What Is the Difference Between a Trustee and a Fund Manager in Papua New Guinea?

Investors often hear two names attached to a fund: the trustee and the manager. Which one is responsible when something goes wrong? The Capital Market Act 2015 gives a clear answer, and it differs from the arrangement most older Papua New Guinean funds grew up with.

The trustee: responsible entity

“Responsible entity” is a term borrowed from Australian law, where a single licensed company both holds and manages the fund. The 2015 Act adopts that single-responsibility model. The trustee holds the scheme property on trust (section 191(2)), owes the eleven duties in section 191(1), keeps the trust accounts (section 193), keeps the register and calls meetings, and is the entity the Commission licenses, supervises (section 196) and, if necessary, replaces. See who can be the trustee and its duties.

The fund manager: an agent of the trustee

The Act does not create a separate office of “manager” for a unit trust. Instead section 190(2) gives the trustee “power to appoint reasonably qualified persons as agents, or otherwise engage a person, or outsource to a person to perform specific functions for the scheme”. Choosing and trading the portfolio is the function most commonly outsourced. The person who does it is carrying on “fund management”, defined in Schedule 2 as “undertaking on behalf of any other person or persons … the management of a portfolio of securities or derivatives”. Fund management is a regulated activity, so the manager needs its own capital market licence under section 34, with the K50,000 deposit or K250,000 insurance that section 46 requires. See who needs a licence.

Three rules keep the manager subordinate:

• No custody. A person outsourced to perform a trustee function, “including the function of a fund manager”, shall not accept or hold scheme assets in trust and shall not create a bank account for the scheme (section 193(6)–(7)). The manager gives instructions; the trustee holds the money.
• Within the engagement. The agent must perform its functions “within the terms of that engagement” (section 190(4)).
• Trustee answers for the agent. For deciding whether there is a liability to members or whether the trustee has properly performed its duties, “the trustee is taken to have performed (or failed to perform) such duties or functions, which the agent or the person has performed (or failed to perform), even if such duties or functions were performed fraudulently or outside the terms of their engagement” (section 190(3)).

So if a landowner company’s fund loses money because the manager breached the investment mandate, the members sue the trustee. The trustee may in turn recover from the manager, and section 190(5) provides that anything recovered under an agent’s indemnity for a loss connected with the trustee’s duties forms part of the scheme property, not the trustee’s own.

The old model: the Pacific Balance Fund

Before 2015 Papua New Guinea’s unit trusts followed the older two-party structure. In National Superannuation Fund Ltd v Pacific Equities and Investments Ltd [2006] PGSC 12; SC845, Lay J described it by quoting the High Court of Australia: property was vested in a trustee “bound by a trust deed to deal with the property as directed by the manager”. The manager ran the fund; the trustee was a custodian and watchdog. The Pacific Balance Fund’s deed of 22 October 2001 appointed Melanesian Trustee Services Ltd (MTSL) as trustee and Pacific Equities and Investment Ltd (PEIL) as manager. When Nasfund, a large unit holder, alleged serious breaches by the manager, the deed obliged the trustee to call a unit holders’ meeting, and on 14 July 2006 the unit holders resolved to remove PEIL. The manager’s attempt to enjoin that resolution failed in Pacific Equities and Investment Ltd v Melanesian Trustee Services Ltd [2007] PGNC 24; N3122. See the 2006 case.

When one company does both

After PEIL’s removal MTSL acted as both trustee and manager of the fund. The 2015 Act permits this: the trustee may manage the portfolio itself rather than outsource, provided its licence covers fund management. But it concentrates risk, because the body meant to supervise the manager is the manager. When the Commission revoked MTSL’s licence in 2023 its stated grounds included that MTSL had been “excessively paid as fund manager of a passively managed fund”, had “delayed as Trustee to outsource its fund management duties” and lacked good governance “as both Trustee and Fund Manager” (quoted in Melanesian Trustee Services Ltd v Securities Commission of Papua New Guinea [2023] PGNC 356; N10524). MTSL denied the allegations and appealed. The interim trustee the Commission appointed was directed to perform “the functions of the Trustee and Fund Manager” until new appointments were made. The Commission has since licensed MRL Capital Ltd as both trustee and fund manager of the Lihirian Investment Fund, so the combined model remains in use.