What Did the Supreme Court Decide in Nasfund v Pacific Equities (2006)?

National Superannuation Fund Ltd v Pacific Equities and Investments Ltd [2006] PGSC 12; SC845 was decided by Lay J, sitting as a single judge of the Supreme Court, on 11 July 2006. It is the first reported Papua New Guinea decision on a public unit trust.

Background

The Pacific Balance Fund (PBF) was built from the assets of the former Investment Corporation Fund. Its trust deed of 22 October 2001 made Melanesian Trustee Services Ltd (MTSL) the trustee, licensed under section 72 of the Securities Act 1997. The fund had more than 30,000 unit holders; Nasfund held 21 percent of the units. Pacific Equities and Investments Ltd (PEIL) was the manager and kept the accounts.

Two disputes ran side by side. The Securities Commission directed MTSL to terminate PEIL as manager; PEIL appealed to the National Court under section 13 of the 1997 Act (CIA 19 of 2006). Separately, Nasfund complained to the trustee that PEIL was in serious breach of the deed. Clause 21.1(1) obliged the trustee, where the manager was in material breach, to convene a meeting of unit holders within 42 days to consider removal. MTSL called a meeting for 14 July 2006.

PEIL then applied in its Commission appeal, and on 29 June 2006 Injia DCJ restrained the unit holders, including Nasfund, from taking any step to remove PEIL and from putting its removal on the agenda of any meeting. Nasfund, not a party to that appeal, appealed and asked a single Supreme Court judge to stay the injunction.

The issues

• How far can a single Supreme Court judge go? Sections 5 and 19 of the Supreme Court Act allow interim orders, but not one that “involves the decision on the appeal”.
• Who decides whether the manager stays: the court, or the unit holders under the deed?

What the Court decided

Lay J held that staying the whole injunction would leave the appeal of “academic interest only”, which was beyond a single judge (para 12). A narrower order, allowing the vote but not its implementation, preserved the appeal (para 13). He then found an arguable case on the merits.

Where the accounting function sits with the manager, the judge held, “the Manager has a positive duty of disclosure to the Unit Holders” (para 22). The accounts had been unaudited since 2002, a K37 million write-off was proposed, and no unit holders’ meeting had been held since the trust began. The court should not lend its power to an open-ended deferral of the meeting (para 24). Damages would not compensate PEIL for losing its position, but the absence of accounts was itself a prejudice to every unit holder that money could not measure (para 27).

The orders: the injunction was stayed so far as it prohibited the 14 July 2006 meeting considering and voting on PEIL’s removal; the meeting could proceed on its agenda; the restraint on actual removal under clause 23.3 was not stayed; and if a removal resolution was carried, the trustee was to take no step to implement it until the appeal was determined, unless PEIL voluntarily executed a retirement deed. The meeting went ahead and voted to remove PEIL; what followed is explained in Pacific Equities v Melanesian Trustee Services (2007).

Why it matters for unit holders and trustees today

The principles survive and are now largely written into the Capital Market Act 2015.

• The trustee is answerable. Section 189 makes the licensed trustee the “principal responsible entity”. It may outsource fund management (section 190(2)), but the section 191 duties stay with it: act honestly, with care and diligence, in the members’ best interests, keep scheme property separate and valued, and report material breaches to the Commission. Breach carries a fine of up to K10 million or ten years’ imprisonment, or both. See the trustee’s duties.
• Unit holders decide. Members may remove the trustee itself (section 201). Members with 10 percent of the votes, or 100 members, can require the trustee to call a meeting within 21 days (section 214); if it fails, they may call it themselves (section 215), and 10 percent may call a meeting at their own expense (section 216). The deed is enforceable by members (section 212). See removing the trustee.
• The Commission’s role. Today the Commission acts through licensing: a licensee that disobeys a direction may have its licence revoked or restricted under section 48, with an appeal to the National Court within 14 days under section 56. Other Commission decisions go first to review by the Board under section 111 of the Securities Commission Act 2015 (within 30 days), then to the National Court on a question of law under section 114.