How Do I Withdraw or Redeem Units From a Unit Trust in Papua New Guinea?

Getting money out of a unit trust is governed by the trust deed and by Division 7 of Part V of the Capital Market Act 2015. The rules differ sharply depending on whether the scheme is liquid.

Where the right to withdraw comes from

The Act does not itself give unit holders a right to redeem. It permits the deed to do so, and most deeds do, because an open-ended fund that cannot be left would attract few investors. If the deed is silent, there is no right to withdraw and the only exit is to sell your units to someone else or wait for the scheme to be wound up. Section 210(5) requires a deed that does confer the right to specify it, to set out adequate procedures for making and dealing with withdrawal requests while the scheme is liquid, and, if the right may be exercised while the scheme is not liquid, to provide for it to be exercised under Division 7. Read the withdrawal clause before you invest. See what the deed must contain.

Withdrawing from a liquid scheme

A scheme is liquid if liquid assets such as cash, bank bills and marketable securities make up at least 80 percent of the value of the scheme property (section 257(5)). In a liquid scheme the deed will normally allow you to lodge a withdrawal request on any business day, or on set dealing days, and the trustee pays the withdrawal price within the period the deed specifies. That price is usually the net asset value per unit less any exit charge; see how units are priced. The steps are:

• Complete the trustee’s withdrawal form, stating the number of units or the kina amount, and sign it. Joint holders usually must all sign.
• Lodge it by the cut-off time on the dealing day. Requests received after the cut-off are priced at the next valuation.
• The trustee cancels the units, updates the register (section 250(2)) and pays the proceeds to your nominated bank account from the scheme’s trust account (section 193(4)).

Section 257(3)(a) forbids the trustee from allowing a withdrawal from a liquid scheme “otherwise than in accordance with the trust deed”. It cannot waive the notice period for one member or pay a favoured investor ahead of the queue.

Withdrawing from a non-liquid scheme

A property trust or a fund of unlisted shares will usually fall below the 80 percent test. In a non-liquid scheme there is no on-demand redemption. The trustee may, when particular assets are available and can be turned into money, make a written withdrawal offer to all members, open for at least 21 days, specifying the assets to be sold, the money expected and how requests will be scaled back if demand exceeds the money available (section 258). Payments are made within 21 days after the offer closes, pro rata if necessary (section 260). Section 257(3)(b) makes it an offence for the trustee to allow a withdrawal from a non-liquid scheme other than under the deed and sections 258 to 261. See withdrawal offers and the liquidity test.

What happens if the trustee breaks the rules

Section 257(4) provides that a trustee which contravenes subsection (3) is guilty of an offence and liable to a fine of up to K500,000, and that every director of the trustee is liable to a fine of up to K100,000 or imprisonment for up to seven years, or both. The point of the rule is fairness. A trustee that quietly lets a large institutional holder out of an illiquid fund leaves the remaining members holding the least saleable assets. Section 210(6) states the principle: the right to withdraw, and any deed procedures for withdrawal requests, “shall be fair to all members”. A member who suffers loss from a breach may sue the trustee under section 262 within six years, and the Court may make any order to protect members’ interests (section 256).

Listed units: sell on the market

Some schemes list their units on PNGX Markets Ltd, the stock exchange approved under section 9. Listed units are generally not redeemable from the trustee; instead you sell them through a licensed stockbroker at the market price, which may be above or below net asset value. Section 242(a) recognises this by valuing a listed interest at its last sale price. The buy-back exception in section 321 shows that a deed may still contain a covenant for the trustee to repurchase units at a price tied to underlying asset value, but that is a matter for the particular deed. See listing units on PNGX.