Papua New Guinea Law Reports - 1987
[1987] PNGLR 96
N593
PAPUA NEW GUINEA
[NATIONAL COURT OF JUSTICE]
PUNG NIMP SUING ON BEHALF OF AND AS REPRESENTING ALL MEMBERS OF THE RAMDI KUNDUMP GAGAMP LINE
MINIMBI KEN SUING ON BEHALF OF AND REPRESENTING ALL MEMBERS OF JIGA LINE
PEPA TEMBON SUING ON BEHALF OF AND REPRESENTING ALL MEMBERS OF THE GAGA LINE
MEK NUKINTS SUING ON BEHALF OF AND REPRESENTING ALL MEMBERS OF THE RAMDI KUTKAM PALGUMP LINE
V
ROBI RUMANTS,
BARKLEY MARK,
PENROCK KANAMB,
BONNA NONGGOR
AND YAB CORPORATION PTY LTD
Mount Hagen
Woods J
16-19 February 1987
6 March 1987
29 May 1987
TRUST AND TRUSTEES - Breach of trust - What is - Sale of shares held in trust - Trustees directors of proprietory company - Company holding traditional land - Shares held in trust for clans - Duty to consult with beneficiaries - Proper “consultation” - Consent of beneficiaries - Breach established - Constitution, s 255.
TRUST AND TRUSTEES - Following trust property - Purchaser with notice of trusts - Sale of shares in proprietory company - Company holding traditional land - Sale without consultation with beneficiaries - Purchaser trustee for beneficiaries.
Four clan representatives took up shares in a company, Koibuga Plantation Pty Ltd, of which they were directors, as trustees for their respective clans. Following certain incidents in 1984, the plantation owned by the company was left unworked and untended. In 1985 the directors met on a number of occasions and agreed to sell the company to Yab Corporation Pty Ltd for K70,000. The sale was effected without valuation or financial statements or reports being prepared, without proper consultation with all the clan members and with the purchaser aware that the directors were trustees of the shares for their respective clans and that there was opposition to the sale by some of the clan members.
In proceedings seeking, inter alia, a declaration that the sale of the shares was void as being effected in breach of trust,
Held:
(1)      As the primary duty of the directors and trustees of the shares in the company holding what was traditional clan land of the beneficiary clans, was to preserve the land in specie for those beneficiaries, the shares could not be sold without the express authority or consent of all the beneficiaries.
(2)      For the purpose of obtaining the consent of all the beneficiaries to the sale, the trustees were required to consult fully in a meaningful way (Constitution, s 255) with all beneficiaries; proper consultation in the circumstances, required full disclosure with a valuation and proposals for a sale to be effected in accordance with normal commercial and accounting procedures.
(3)      On the evidence there had not been proper consultation by two of the trustees which amounted to breaches of trust.
(4)      Where a purchaser of the legal estate takes with notice of a subsisting trust or equitable interest the beneficiaries have a right in rem to follow the trust property into the hands of the person who has received it.
Nelson v Larholt [1948] 1 KB 339; [1947] 2 All ER 751 and Re Diplock; Wintle v Diplock [1948] Ch 465; [1948] 1 All ER 193, followed.
(5)      As the purchaser of the shares, Yab Corporation Pty Ltd, took with knowledge of the trust situation and of opposition of some beneficiaries, those beneficiaries were entitled to a declaration that the relevant shares which were held in trust for them by two of the directors should be held in the same trust by the purchaser.
Cases Cited
The following cases are cited in the judgment:
Diplock, Re; Wintle v Diplock [1948] Ch 465; [1948] 1 All ER 193.
Nelson v Larholt [1948] 1 KB 339; [1947] 2 All ER 751.
Summons
This was a summons for a declaration, injunctions and other appropriate relief in respect of an alleged breach of trust in the course of the sale of shares in a proprietory company.
Counsel:
I Molloy and J Pakau, for the plaintiffs.
M A Laufa, for the trustee Bonna Nonggor.
P Kopunye, for the defendant Yab Corporation Pty Ltd.
Cur adv vult
29 May 1987
WOODS J.: The plaintiffs are claiming that the first four defendants held certain shares in Koibuga Plantation Pty Ltd on trust for the members of certain Lines of which they, the plaintiffs, are members and that they sold these shares to the fifth defendant in breach of trust.
The plaintiffs are claiming:
(1)      a declaration that the plaintiffs are the beneficial owners of the said shares;
(2)      a declaration that the sale or sales aforesaid is or are void and/or that the defendants/transferees hold the shares in trust for the plaintiffs;
(3)      an injunction against each of the defendants restraining them, whether by themselves, their servants or agents or otherwise from dealing with the said shares whether by sales, charge or howsoever;
(4)      an account of moneys due from the defendant trustees to the plaintiffs;
(5)      payment of the amount found due on the taking of an account;
(6)      damages; and
(7)      further or other relief as the court deems fit.
The history of the matter begins in 1982 when Koibuga plantation was transferred from Koibuga Holdings Pty Ltd to Koibuga Plantation Pty Ltd and the first four defendants took up the issued share capital in the company. These four defendants took up these shares as trustees on behalf of their respective clans. Members of the clans contributed money towards these shares. Because the clans were unable to raise the required purchase money Bonna Nonggor, one of the defendants, himself raised a substantial amount and there was some vendor financing and bank finance and coffee sale advances. Bonna Nonggor held shares in two capacities, as a trustee for his clan and in his own right for about half of the issued shares in the company. I find no evidence to suggest that the additional money raised personally by Bonna Nonggor was on behalf of his Line and thus guaranteed by his Line and I find no breach of trust here by Bonna Nonggor.
The four trustee shareholders were the directors of the company and the assets of the company comprised the plantation. The management of the plantation was contracted to a management company. The plantation operated smoothly until 1984, when in August of that year, following an incident involving a motor vehicle accident and some destruction to plantation property by some members of the shareholder clans, the management company was forced off the plantation and the plantation was left unworked and untended. There was a fallout between the shareholder clans and some tribal fighting. All the buildings on the plantation were eventually destroyed.
It is not clear where the initiative came from but early in 1985 there were directors meetings to discuss the sale of the plantation by the sale of the company. It appears that certain outsiders had expressed interest and that the PNG Banking Corporation was concerned about its security.
There were a number of meetings of directors and also an annual general meeting of the company all of which seem to have been held at the offices of Coopers and Lybrand, Accountants in Mt Hagen. And after some initial opposition from Bonna Nonggor who was the majority shareholder, it was finally agreed at a meeting to sell the company to Yab Corporation. The total consideration for all the shares was K70,000.00, Yab Corporation thereby taking over the company’s assets and liabilities.
There appears to be no statement or valuation of what these assets and liabilities were at the time of the sale apart from statements that there was a fully grown plantation on which all buildings were destroyed and there were certain debts. There was some insurance money somewhere, although no one really seems to know how much and where, until evidence at the very conclusion of the case revealed two cheques totalling K69,560.00 being paid into the bank in November-December 1984. With respect to these cheques it is of interest that whilst there is a financial report for the year ended 31 December 1985 which includes the figures for 1984 there is no reference anywhere to the K69,560.00 for the insurance.
Whilst there are signed share transfers for all the shares in the company the plaintiff produced two share certificates still in the name of the trustee shareholders. It appears that money may have been paid over on the share transfers without the delivery of the share certificates.
We thus have a situation of trustees selling their shares and certain beneficiaries of those trusts challenging the sale. A trustee has no power to sell the trust property except under the authority expressly or impliedly conferred on him by the trust instrument. The primary duty of the trustee is to preserve the trust property in specie for the benefit of the beneficiaries. In this case the trustees have no authority to sell without the beneficiaries concurring because they were given the trust property, namely, the shares which own the land, to hold for the benefit of the beneficiaries. This was in effect the traditional land of the beneficiaries which they had finally bought back to be held for the traditional owners. There could be no implied right to sell without the express authority or consent of the beneficiaries. This must in this situation mean the consent of all the beneficiaries.
The evidence suggests that whilst there may have been a lot of discussions about what to do and the need to sell there was no clear consent of all the beneficiaries to the sale. The directors at all times knew that there was some difference with some of the beneficiaries of the trusts. Exhibited minutes of some meeting of 9 June 1985 clearly indicate that all is not well. There is an obligation on trustees in this type of situation to consult fully with their respective lines, and I refer here to the emphasis placed by the Constitution in s 255 for meaningful consultation.
“Consultation. In principle, where a law provides for consultation between persons or bodies, or persons and bodies, the consultation must be meaningful and allow for a genuine interchange and consideration of views.”
We are not just dealing with commercial assets owned by some people or a business group, we are dealing with what has been identified as the traditional land of these clans. It is not just a question of commercial reality. It is, what do the people want to do with their traditional land; not overlooking of course the obligation of the beneficiaries as owners of a company with financial obligations.
This situation required a completely open approach of careful consultation with everyone concerned supported by properly prepared financial statements or reports. The trustees at no time made any attempt to support their actions with a statement of the commercial realities; there is no valuation as at the date of the sale. It is all very well that they let out to tender but how widely was it advertised. And the tender price must still be disclosed properly to the beneficiaries and compared with a proper valuation of the property. The trustees have an obligation to obtain the best price.
Without proper consultation with the beneficiaries and full disclosure with a valuation, and followed by a sale effected without following normal commercial procedures of full advertisement, proper evaluation, and accounting the beneficiaries have good ground to challenge the trustees’ actions.
However have all the trustees breached their duties. The first plaintiff, Pung Nimp, states that he represents the Randi Kundump Gagamp Line and the evidence shows that he was a contributor on behalf of that Line. He gives evidence of there being some opposition to the sale and there not being full consultation. From his evidence as a contributor I am satisfied that there are grounds to challenge the actions of the trustees.
The second plaintiff, Minimbi Ken, states that he represented the Jiga Line. However, there is no evidence that he was a contributor on behalf of that Line. Further there is no evidence from contributors from that Line that they had any valid complaints. I am therefore unable to be satisfied that there is a valid complaint from the members of that Line who had an interest in the company.
The third plaintiff Pepa Tembon states that he represents the Gaga Line and the evidence shows that he was a contributor on behalf of that Line. He gives evidence of there being some opposition to the sale and there not being full consultation. From his evidence as a contributor I am satisfied that there are grounds to challenge the actions of the trustees.
There is no evidence by the members of the Ramdi Kutkam Palgump Line that their trustee Bonna Nonggor sold without proper consultation. Without complaint by the latter beneficiaries even though there is no evidence of proper valuation I am unable to find any breach of duty by Bonna Nonggor in respect of his shares.
I am therefore satisfied that there has been a breach of duty as trustees by Robi Rumants and Penrock Kanamb. What therefore is the effect of this breach of duty.
There is a principle of equity that not merely is the legal owner against whom an equitable interest first arose bound by that equitable interest but so is everyone who takes the legal estate out of which it arose. The exception is a purchaser of the legal estate for valuable consideration and without notice. The beneficiaries therefore have a right in rem to follow the trust property into the hands of the person who has received it. This principle is clearly stated in “Equity” by Meagher, Gummow and Lehane at par 850 and see cases like Nelson v Larholt [1948] 1 KB 399, per Denning J, and Re Diplock; Wintle v Diplock [1948] Ch 465.
Yab Corporation knew about the equitable interest when they purchased it. The representatives of Yab Corporation knew the directors were also the shareholders as trustees for their lines, Mr Tandowai and Mr Wap on behalf of the Yab Corporation attended the directors’ meeting of 8 May where mention was made of the shares being held in trust. Mr Wap knew the directors represented each clan and knew that the directors were trustees. With that knowledge the transferee was bound to make independent inquiries to establish whether or not the beneficial owners of the shares consented to their transfer. Further both Coopers and Lybrand the accountants and also the manager of the Highlands Associates which was the Managing Company of the plantation and the Papua New Guinea Banking Corporation all knew of the trust situation and were all aware of some opposition from the beneficiaries to the transfers. In some respect these three parties were agents for Yab Corporation as well as the agent for the vendors. Therefore as agents for Yab Corporation they had notice of the trust for Yab Corporation and they had notice of some opposition.
It would appear that everyone concerned with the sale was too anxious to effect the sale without considering the implications of the rights of the beneficiaries of a trust and the duties and responsibilities of trustees, and without considering prudent commercial practice of proper consultation and proper consent. Any prudent agent (and in a way the accountants and Mr McDonald and the bank were acting as agents) would ensure that the parties to major transactions get the proper legal and accounting advice. The bank was being very careful to avoid having to act under its mortgage. However, by so avoiding its legal rights there, but yet appearing to act as agent to ensure a sale, it avoided the safeguards of its legal rights.
This Court has been asked to sanction what in effect was a very casual transfer of a valuable commercial entity when normal legal and accounting practices were ignored. This Court cannot sanction such a dealing where complaints have been made and has disclosed breaches of trust.
I am not saying that the plantation should not have been sold. It would appear something had to be done. However, the solution was effected without fully considering everyone’s rights and obligations. If a trustee has difficulty in fulfilling his trust obligations there is a procedure to apply to a court for guidance and appropriate orders and to ensure that proper notices are given to any concerned parties. See s 46 of the Trustees and Executors Act (Ch No 289).
In this case the property is easy to follow, it has not changed its nature or been mixed or otherwise become untraceable. It is shares transferred to the purchaser, the fifth defendant.
Beneficiaries, represented by the first and the third plaintiffs are entitled to a declaration that the respective shares which were held in trust for them by the first and third defendants are held in the same trusts by Yab Corporation Pty Ltd.
I declare that those 2,026 shares formerly held by Robi Rumants for and on behalf of Ramdi Kundump Gagamp Line, and those 3,664 shares formerly held by Penrock Kanamb for and on behalf of Gaga Line are now held by Yab Corporation Pty Ltd respectively on trust for and on behalf of those members of Ramdi Kundump Gagamp Line, and Gaga Line who originally contributed and in the proportions in which those shares were originally held.
Of course these two former trustees and therefore the respective beneficiaries are bound to give credit for any amount they may have received on account of those shares.
Declarations and orders accordingly
Lawyer for plaintiffs: J Pakau.
Lawyer for Bonna Nonggor: Warner Shand Wilson Donigi Reiner.
Lawyer for Yab Corporation Pty Ltd: P Kopunye.