What Did the National Court Decide in Pacific Equities v Melanesian Trustee Services (2007)?

Pacific Equities and Investment Ltd v Melanesian Trustee Services Ltd [2007] PGNC 24; N3122 was decided by Hartshorn J in the National Court on 21 March 2007. It is the sequel to Nasfund v Pacific Equities (2006).

Background

Pacific Equities and Investment Ltd (PEIL) was the fund manager of the Pacific Balance Fund (PBF), an unincorporated unit trust, under a trust deed of 22 October 2001 and a deed of appointment of 16 May 2002. Melanesian Trustee Services Ltd (MTSL) was the trustee, licensed under section 72 of the Securities Act 1997. Nasfund was a substantial unit holder.

After Nasfund alleged serious breaches of the deed, MTSL convened a meeting of unit holders for 14 July 2006. A single judge of the Supreme Court had allowed the meeting to vote on PEIL’s removal but ordered that no step be taken to implement the vote until Nasfund’s appeal was decided. The meeting resolved to remove PEIL. On 25 September 2006 PEIL issued an originating summons (OS 673 of 2006) against MTSL and Nasfund seeking declarations that the meeting, or alternatively the resolution, was null and void. By motion filed 7 December 2006 it asked for an interlocutory injunction restraining the defendants from giving any effect to the resolution until judgment.

The issues

PEIL said the meeting and the resolution were unlawful because:

• MTSL had not served a written notice to show cause under Article 8 of the deed of appointment;
• the meeting was held 52 days, not within the 42 days required by clause 21(1) of the trust deed, after MTSL first had notice of the breach;
• PEIL was not given notice of the meeting as clause 26.5 required; and
• the notice did not give unit holders enough information “to form a reasoned judgment” under clause 26.7.

The defendants answered that Article 8 was a separate removal route; that 42 days was impossible because PEIL had not kept a proper register, and reformatting it and mailing 30,000 unit holders took over five weeks; that PEIL’s managing director admitted receiving the notice five weeks before the meeting; and that the notice carried PEIL’s response to every allegation, while PEIL also ran its own mail-out.

What the Court decided

The judge applied the settled interlocutory injunction principles from American Cyanamid v Ethicon. The first question is whether the applicant has a serious question to be tried, meaning “a serious, not a speculative case which has a real possibility of ultimate success” (para 12). Conflicts in affidavit evidence are not resolved at this stage (para 26).

On the 42-day point the judge asked how PEIL had suffered from being given more time, when no unit holder complained (para 21). On Article 8, he could see no reason why an alleged breach of a separate show-cause procedure would make a clause 21 meeting unlawful (para 17).

Having found no serious question, he did not need to weigh the balance of convenience, but added that PEIL would in any event be adequately compensated in damages. Its claims of “serious hardship and irreparable harm” to its reputation and survival were unsupported assertions, and Nasfund in particular was well able to pay any damages awarded (paras 31–33). The “clean hands” objection was left undecided. The orders: the application for an interlocutory injunction was refused, with costs to the defendants.

Why it matters for unit holders and trustees today

The Capital Market Act 2015 now supplies a statutory code for meetings, and the decision shows how courts are likely to read it.

• Manager and trustee. There is no separate statutory office of manager. The licensed trustee is the responsible entity (section 189) and may engage or outsource to a fund manager (section 190(2)), but it owes the section 191 duties and must hold scheme property in trust for members (section 191(2)). A manager’s position rests on its contract with the trustee, exactly as PEIL’s did. See trustee and fund manager.
• Meetings and notice. Members with 10 percent of the votes or 100 members may require the trustee to call a meeting within 21 days, to be held within two months (section 214); at least 21 days’ notice is required (section 218). If the trustee defaults, members may call the meeting themselves (sections 215 and 216).
• Removing the trustee. What unit holders did to the manager in 2006 they may now do to the trustee itself, by resolution under section 201, choosing a licensed replacement at the same meeting. See removing the trustee.
• Enforceability. The trust deed is “legally enforceable as between the members and the trustee” (section 212), so disputes about whether a meeting followed the deed remain for the National Court, applying the same injunction principles under Order 14 Rule 10 of the National Court Rules 1983.