her first child and from that time a property at 53 Glebe Place was rented as their London home. Later, in 2010, 53 Glebe Place was bought outright and later still, in 2011, the next door property at 54 Glebe Place was purchased as well and knocked through. From 2009 the couple lived in London, Moscow, the south of France and St Barths in the Caribbean. The property in St Barths was called Sand Club and had been bought as a holiday home in May 2010. A value of $40 million has been given for it. A country residence in Herefordshire called Great Venn was also purchased in 2010. Later the couple sought to purchase another country house in Wiltshire called Doves House but that purchase fell through.
By early 2011 Mr Pugachev's position had deteriorated and he fled Russia on 28 th January 2011, just after criminal investigations were opened in Russia relating to the bank's collapse. Ms Tolstoy said she did not remember him being particularly worried at a point around this time. She may have meant a few months before Mr Pugachev fled, in which case it does not matter. If the evidence was intended to suggest that his departure in January 2011 cannot fairly be called fleeing the country, then I do not accept it.
A complete picture of how Mr Pugachev's personal and business interests are operated is not available but what can be said is that in this period a company called Galaxis Capital LLP was involved, with an office in Knightsbridge. The individuals there were Pierre Lussato and Alexis Gurdjian. Many very rich families run their affairs through a "family office" and at that time the family office seems to have been operated by Mr Lussato at Galaxis. Later the family office seems to have been run by Martin Liechti of a company called Oakhill Management Ltd. Another close associate of Mr Pugachev's was and remains Natalia Dozortseva. She was the head of legal at Mezhprom Bank. While no longer associated with the bank, she is still closely associated with Mr Pugachev.
Mr Pugachev and Ms Tolstoy looked for a property in London to be their main residence. They identified Old Battersea House in Chelsea. Contracts were exchanged in November 2011 and the property was bought for £12 million. It needed very substantial renovation. That work has never been completed and the property stands empty today.
A New Zealand trust called the London Residence Trust was declared of Old Battersea House on 6 th December 2011. The trust deed was drafted by William Patterson, a New Zealand solicitor, on instructions from Mr Lussato. The trust is a discretionary trust. Mr Pugachev, Ms Tolstoy and their children are among the named discretionary beneficiaries, as well as Victor and Alexander Pugachev. The trustee was a newly incorporated New Zealand company called Kea Trust Company Ltd, the second defendant. In addition the trust deed provides for a "Protector" with various powers. The First Protector is Mr Pugachev. If Mr Pugachev dies or is "under a disability" (see below) the Protector is Victor Pugachev. The London Residence Trust has terms in it expressly providing for a right of residence for Ms Tolstoy and her children in the residential property.
Mr Patterson's firm Patterson Hopkins is a partnership with his wife Robyn Hopkins....
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