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bare trust, Beneficiaries, Corporate trustee, Deed of Trust, Illusory trust, protector, Settlor; settlors, Settlors, sham, Sham trust, Trust classification, Trustee liability, Trustee Resolutions, Trustees, Trusts

The curious story of the Angora cat

Para 438 in the decision of MezhProm Bank v Pugachev refers to a phenomenon in patent law known as the Angora cat problem first identified by Professor Franzosi, an eminent academic expert in the field:

“Professor Mario Franzosi likens a patentee to an Angora cat. When validity is challenged, the patentee says his patent is very small: the cat with its fur smoothed down, cuddly and sleepy. But when the patentee goes on the attack, the fur bristles, the cat is twice the size with teeth bared and eyes ablaze.”

This might seem a surprising analogy to draw in a decision on the validity of five New Zealand trusts by a Chancery Division Justice.  However, once apprised of Justice Birss’ strong patent background the quote is more apposite.

To the case in hand.  Arguments relating to sham and illusory trusts may not naturally turn one’s mind to the Angora cat.  However, this decision, like the Angora cat, features two distinct and entirely opposed concepts of a trust.

Paradoxically, the case could have gone for or against the propositions that substance (as determined by a judge) should rule over the form of a trust; and that  where that substance does not, it is still open for a finding of sham.


The facts of MezhProm Bank v Pugachev  can be stated briefly as follows:

Sergei Pugachev was a Russian oligarch. He was involved in Russian politics, being elected a senator of the Russian Federation. More notably he became extremely wealthy as a banker. He founded MezhProm Bank in 1992 and later acquired significant mining and property assets in Russia and in France. He is sometimes reputed to have been “Putin’s banker” and, at his peak, claimed to be worth US$15 billion.

However, Mr Pugachev seems to have fallen dramatically out of favour following the Global Financial Crisis. By late 2008 MezhProm was in serious financial trouble. Its banking licence was revoked and the state Deposit Insurance Agency (DIA) was appointed liquidator. Pugachev also fell out with his former political allies and benefactors. He was subsequently accused of misappropriating billions of dollars from MezhProm and his Russian assets were progressively expropriated. He fled from Russia in 2011.

Mr Pugachev already had two sons when he entered a relationship with a Russian émigré living in the UK named Alexandra Tolstoy, a distant relative of the novellist Leo Tolstoy. They had three children but their relationship was also very volatile. In 2011 Pugachev purchased a London home for the family and a trust named the London Residence Trust was established by declaration of trust in New Zealand. The trustee was a New Zealand company. The trust was a discretionary trust with  Mr Pugachev, Ms Tolstoy and their children, as well as Mr Pugachev’s earlier children, among the named discretionary beneficiaries. Mr Pugachev was named First Protector. The trust had express terms providing a right of residence for Ms Tolstoy and her children in the residential property.

In 2012 the pressure on Mr Pugachev from Russia was increasing.  The possibility of action by creditors to freeze Pugachev’ assets was being reported. Pugachev sought advice on how to protect his assets from such claims. Between July and November 2013 four more New Zealand trusts were set up and assets placed into them. The trusts were the Kea Three Trust and the Riviera Residence Trust (both declarations of trust made on 16th July 2013), the Wiltshire Residence Trust (declared on 3rd October 2013) and the Green Residence Trust (declared 28th November 2013).  The terms of these trusts were essentially the same as the terms of the London Residence Trust. Mr Pugachev is First Protector, followed by his eldest son Victor. The trusts held assets in the United Kingdom, St Barths, Switzerland and Russia.

Before being depleted, the value of all the assets in all the trusts, including the London Residence Trust, was over $95 million.  On 2nd September 2013 the Swiss authorities froze bank accounts associated with Mr Pugachev and his companies.  A claim in Russia against Mr Pugachev was filed by the DIA on 2nd December 2013. The Russian liquidation of MezhProm Bank was recognised by an order made by Henderson J in the UK on 11th July 2014 pursuant to the Cross Border Insolvency Regulations.  The deficiency in the bank’s assets at the date of its entry into liquidation was approximately US $ 2.2 billion. Henderson J made a without-notice worldwide asset freezing injunction against Mr Pugachev in the first of a long running series of litigation skirmishes between the parties, including two appeals to the Court of Appeal.

The litigation was commenced in 2014 by MezhProm Bank and the DIA as claimants. Following the collapse of the relationship between Mr Pugachev and Ms Tolstoy, most of the litigation defence was undertaken by Ms Tolstoy on behalf of her children, seeking to defend the trusts for their benefit. Mr Pugachev himself fled from the UK to France (where he remains), and where he claimed citizenship, in breach of orders restricting his travel.

In 2015 Mr Pugachev purported to replace the original trustees with a set of newly incorporated trustee company more closely controlled by himself and Victor. The original trustees challenged the validity of their removal but it was upheld by Heath J in the New Zealand High Court in October that year.  See Protector Powers – fiduciary or not.  In the UK he was subsequently found guilty of contempt of court and sentenced to 24 months imprisonment. Default judgment for the claimants was entered in respect of the Russian claim against Pugachev.

The Claims

The current case proceeds on the basis of two main claims:

  1. The “Illusory Trust” claim, which Mr  Justice Birss preferred to re-state as the True Effect of the Trusts claim, and
  2. The Sham claim

True effect of the Trusts

At [167] Mr  Justice Birss  states that the New Zealand decision in Clayton, which he considers at length “shows that when considering what powers a person actually has as a result of a trust deed, the court is entitled to construe the powers and duties as a whole and work out what is going on, as a matter of substance. Even though the VRPT deed [in Clayton] named more than one Discretionary Beneficiary and named Final Beneficiaries which did not include Mr Clayton, when the deed is examined with care, what emerged is that in fact Mr Clayton had effectively retained the powers of ownership.”

This appears to be a gloss on the decision in Clayton, where notwithstanding the extent of powers retained by Mr Clayton the  Supreme Court found at [50] that it was  “..necessary to analyse the VRPT deed more closely to see whether Mr Clayton’s powers and entitlements as Principal Family Member, Trustee and Discretionary Beneficiary give him such a degree of control over the assets of the VRPT that it is appropriate to classify those powers as rights or interests in terms of paragraph (e) of the definition of property in s 2 of the [relationship property legislation]”.

As noted then at [58] “The fact that [Mr Clayton] cannot remove the Final Beneficiaries does not alter the fact that he can, unrestrained by fiduciary obligations, exercise the VRPT powers to appoint the whole of the trust property to himself.”  This led not to a finding of sham or that the true effects of the trust were something other than represented by the deed, but rather Mr Clayton’s powers had a value for relationship property purposes.

At [115] the Supreme Court states that “The fact that the trust deed gives Mr Clayton powers that amount in effect, to a general power of appointment does not indicate that when entering into the VRPT deed, Mr Clayton in fact intended to create a structure different from that set out in the terms of the VRPT deed itself…”

The  Supreme Court found that the VRPT was not a sham and that while that did not “preclude a finding that the attempt to create a trust failed and that no valid trust has come into existence. [In which case that] would lead to a finding that the trust is illusory” given that the matter had settled, and the somewhat extraordinary terms on which Clayton was settled, there was no need to determine the question.

Back to the case in hand.  The terms of the trusts are considered at length in the judgment with particular care paid to the protector powers, which were reserved in the first instance to Mr Pugachev; great attention was also paid as to whether Mr Pugachev should be considered the Trust’s settlor (notwithstanding that the trusts were settled by way of declaration, which is an entirely accepted method of trust settlement).  In this regard it is noted at [271] that:

“I suppose it might be said that since the deed does not identify the settlor, it is an inappropriate use of extrinsic evidence into take in account that the settlor is Mr Pugachev. I would reject that approach. … I doubt it is an accident that the document does not identify a settlor at all. By not showing on the face of the deed that the settlor is the same person as the First Protector and first named Discretionary Beneficiary, the deed does not make what is going on quite so stark.”

It is suggested that the malign conclusion drawn, is unnecessary given that the source of the trust’s assets was largely accepted and raises the important distinction between the terms on which a trust is settled, and the source of the trust’s assets and the need not to conflate the two concepts.  It is also important to consider that the terms of the trusts were not in the nature of the unusual terms of Clayton.

Nevertheless the conclusion on the true construction of the substance of the  trusts is summarised as follows at [272] to [278]:

  1. The fact that the power of removal of trustees is expressed to be “with or without cause” is significant. In the context of all the other factors in this case, to go to the trouble of saying expressly that removal of a trustee may be without cause seems to me to negative any idea that the power is subject to a limitation of any kind. If the Protector had not been the settlor (nor a Discretionary Beneficiary) then I can see that those words might not be read in the same way (cf Davidson in which the Protector was neither a settlor nor a beneficiary). Even before Heath J it was not so clear on the evidence before him as it is before me that Mr Pugachev was the settlor (see paragraph [38].) But on its face the document confers a power on the settlor to remove trustees without cause.
  2. This construction renders much of the deed superfluous but that is not a strong enough factor set against the others to lead to a different conclusion. The language used to refer to the Protector’s powers is wide. The fact that the trustees’ obligations are fiduciary does not support the proposition that the Protector’s powers must also be fiduciary.
  3. It may be the case that for some trust deeds one can say that the trust is for the family (as a whole) rather than for one individual, or one can say that the purpose of the trust is to promote the interests of the Discretionary Beneficiaries as a whole as opposed to one individual. However the deeds here do not expressly identify what the purposes of the trusts are. While the Discretionary Beneficiaries are all members of the same family, to correctly construe the deed account needs to be taken of the Protector’s powers. So to construe these trust deeds by identifying the purpose of the trusts takes one back to all the other factors under consideration.
  4. I believe the provisions about the Protector being Under a Disability defined as to include a disability by operation of law support the same conclusion. The arrangements have been set up so that if the Protector is subject to a court order requiring him to do something he does not want to do, he ceases to be the Protector and his son Victor stands in his place. If required to act against his will Mr Pugachev can truly say to the court that he has none of the Protector’s powers. If the Protector’s powers under the deed were limited to acting only in the best interests of the Discretionary Beneficiaries as a class, rather than in his own selfish interests, then I doubt this provision would be necessary. What it does is allows Mr Pugachev’s effective complete control of the trusts to cease to exist the moment he is compelled to do something he does not want to do, like hand over the assets to a creditor. It is an attempt to make the trust judgment proof and should not be accepted.
  5. The trust deeds are not identical but I do not believe the differences are significant enough to matter. The defendant’s best case would be whether the unique residence clause in the London Residence Trust makes any difference. I do not believe it does. While he is alive the right of residence is given to Mr Pugachev and clause 4.6 allows him to direct a sale, with the proceeds becoming general trust assets.
  6. In the other trusts the class of Discretionary Beneficiaries is more focussed on the children of Ms Tolstoy’s union with Mr Pugachev (but not entirely). That does not make any difference.
  7. I conclude therefore that on their own terms these trusts do not divest Mr Pugachev of the beneficial ownership he had of the assets transferred into them. In substance the deeds allow Mr Pugachev to retain his beneficial ownership of the assets.

The conclusion then was that the beneficial ownership of the assets had not been transferred to the trusts and thus remained with Mr Pugachev, that is, that is the true effect of the trust.


The sham finding appears to be largely based on the view formed that the obvious inference was that Mr Pugachev intended to maintain control and that the trustee had no intention independent of Mr Pugachev.  This is difficult to reconcile with the practice of settling trusts and the generally acceptable inference that a trust settled for the benefit of beneficiaries is intended to benefit those beneficiaries – one of which in these instances was Mr Pugachev.

The analysis on this point is disturbingly tautological in that:

  • the obvious inference from the circumstances as a whole was that Mr Pugachev’s intentions were what I have found them to be, including in particular that they were a pretence to disguise control, that Victor was part of the pretence and that control was to be maintained via the role of Protector [434]
  • Given Mr Pugachev’s true intentions, the finding on the True Effect of the Trusts claim means that these trusts are not shams [436]
  • However if a proper approach to the construction of these deeds was to lead to a conclusion that the Protector’s relevant powers are fiduciary …  those deeds are a sham [437]

So to paraphrase – if there are constraints on Mr Pugachev the deed is a sham because any facts that contradict the view that he has total control and this the true effect of the trust is that he retains control, must be disregarded.

This suggests the impossible conundrum that once a view as to “the true effects is decided” any contrary facts rather than disproving the proposition instead become evidence of the sham.  Who then is shamming who?

The conclusion on the sham argument is then summarised at [441] and [442] as follows:

    1. I do not believe this characteristic of the deeds in this case is accidental. Whether “sham” is a perfect description is not clear but it does not matter. This is not a case in which, contrary to what an ordinary looking trust deed with just a settlor and a trustee may state in words, the whole scheme always was in truth that the settlor would exercise covert control of the trustee and both settlor and trustee always intended that that would be so. In that sort of case the word sham accurately describes the trust deed.
    2. However whatever label is to be applied to this case, in my judgment the combination of circumstances here means that the court should not give an effect to these instruments that would result in the assets being regarded as outside Mr Pugachev’s ultimate control. The whole scheme was set up to facilitate a pretence about ownership (or rather its absence) should the need arise.

Where to now?

It can be argued that the case must be limited to its particular context and that the ability of an English Chancery Court to rule on trusts governed in accordance with New Zealand law, in respect of assets owned in jurisdictions including Switzerland, France and Russia must necessarily be limited to its facts.  The interpolation of a Russian oligarch with alleged wealth of $15bn as a putative settlor, notwithstanding that each trust was made by way of declaration, perhaps also can be limited to the arguably unique circumstance.

Whether the Angora cat is smooth, cuddly and sleepy or large, bristley and baring of teeth remains to be seen.

Editor’s note:

The case will be discussed in a webinar on Wednesday 18th October at 10.30am.  See Trust Series 2017 – Important Trust Cases  to enquire about a copy of the webinar.


  • MezhProm Bank v Pugachev [2017] EWHC 2426 Ch
  • Clayton v Clayton [2016] NZSC 29
  • Kea Trust Company Limited v Pugachev[2015] NZHC 2412
  • Kea Trust Company Limited v Pugachev[2015] NZHC 2218
  • Kea Trust Company Limited v Pugachev [2015] NZHC 1960
  • Matthew Conaglen and Elizabeth Weaver, Protectors as Fiduciaries: theory and practice (2012) 18(1) Trusts and Trustees 1 at 19
  • Re Bird Charitable Trust [2008] JLR 1 (Deputy Bailiff Birt and Jurats Bullen and Liddiard) at paras 82–92.
  • Kain v Hutton [2008] 3 NZLR 589 (SC) at paras [18]–[20] (per Blanchard J for himself, Elias CJ, McGrath and Anderson JJ).
  • Mark Hubbard, Protectors of Trusts (Oxford University Press 2013) at 85–86
  • Vatcher v Paull [1915] AC 372 (PC) at 378C
  • Clayton v Clayton [2015] 3 NZLR 293 (CA). Leave to appeal to the Supreme Court has been granted (Clayton v Clayton [2015] NZSC 84) and judgments were issued on 23 March 20.  See The Supreme Court Writes Back


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