How Must a Trustee Hold Scheme Money and Assets in Papua New Guinea?

The commonest way investors lose money in a pooled fund is not bad investment but mixing: scheme money sitting in the operator’s own account, spent on the operator’s own bills. The Capital Market Act 2015 attacks that risk directly.

Separation and the trust

Section 191(2) requires the trustee to “hold the scheme property in trust for the unit holders or members”, and section 191(1)(g) requires it to ensure that scheme property is “clearly identified as scheme property” and “held separately from property of the trustee and property of any other scheme”. Scheme property is widely defined in section 183: contributions, borrowed money, everything acquired with them and all income derived from them. A trustee running two funds must keep each fund’s shares, properties and cash apart from the other’s and from its own balance sheet. Breach of section 191(1) carries a fine of up to K10,000,000 or ten years’ imprisonment, or both. See the trustee’s duties.

The trust account under section 193

The rest of section 193 fills out the regime:

• Overseas receipts. Assets received outside Papua New Guinea may be deposited into a trust account the trustee maintains in that place (subsection (3)).
• Withdrawals. The trustee may not withdraw from or deal with assets in the trust account “except for the purpose of making a payment (a) to the person entitled thereto; or (b) that is otherwise authorised by law” (subsection (4)). A redemption or a fee the deed permits is authorised; a loan to a director is not.
• Creditor protection. Assets in the trust account “shall not be available for the payment of the debts of a trustee” and cannot be taken in execution of a judgment against the trustee (subsection (5)).
• Outsourced providers. Anyone subcontracted to perform a trustee function, “including the function of a fund manager”, shall not accept or hold scheme assets in trust and shall not open a bank account in trust for the scheme (subsections (6) and (7)). Custody stays with the licensed trustee. See trustee versus fund manager.
• Liens preserved. Nothing in the division takes away a lawful claim or lien a person has over scheme assets, including over assets received for the purchase or sale of securities before they reach the trust account (subsection (8)).

Contravening section 193 attracts a fine of up to K5,000,000; contravening it with intent to defraud attracts a fine of up to K10,000,000 or ten years’ imprisonment, or both (subsection (9)).

Dealing in securities and custody by others

Section 194(1) adds conditions whenever the trustee deals in securities for members: the assets must be applied solely for the purposes specified in the deed and in the members’ best interests; pending application they must be banked in the trust account by the next business day; and the trustee must keep a separate book entry for each scheme. Section 194(2) makes it an offence for “a person other than the trustee” to keep scheme assets in its custody, and section 194(3) imposes on that person, or on each director if it is a corporation, personal liability to a fine “at a minimum sum of K500,000.00” or up to five years’ imprisonment, or both. A minimum rather than a maximum fine is unusual, and the cross-references in subsections (2) and (3) are awkwardly drafted, but the policy is plain: nobody but the licensed trustee may have custody. Where the trustee itself contravenes subsection (1), every director is personally liable to a fine of up to K1,000,000 or five years’ imprisonment (subsection (4)).

When the accounts were frozen: ANZ v MTSL

The trust-account rules met regulatory enforcement in Australia and New Zealand Banking Group (PNG) Ltd v Melanesian Trustee Services Ltd [2019] PGNC 100; N7805. In 2018 the Securities Commission, acting under section 48(6), directed ANZ to restrict the bank accounts of Melanesian Trustee Services Ltd (MTSL) and of the Pacific Balance Fund it administered. In a separate appeal another judge had stayed those directions, but ANZ, not a party to that appeal, treated itself as unbound. MTSL then sought an order that it be allowed to operate the fund’s accounts without restriction. Dingake J dismissed the application: MTSL had not put in evidence that it held a current licence, its previous licence having been said to expire in December 2018, and under section 44 a licence lasts only 12 months. Without proof of a licence, the court would not order that the trustee be permitted to operate the accounts.

The lesson is that a scheme’s bank accounts are only as secure as the trustee’s licence. An unlicensed trustee cannot lawfully operate them, the Commission can restrict them under section 48(6), and unit holders may be unable to redeem while the dispute lasts. See the ANZ case explained.