Neville and Neville v Privatisation Commission [2001] PGNC 30; N2184 (26 November 2001)

N2184

PAPUA NEW GUINEA

[IN THE NATIONAL COURT OF JUSTICE]

OS 548 of 2001

BETWEEN:

TIMOTHY PETER NEVILLE &
PETER JOHN DALTON NEVILLE

Plaintiffs

AND:

PRIVATISATION COMMISSION

Defendant

WAIGANI: KANDAKASI
2001: 18th September
26th November

PRACTICE & PROCEDURE – Application to be joined as a party and lifting of interim injunctive orders – Applicant coming under the management, administration and control of another entity, the Privatization Commission – That other entity consented to orders sought to be lifted and has not consented to application to join as a party and lifting of injunction – No standing of applicant – Application dismissed.

PRIVATIZATION OF STATE ENTERPRISES – Powers of the Privatization Commission – Commission vested with the assets, management and administration and control of enterprises declared to be privatized – Exercise of the Enterprises powers and functions subject to control and direction of the Commission’s authority – Corporate veil lifted as against the Commission and any third party dealing with such an entity – Commission intended be one stop shop for privatization of enterprises declared to be privatized.

INTERIM INJUNCTIONS – Grant and continuity of – Where balance of convenience fall in favour of - Substantial issue to be argued on substantive proceedings -Fairness and equity dictate grant and continuity of.

COMPANY LAW – Lifting of cooperate veil – Statutory provision vesting control of a company in another amounts to lifting of – Circumstances warrant lifting of in fairness and in equity – Separate legal personality can not be raised if control already removed and would result in an unfair and in equitable result.

Cases Cited:

Kenneth Winston Bromley v. Finance Pacific Limited & 2 Ors (unreported and unnumbered judgement).
Inakambi Singorom v. John Kalaut [1985] PNGLR 238 at 241.
Odata v. Ambusa Copra Oil Mill and National Provident Fund Board (unreported judgement) N2106.

Other Cases:

South Carolina Insurance Co v. Assurantie Maatschappij [1987] AC 24 at pages 44 – 45.

Counsel:

Mr. E. Anderson for the Applicant
Mr. J. Griffin and Varitimos for the Plaintiff/Respondent
Mr. I. Mileng for the Defendant/Respondent

26th NOVEMBER 2001

JUDGMENT

KANDAKASI, J: The Papua New Guinea Banking Corporation ("PNGBC" or "Bank") is applying to be joined as a party to the proceedings. It is also seeking a lifting of an interim injunction against it. The injunction was granted in the Bank’s absence with the consent of the plaintiff (‘the Nevilles") and the Defendant ("the Commission") on the 4th of September 2001. The injunctive orders prevents the Bank from proceed with a mortgagee sale of the Nevilles assets for failure to meet loan and lease repayment obligations whilst the Nevilles pursue a claim for a recovery of substantial debt due and owing to them from the State. A recovery of those debts will fully settle all of the debts due and owing to the Bank.

The Bank argues that the Commission neither had the powers nor the authority to consent to the injunctive orders. It relies on the principle of separate legal entity upon incorporation under the Companies Act 1997, and argues that, it is entitled to be heard in these proceedings and a set aside of the interim injunctive orders. On the other hand, the Nevilles and the Privatisation Commission argue that, once the Bank was identified for privatisation and placed under the control of the Privatisation Commission, it could no longer assert its separate personality. These arguments present the following legal questions to be determined:

1. Is PNGBC under the control of the Commission?
   
2. Did the Commission have the power to consent to the grant of the interim injunctive orders?
   
3. Is PNGBC entitled to raise its separate legal personality as against the Commission and other parties once placed under the control of the Commission?
   
4. Can PNGBC be joined as a party to these proceedings?
   
5. Is it fair, reasonable, just and or equitable that the interim injunctive orders be lifted?
   

The facts and the background leading to these proceedings and the application are not in any serious contention between the parties. The Nevilles, have been the only two directors and shareholders of a company, Coecon Limited ("Coecon") for over ten years.

For many years Coecon successfully operated a profitable and viable earthmoving and construction business. Some of its business included the carrying out of many large projects for the State. In the process, it has accumulated considerable assets. The value of its assets exceeds its liabilities by many millions of Kina.

By a written contract dated 25th June 1999, Coecon contracted with the State to undertake a major construction work for the National Fisheries Surveillance Project at a site at Put Put, Kavieng, New Ireland Province. It brought a large amount of equipment to the project site and part performed the contract until 27th October 1999. It experienced considerable difficulties in obtaining payment for work done under the contract from the State. The State through its representatives continually informed Coecon that it could not make the payments promptly because of its cash follow problem. There were no complaints over the quality of the work done by Coecon.

Due to the delay in payment from the State, Coecon was placed in a much more difficult financial position. It could have removed its equipment from Kavieng but could have been at a considerable expense. If it did that, it could have incurred further considerable costs in taking the equipment back to Kavieng to continue the contract once the payments were made. In any case, the State instructed Coecon to keep the equipment at Kavieng and assured it that the contract would be completed. This forced Coecon to continued to retain the equipment at Kavieng at considerable expense. That also meant that Coecon’s staff to carry out the contract had to remain on site again at considerable costs to Coecon.

Various meetings were held with representatives of the State to sort out the delay in payment and the completion of the contract. The State continued to maintain that the company’s staff and machinery needed to be in position to complete the contract as soon as the outstanding payments were made. The State also continued to assure Coecon that funds would soon become available.

The delays in payment substantially contributed to Coecon seriously falling behind meeting its loan and lease repayment obligations with the PNGBC. Coecon’s debt to PNGBC continued to increase, and ultimately reached a point where it could not meet its liabilities, unless the State met its liabilities to Coecon. This led PNGBC to foreclosing on Coecon and appointing a receiver, one Mr. Wardley under a deed of appointment dated 18th October 2000. The receivership was brought about solely by the fact that the payments due in respect of the Kavieng contract were not made by the State to Coecon.

Coecon instituted proceedings WS. No. 1617 of 2000, against the State for a recovery of the amounts due and owing to it under the construction contract. Judgment was obtained against the State on 30th July 2001, with damages to be assessed.

The estimated value of the plant and equipment owned by Coecon is very significant. It is in the region of K18 million. According to the appointed receiver, Mr. Wardley, the total debts due and owing to the Bank inclusive of accrued interest and charges add to about K7,052,449.96. The State owes Coecon over K12,000,000.00. If these amounts were paid as and when they fell due under the contract between the State and Coecon, Coecon could not have fallen into arrears and the interest on the arrears would not have accrued. Also, it would not have been necessary for a receiver to be appointed. Mr. Wardley goes on to say that if the claim for work done and standby in respect of the Put Put contract had been paid as when and they fell due by the State, all arrears would have been eliminated. He further states that Coecon would then be in credit of over K6 million.

There is no dispute that Coecon has, over the many years it has existed, acquired considerable property, both real property and plant and equipment. It has improved various parcels of vacant land and developed them by constructing units, houses, and workshops some of which are for its own businesses and operations. The workshops and accommodation are used in the running of the business and are essential to the successful operation of the business and the needs of the company. If such properties and equipment are allowed to be sold by the Bank, they would likely attract a price considerably less than if they were sold in a more timely fashion.

The Privatisation Commission is the sole shareholder of the Bank according to a "Notice of Change of Shareholders" dated the 19th of April 2001 on transfer from Finance Pacific Ltd ("Finance Pacific"). Finance Pacific became the sole shareholder on transfer from Jimmy Maladina on the 23rd of December 1998. On the 30th of March 2001, Finance Pacific was declared in a publication in the National Gazette to be a privatised enterprise under the Privatization Act 1999, as amended. At that time, the Bank was the wholly owned subsidiary of Finance Pacific.

The Commission was established under the Privatization Act. As already noted, Finance Pacific was privatised under the Act. Before privatisation occurred, Finance Pacific was at all times owned and controlled by the State. Finance Pacific owned the entire shareholding in PNGBC. In effect therefore, the State both prior to and following the privatisation of Finance Pacific, was owned and controlled by the State. After privatisation of Finance Pacific, the State continues to be the sole owner of PNGBC. Likewise the Commission is an entity of the State charged with the duty to privatize State entities identified by the government of the day for privatisation. It holds the assets of such entities that are in the course of privatisation on behalf of the State pending the State divesting itself of those assets. In other words, the Commission is the entity created by its Act through which the State can divest itself of State-owned businesses. Hence it is simply an agent of the State for the purposes of transferring the assets of an entity identified for privatisation. I note that the members of the Commission include the Governor of the Bank of Papua New Guinea and a number of other key sectors of the country (s. 6 of the Act).

The Bank is a secured creditor of Coecon. The appointment of the receiver was within its rights under the securities. Mr. Wayne Thistlethwaite employed as a manager of PNGBC deposes in his affidavit of the 11th of September 2001 that, PNGBC has not been privatised. It is on this basis that PNGBC is taking issue on the interim injunctive orders and is applying to be joined as a party to the proceedings.

The questions to be determined in this case will depend to a large extent on the kind of powers the Commission is vested with. I therefore consider it important that I should first deal with that aspect and follow on from there.

The relevant section of the Act is section 14. That section reads:

"14. Vesting of assets in the Commission

(1) To assist in the privatisation process the Commission shall have vested in it the assets of an enterprise.

(2) The Head of State, acting with, and in accordance with, the advice of the National Executive Council, may from time to time by notice in the National Gazette declare that an enterprise is to be a privatized enterprise for the purpose of this Act, and on and from the date specified in the said notice the assets, management, administration and control of the said enterprise shall vest in the Commission.

(3) Notwithstanding anything contained in this Act or any other Act, all assets referred to in Subsection (2) shall vest absolutely in the Commission and the legal and equitable title to the said assets shall not be affected by any lack of procedure or process.

(4) It is the intention of the Subsection (2) to vest a clear title in the Commission so that any third party dealing with the Commission need not concern himself with any aspect of procedure or process.

(5) The Commission may be resolution declare that any assets vested in it pursuant to this section are vested in a specific successor company."

(underlining mine)

The term "the assets" is defined by section 1 of the Act. It is defined to mean, unless a contrary intention appears:

"Any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description (including money) and includes share and capital (uncalled or otherwise) in any company, securities, chooses in action and documents of any kind."

(my underlining)

It is apparent from these provisions that, once a public or State enterprise is declared to be privatized and that fact is published in the Papua New Guinea National Gazette, its asserts become vested in the Commission. That is to say, the ownership of all assets, management and administration and control of the enterprise becomes vested or comes under the Commission. This also includes the liabilities of the enterprise or the corporation declared to be privatized. That is according to the judgement of National Court in Kenneth Winston Bromley v. Finance Pacific Limited & 2 Ors (unreported and unnumbered judgement delivered 21/06/01) O.S. 285 2001; unless the Supreme Court rules otherwise.

This accords well, in my view with the intent of Parliament in enacting the Act. That intent is express in section 4 in these terms:

"(1) The objects of the Commission are to ensure an effective and coordinated approach to privatization by recommending a privatization policy, and, where such privatization policy is approved, by ensuring that privatization is effected in accordance with the privatization policy.

(2) By virtue of privatization –

(a) the State will divest itself, as far as is possible, of certain functions and assets and the proceeds thereof will be dealt with in accordance with Section 17; and
(b) the State will divest itself, as far as is possible, of interest in the ownership, management and control of public enterprises and the provision of goods and service by the State.

(3) The Commission shall carry out the privatization, consistent with the privatization policy and with the purpose of fostering and developing an economic environment that allows free and fair play of market forces and encouraging competition and market efficiencies in the provision of goods and services."

(my underlining)

It is settled law in our country that, all statutory provisions must be given their fair and liberal meaning so as to give effect to the intent of Parliament. For an example of an authority on this; see Inakambi Singorom v. John Kalaut [1985] PNGLR 238 at 241. In the present case, the intent of Parliament behind the Act is to facilitate "an effective and coordinated approach to privatization". That is why in my view, Parliament provided for the "assets, management, administration and control of the ...enterprise" to be vested in the Commission. This includes any valuable interest in any company such as interests, securities or bonds. Then to see this intent carried through without any hindrance due to lack of procedure or process, Parliament provided by s. 14(2) of the Act that, that could not affect the vesting of the assets in the Commission. This is why s 14 (4) of the Act provides that a third party dealing with the Commission need not concern itself with meeting any requirements for the acquisition of the assets of the enterprise declared to be privatized.

It is clear to me therefore, that Parliament intended that, the process of privatization should proceed in an efficient and coordinated manner. The Commission is thus vested with all of the assets of the enterprise declared to be privatized and is in charge of the management and control of the enterprise. A third party wishing to acquire an interest in the enterprise declared to be privatized, would have a one-stop shop with only the Commission. The third party need not concern itself with the process or procedure for the transfer of the interest or assets to it by the enterprise declared to be privatized.

No doubt, Parliament foresaw the risks of not vesting such powers and interests in the Commission. If Parliament did not provide in terms of s.14, it could not allow for an efficient and coordinated privatization of State owned enterprises. For example, an enterprise declared to be privatized might deliberately take steps that might delay, hinder or completely block its efficient privatization. This would run contrary to the privatization of such enterprises.

In the present case, Finance Pacific Limited was declared to be privatized on the 30th of March 2001. The Head of State published that in the Papua New Guinea National Gazette, pursuant to s.14 of the Act, in accordance with the advice of the National Executive Council.

As already noted, Finance Pacific was a company owned by the State. It was the sole shareholder of PNGBC in trust for the State. That one share was transferred to the Commission on the 30th of March 2001, with the State still being the ultimate beneficiary. This was consistent with s.14 of the Act and the declaration dated 30th March 2001, declaring Finance Pacific to be a privatised enterprise.

PNGBC through Mr. W. Thistlewaite, is asserting that PNGBC is not and never has been a privatized authority. Then in submissions, counsel for the Bank argues that, its client has never been privatized. Therefore, the Commission had no power or authority to bind PNGBC. Hence, the consent order should be set aside. Effectively, the Bank is raising its separate corporate personality and is asking to be joined as a party so that it can be heard. It also argues that no situation known to law has arisen, so as to enable its shareholder, the Commission through Finance Pacific to consent to the consent orders.

The Commission counters these arguments by pointing to and relying on the provisions of sections 1 and 14 of the Act. Based on those provisions, the effect and or meaning of which were already discussed above, it argues that it had the power to consent to the consent orders. With regard to the separate corporate personality argument, it submits that, the wording in s.14 specifically vested in the Commission all management and administrative control over the assets of Finance Pacific, which consists only of PNGBC. Consequently, PNGBC has no right to be joined has a party by virtue of the declaration for it to be privatized from the date of the publication to that effect in the National Gazette.

I find persuasion in the Commission’s argument for a number of reasons. Firstly, PNGBC is claiming that, the Commission lacked authority to bind it. It was therefore, incumbent on PNGBC to show its authority for this application. The affidavit in support is by a manager. He says nothing about his authority to depose to his affidavit and his authority to make the application. There is no evidence of a board resolution in favour of this action. In the circumstances, I doubt whether this is a well-considered action authorized by the board. This is particularly important because of the provisions of the Act.

Secondly, by the provisions of sections 1, 4 and 14 of the Act, as noted, Parliament intended that the process of privatization should proceed efficiently under the leadership and direction and or control of the Commission. All assets, management, administration and control of Finance Pacific became vested in the Commission from the date of the declaration and its publication in the National Gazette on the 30th of March 2001. By virtue of sections 1 and 14 of the Act, Finance Pacific’s assets, including its main and only interest, sole shares in PNGBC got vested in the Commission, which was another entity of State. With that in my view, passed also the management, administration and control of PNGBC, being the only investment or interest of Finance Pacific. If the situation was otherwise, than the privatization of Finance Pacific Ltd could not proceed efficiently and in a coordinated manner as intended by Parliament under s.4(1) of the Act. In my view, the protection of the corporate veil or separate legal personality upon registration under the Companies Act was lifted by s.14 of the Act. This was by virtue of the s.14(2) of the Act, when Parliament removed and placed in the Commission the assets, management, administration and control of enterprises to be privatized.

Generally the law allows for a lifting of the corporate veil even in situations in which, there is no clear statutory on other sources of vesting control in any other entity or an authority. The few cases on this issue in the country to date appear ready to lift the corporate view if the control of a company is in somebody else. I referred to the cases on point in my recent judgement in Odata v. Ambusa Copra Oil Mill and National Provident Fund Board (unreported judgement delivered 06/07/01) N2106. In that case, I ordered a lifting of the corporate veil to enable the plaintiff to sue the NPF who was ultimately in control of Ambusa. In this case, Parliament by specific legislation provided that the Commission is to take control of the management and the assets of the enterprises declared to be privatized.

In the Odata’s case, I also found that, if the circumstances of the case warrant a lifting of the corporate veil, than the Court should not hesitate to so order. In this case, it is common knowledge that PNGBC is the one set to be privatized through the declaration for privatization of Finance Pacific Ltd. The parties in the Kenneth Winston Bromley case (supra) acknowledged this at page 3 of the judgement. The Nevilles are indebted to PNGBC because of a failure on the part of the State who is the sole shareholder of PNGBC through the Commission. Without first meeting the Nevilles demand against the State, the State is, through its business arm, PNGBC seeking to foreclose on the Nevilles and drive them out of business. In my view the Nevilles are quite correctly concerned with this conduct. It appears most unfair for the State through PNGBC to force the Nevilles to the point of bankruptcy and then seek to gain from such conduct. In all democracies, States exist for the protection of the people. It is supposed to stand up for the rights of their citizens. That is why people have come to trust the State for their existence. It is through a trust in the system of government for and by the people that have we managed to exist as a nation for more than 25 years now. Once that is put to serious question by conducts such as the present, our existence as a people and nation might be gone.

What the State through PNGBC appears to be doing in this case in effect is a departure from the States duty to protect its people from unjust deprivation of property or any other unfair conducts. Even, if it was not in breach of any specific law, it would appear to amount to the State taking an unfair advantage against its own natural and corporate citizens. If the State is allowed to proceed with the liquidation proceedings against the Nevilles, it will be most unfair and inequitable. This would destroy the basis of our society or country. It might lead to chaos because there will appear to be no more trust in the State and the people will be most reluctant to deal with the State and any of its instrumentality for fear of similar things happening to them. This would threaten the very existence of out society.

Given this, what the Commission has done in terms of consenting to the interim restraining orders, was the most sensible thing to do in the circumstances. The circumstances do dictate a lifting of the corporate veil so that, the actions of the shareholder can be seen in its proper perspective. This, as noted already, reveals that the sole shareholder and or the ultimate beneficiary of PNGBC is the State, on which account the Nevilles have suffered serious financial difficulties. In this circumstances, granting leave to PNGBC to be joined has a party will not only delay a prompt resolution of this matter, but will cause a lot of confusion and will certainly affect its efficient and coordinated privatization.

The third reason for rejecting the Bank’s arguments is this. The interlocutory orders were made with the consent of the Commission. For the reasons already given above, the Commission controls PNGBC because it was formerly a subsidiary of Finance Pacific, and Finance Pacific itself was formerly owned by the State. It is now owned by the Commission which is an other entity of the State.

The order was made against the Commission, being the party entitled to control the actions of both PNGBC and the receiver. In the circumstances both PNGBC and the receiver are both bound by the instructions of the Commission. It was therefore, appropriate for the Commission to be specifically named in the order.

Injunctions are frequently expressed in such a way as to restrain the conduct of entities that are under the control of a defendant party. It is almost invariably the case, for example, that injunction extend to servants or agents of a defendant. This does not mean however that, such servants or agents have any standing to intervene in the proceedings or be joined. It should be noted in this regard that, PNGBC is only making this application. The receiver has not sought to be joined. Instead, he has provided an affidavit in support of the Nevilles, especially in relation to their assets and the value of those assets, which is sufficient to fully satisfy the debt to PNGBC.

The importance of this is that the party who would be and is required to see to a compliance of the orders by the Bank, because of the level of its control, is the Commission. The Commission has consented to the orders in question on the 4th of September 2001, and is not seeking to set aside or appeal against it. Instead it is PNGBC which is now under the control of the Commission, is applying to set aside the orders and to be joined as a party without any authority or clearance from the Commission. In my view, this is not within the intent of Parliament to see an efficient and coordinated privatization of PNGBC. If Parliament intended that entities like PNGBC once declared to be privatized, should have a say, it could have provided for it but it did not.

On these bases, I am of the view that PNGBC has no standing to dispute the injunction since the party which controls it, the Commission, has consented to the interlocutory injunction. By necessary implication, the Commission has bound PNGBC, which is subject to its control, to the terms of the order. The situation is akin to an injunction issued against a company, naming its servants or agents as being bound by the injunction. In such a case, it is not open to any individual servant or agent to come to Court and contest the injunction. If it were, there might be cases in which thousands of servants or agents could approach the Court to seek to have the injunctive orders against them set aside or varied. The accepted position however is that, where an entity in control of other entities consents to an injunction, the other entities are bound by the injunction because they are subject to the control of the controlling entity.

Injunctive orders are usually made in person by a Court of equity to compel or restrain the doing of an act. The exercise of this power is subject to any relevant statutory restrictions, otherwise it is unlimited: South Carolina Insurance Co v Assurantie Maatschappij [1987] AC 24 at 44 – 45. In Papua New Guinea the National Court has an inherent power to grant an injunction. That power has been and can be readily exercised if, for example, it is necessary for the administration of justice.

One of the circumstances, in which the Courts will always grant injunctions, is where the other party has acted unconscionably: see the South Carolina case (supra). In my view, it is unconscionable for the State, as the controller of PNGBC through the Commission, to seek to take steps to sell the assets of Coecon. This is as noted earlier, particularly so after having brought about Coecon’s indebtedness to PNGBC by the State’s own failure to make the payments due to Coecon under the construction contract. By not paying Coecon the amounts, which were due to it under the construction contract, the State has caused Coecon to fall into arrears with PNGBC. There is the appearance if not in reality, that the State is forcing Coecon into bankruptcy to avoid its liability to Coecon. As I already said, this is most unfair and inequitable. In fact the receiver confirms that position in these terms:

"It is apparent that if the claim for work done and standby in respect to the Put Put contract had been paid when due, all arrears in respect of the two fully drawn loans would have been eliminated, the lease arrears would not exist and instead an overdraft of K2,701,196.04, Coecon would have had funds in hand of K5,867,895.05."

Indeed, I also note that, the State has consented to judgement for the monies owned to Coecon for the construction contract. Parties are negotiating to settle the amount and failing that, an assessment of Coecon’s damages will proceed. As soon as they agree on the figures and or there is judgment, there will be a settlement of Coecon’s account with PNGBC. This shows that, the balance of convenience favours the maintenance of the injunction for without the injunction, Coecon might loose everything to PNGBC and therefore the State, who is the cause of Coecon’s financial hardship.

Finally, in addition to the above, there is obviously the triable issue of whether PNGBC which is solely owned by the State is entitled to take enforcement action against Coecon, when the right to take such an action has arisen only because the State itself has defaulted and remains in default on payments due to Coecon. Hence, even if PNGBC had an independent standing in the matter, the injunction should remain because there is a serious issue to be tried.

In summary, I answer each of the issues presented in this case as follows.

1. PNGBC is under the control of the Commission following the declaration that its sole shareholder and owner Finance Pacific is privatized pursuant to s.14 of the Act in the National Gazettal. This is so by virtue of sections 1 and 14 of the Act.
   
2. By virtue of s.14(2) and s.1 of the Act, the Commission did have the power to consent to the consent orders of the 4th of September 2001.
   
3. PNGBC is not entitled to raise its separate legal personality once it came under the powers of the Commission pursuant to s.14 and 1 of the Act.
   
4. PNGBC can not be joined as a party with the authority or consent of the Commission, which is now in control of it. The situation is akin to a servant or agent seeking to be joint as a party when its master or principle has the sole authority to bind the servant or the agent.
   
5. Even if PNGBC has a separate legal right to be heard despite the provisions of ss.1 and 14 as well s.4 of the Act, it would be most unfair and inequitable to allow PNGBC to proceed with the liquidation of Coecon Ltd because the State being the sole beneficiary of PNGBC has forced Coecon to go into arrears which has triggered the liquidation. It would also be inequitable to allow PNGBC to proceed with the liquidation exercise against Coecon since Coecon’s assets exceeds the amounts owed and that it might not be long before the State pays Coecon what its owes to PNGBC.
   

For these reasons I order a dismissal of the application by PNGBC to be joint as a party to these proceedings. I also order a dismissal of the application for a lifting of the interim injunctive orders. Costs follow the event in the normal party basis.
______________________________________________________________________

Lawyers for the Applicant: Gadens

Lawyers for the Respondent/Plaintiffs: Rageau Elemi & Kikira