Papua New Guinea has seen its share of “money schemes” that collect contributions from hundreds of people on the promise of returns no bank could match. Many are, in law, unregistered managed investment schemes. The Capital Market Act 2015 gives the Securities Commission, the courts and investors themselves tools to deal with them.
The offence and its penalty
A person who establishes or operates a unit trust or managed investment scheme without a licensed trustee appointed by the members and without the scheme being approved and registered by the Commission “commits an offence and shall be liable to a fine not exceeding K10,000,000.00 or imprisonment for a term not exceeding ten years, or both”.
The offence is committed by the person who operates the scheme, which section 187(5) says does not include a mere agent or employee or someone winding the scheme up. If the operator also carries on the business of fund management or dealing without a licence, section 34(4) adds a second offence with the same maximum penalty, and if units were offered without a registered prospectus, section 128(7) adds a third. See when registration is required.
Winding up by the Court
Section 188(1) provides that where a person operates a scheme in contravention of section 184(1), the Commission, the trustee of the scheme or a member of the scheme may apply to the National Court to have the scheme wound up, and under section 188(2) the Court “may make any orders it considers appropriate for the winding up”. That allows the Court to appoint a liquidator, freeze assets, order accounts and direct how the remaining money is shared among contributors. A single member may apply; an investor need not wait for the regulator. Section 188(3) then provides that, whatever is done about winding up, “every promoter and each individual director, the chief executive officer, the chief financial officer and the company secretary are guilty of an offence” and face the section 184(2) penalty. Running the scheme through a company gives its controllers no shield. See court-ordered winding up.
Investors may cancel their contracts
Section 263 gives subscribers a self-help remedy. Where a scheme is being operated unlawfully and a person offers or invites subscriptions for an interest in it, or where an offeror fails to comply with sections 124 and 125 on offers and excluded offers, a contract to subscribe “is voidable at the option of” the subscriber “by notice in writing to the offeror”. The mechanics run as follows.
| Stage | Effect (s 263) |
|---|---|
| Subscriber gives written notice | Both parties’ obligations are suspended for 21 days (s 263(2)(a)) |
| Offeror does nothing | The contract is void at the end of the 21 days (s 263(3)(a)) |
| Offeror applies to Court within 21 days | Suspension continues until the application and any appeal are finally decided (s 263(2)(b), (4)) |
| Court hearing | The Court may declare the notice of no effect only if satisfied it is “just and equitable” to do so (s 263(6)); it may extend the offeror’s time even after the notice has taken effect (s 263(5)) |
Section 263(1)(a) as printed refers to a scheme “operated in contravention of Section 187(5)”. Section 187(5) is not a prohibition, and the reference is evidently meant to be section 184(1). Once the contract is void, the subscriber is entitled to recover the money paid; in practice that may require joining the section 188 winding up or suing for restitution.
Who may hold the money
An unregistered scheme almost always means the promoter, not a licensed trustee, holds the contributions. Section 194(2) makes it an offence for any person other than the trustee to keep the assets of a unit trust or managed investment scheme in its custody, and section 194(3) imposes personal liability on that person and, if it is a corporation, on each director: a fine at “a minimum sum of K500,000.00” or imprisonment for up to five years, or both. The provision is unusual in setting a floor rather than a ceiling for the fine. Section 193 separately requires scheme assets to be banked in a trust account by the next business day, protecting them from the trustee’s creditors. See holding scheme money.
How the Commission investigates
Under section 54 of the Securities Commission Act 2015 the Commission may investigate where it has reason to suspect a breach of the Capital Market Act or a contravention involving fraud or dishonesty that relates to a managed investment scheme or unit trust. Investigating Officers appointed under section 55 may, under section 56, enter premises without a warrant, inspect and copy books, seize documents including travel documents, search persons and require production of records; obstructing them is an offence carrying a fine of up to K5 million or seven years’ imprisonment, or both. The Commission may then prosecute (section 83) or bring civil proceedings on investors’ behalf (section 84), and under section 101 may file proceedings in the National Court. See investigations.
A registered unit trust cannot promise a fixed return; the value of units rises and falls with the scheme property, and section 191(1)(h) requires regular valuation. A “scheme” that guarantees 20 or 30 percent a month, pays early investors from later investors’ money, has no licensed trustee and no registered deed is not a unit trust but a pyramid. Before paying, ask the Commission whether the scheme is on its record under section 186(2) and whether the operator holds a capital market licence. See spotting a fraudulent scheme.
Sources
- Capital Market Act 2015 — ss 34(4), 124, 125, 128(7), 184, 186(2), 187(5), 188, 191(1)(h), 193, 194, 263
- Securities Commission Act 2015 — ss 54–56, 83, 84, 101
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.