Whether you can get your money out of a unit trust when you want it depends on a single statutory test. The Capital Market Act 2015 borrows the concept of the “liquid scheme” and makes it the hinge of the whole withdrawal regime in Division 7 of Part V.
The 80 percent test
“A registered scheme is liquid if liquid assets account for at least 80 percent of the value of scheme property.”
The test is applied to the scheme property as a whole, valued in accordance with the deed and the trustee’s duty under section 191(1)(h) to value scheme property at regular intervals. If liquid assets are worth K80 million out of a K100 million fund, the scheme is liquid. If a fall in share prices or a new property purchase takes liquid assets to K78 million, the scheme becomes non-liquid, and the on-demand right to withdraw under section 257(1) is suspended until the proportion recovers. The Act contains no grace period and no procedure for declaring a change of status; the classification simply follows the numbers. A well-drafted deed will require the trustee to monitor the test at each valuation and to tell members when the scheme ceases to be liquid.
What counts as a liquid asset
Section 257(6) lists four categories that are presumed liquid:
- Money in an account or on deposit with a bank. Term deposits qualify, though a long-dated deposit with heavy break costs may fall outside the presumption.
- Bank-accepted bills, the short-term money market instruments that funds use to park cash.
- Marketable securities, meaning shares, bonds and units that can readily be sold, typically because they are quoted on PNGX or an overseas exchange. A large block of thinly traded shares may be “listed” without being marketable in any real sense.
- Property of a prescribed kind, which allows regulations to add further categories. None appear to have been prescribed.
Each of these loses its liquid status “if it is proved that the trustee cannot reasonably expect to realise them within the period specified in the constitution for satisfying withdrawal requests while the scheme is liquid”. The word “constitution” is a slip; everywhere else the Act speaks of the trust deed, and that is plainly what is meant.
Section 257(7) then adds a general category: any other property is liquid “if the trustee reasonably expects that the property can be realised for its market value within the period specified in the trust deed for satisfying withdrawal requests”. So an unlisted shareholding for which there is a ready buyer, or a property under a signed contract of sale, may count. The judgment is the trustee’s, but it must be reasonable and made in good faith (section 191(1)(a)–(b)).
Why the deed’s withdrawal period matters
Both tests measure liquidity against the time the deed allows the trustee to pay a withdrawal request. A deed that promises payment within five business days sets a demanding standard; only cash and quoted securities will reliably meet it. A deed that allows 30 or 60 days can treat a wider range of assets as liquid. Trustees drafting a deed therefore choose the withdrawal period with the fund’s likely asset mix in mind, and investors should read the two clauses together. A short payment period in a fund that holds property is a promise that may not be kept.
Which schemes are liquid in practice
| Type of scheme (s 210(2)) | Typical assets | Usual status |
|---|---|---|
| Money market fund | Bank deposits, bills, short-term government securities | Liquid |
| Balanced or managed fund | Listed shares, bonds, cash, some property | Usually liquid, but may slip below 80 percent |
| Property trust | Office, retail and industrial buildings | Non-liquid |
| Fund of unlisted or private company shares | Shares with no ready market | Non-liquid |
A balanced fund such as the Pacific Balance Fund, which historically held both listed shares and property, sits near the boundary. Its status can change with the market, which is why the deed’s procedures for both situations matter.
What follows from the classification
If the scheme is liquid, the deed may allow members to withdraw “at any time” (section 257(1)) under the procedures it sets out (section 210(5)(b)), and section 242(b) values an unlisted interest at the withdrawal price. If the scheme is not liquid, members may withdraw only in response to a withdrawal offer made by the trustee under sections 258 to 261, with proceeds shared pro rata if the money available is insufficient (section 260(3)). A trustee that lets a member out of a non-liquid scheme by any other route commits an offence under section 257(3)–(4), and its directors face up to seven years’ imprisonment. See how to withdraw and withdrawal offers.
Without the test, a run of redemptions on an illiquid fund would force the trustee to sell the best assets first, at whatever price it could get, to pay those who left early. The members who stayed would be left with the unsaleable remainder. The 80 percent rule and the withdrawal offer procedure make everyone wait and share alike, which is the practical expression of the trustee’s duty under section 191(1)(d) to treat members of the same class equally.
Sources
- Capital Market Act 2015 — ss 191(1), 210(2), 210(5), 242, 257(1), 257(3)–(7), 258–261
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.