Central Bank of Solomon Islands v Bank of Hawaii Corporation Ltd [2002] SBHC 111; HC-CC 056 of 2002 (4 April 2002)

HIGH COURT OF SOLOMON ISLANDS

Civil Case No. 056 of 2002

CENTRAL BANK OF SOLOMON ISLANDS

–v-

BANK OF HAWAII INTERNATIONAL CORPORATION

High Court of Solomon Islands
(F. O. Kabui, J.)

Hearing: 22^nd March 2002
Judgment: 04^th April 2002

Mr A. Radclyffe for the Plaintiff
Mr J. Sullivan for the Defendant

JUDGMENT

(Kabui, J): By Originating Summons filed on 28^th February 2002, the Plaintiff seeks the declaration that the Plaintiff’s written approval pursuant to section 23 (1) of the Financial Institutions Act 1998 (the Act) is required to the transfer of the Defendant’s 51% shareholding in the National Bank of Solomon Islands “the NBSI” to John Sullivan, John George Katahanas and Dennis James McGuire

The Facts

The NBSI is a joint venture between the Solomon Islands National Provident Fund (the NPF) and the Bank of Hawaii (the Defendant). The NPF holds 49% of the shares in the NBSI and the Defendant holds 51% of the shares respectively. The issued capital of the NBSI is SBD2, 000,000.00 comprising 200,000 ordinary shares of SBD10.00 each. The Defendant holds 102,000 ordinary shares whilst the NPF holds 98,000 ordinary shares respectively. In 2001, the Defendant published in the United States of America for the information of the regulatory authorities there that it intended to rid itself of its banking interests in many Pacific countries including Solomon Islands. The Defendant intended to complete the exercise by the end of 2001. The Defendant was successful in respect of other Pacific countries except Solomon Islands. An agreement entered into by the NPF and the Defendant on 10^th December 2001 for the sale of 51% shareholding in the NBSI fell through because the Plaintiff did not approve the transfer pursuant to section 23(1) of the Act 22^nd February 2002. By written notice to the NPF, the Defendant terminated that agreement on 25^th February 2002. This event caused the Defendant to look for other ways of disposing of its 51% shareholding in the NBSI. It decided to dispose of its holding by way of gifting strategy for the benefit of the health and education sectors of Solomon Islands and of the NBSI’s local employees. It took this course of action on the advice of Sol-Law a firm of Solicitors in Honiara. The advice was that the strategy being chosen would not offend section 23 (1) of the said Act. This strategy involves the following arrangement. The Defendant would settle three trusts, called “The NBSI Health and Welfare Trust”, “The NBSI Education Trust” and “The NBSI Employees Trust”. The first two are charitable trusts. Each trust in the meantime would have an individual trustee until a corporate trustee is set up in 2 years time subject to the necessary approvals being obtained. At the relevant time the Defendant would make a gift of 34,000 shares in the NBSI to each trustee representing 17% of the issued capital of the NBSI. The shares would be held in accordance with the terms of the relevant trust. The shares would then be transferred to and held by the trustees. Each trustee would appoint one director to the Board of Directors of the NBSI upon registration of the shares. Each director would have been nominated by each trustee and appointed by the Defendant under the NBSI Articles of Association in place of the present directors. It is being proposed that John Sullivan will be the director on behalf of the three trustees who will also be the Chairman plus the present General Manager and one other reputable person to be identified and agreed. The interim individual trustees under this arrangement would be John Sullivan for “The NBSI Health and Welfare Trust”, John George Katahanas for. “The Education Trust” and Dennis James McGuire for “The NBSI Employees Trust”. It is also being proposed that the Articles of Association of the NBSI will be amended to provide for seven directors comprising two directors representing the NPF Board, three representing the trustees one of whom would be a trustee and the other two being independent directors. This composition of the NBSI Board of Directors would ensure that the trustees would not be seen as the controlling force in the NBSI Board of Directors. The NPF is yet to agree to this proposed composition of directors.

The Issue to be determined

The issue here is whether or not the written approval of the Plaintiff is necessary for the transfer of the shares under the said trusts pursuant to section 23 (1) of the Act. At the outset, Counsel for the Defendant, Mr. Sullivan, conceded that the NBSI was a licensed institution for the purposes of the Act. He also conceded that the deeds of gift together with the share transfers were a disposition of the NBSI share capital within the meaning of section 23(1)(2)(a) of the Act and as such was a specified event for the purposes of section 23 (1) and (3) of the Act.

The Plaintiff’s Case

The Plaintiff’s case is that the Defendant requires the written approval of the Plaintiff to effect the transfer of shares in the share capital of the NBSI to the trustees in the manner discussed and agreed by the Defendant and the trustees. Counsel for the Plaintiff, Mr. Radclyffe, argued that whether approval should be given in this case was for the Plaintiff to decide. The issue to be determined, he argued, was whether the transfers in this case or any of them for that matter required the approval of the Plaintiff in accordance with section 23 of the Act. He pointed out that transfer of control was defined by section 23(3) of the Act He said that certain elements must exist for such transfer to fall within the scope of a transfer of control. That is to say, the event constituting the transfer must be one within the meaning of section 23 (2) of the Act and the transfer must result in the person acquiring or exercising power over 20% or more of the voting stock of a licensed financial institution being in control of that financial institution. He argued that the events envisaged in section 23) 1) of the Act were widely defined to include “any other event or scheme the effect of which transfers directly or indirectly, the ownership or the powers exercisable over the voting stock of a licensed institution” (see section 23 (2) (c) of the Act). He therefore concluded that the gifts of shares were transfers of ownership of voting stock in the NBSI as a financial institution. He however, pointed out that the result of such transfer of shares must be to a person who acquires ownership or exercises power over 20% or more of the voting stock. He argued that whilst the word “person” was not defined by the Act, it was defined in section 16(1) of the Interpretation and General Provisions Act (Cap. 85) to include any public body, company or association, and “any body of persons corporate or incorporate”. He cited IRC v. Yorkshire Agricultural Society [1928] 1. KB 611 at 629 in support of his argument. He argued that the three trustees in question were one body of persons who would control 51% of the shares in the NBSI as a financial institution. He said the scheme proposed by the Defendant was an avoidance scheme aimed at by-passing the necessary approval by the Plaintiff under section 23 (1) of the Act. He said the intention of the Act was clear in that the Plaintiff was given a role by Parliament to oversee the operations of licensed financial institutions so that any transfer of shares by whatever means must be a concern to the Plaintiff. He gave an example of a shareholder holding 60% shares in a financial institution being able to dispose of that shareholding to three persons each holding 15% who might be rogues. That, he argued, could not be the intention of the Act. He cited section 8 (1) (g) of the Act, which extends the supervision of the Plaintiff to cover such other matters as the Plaintiff, would consider relevant. He said the use of the word “may” in section 23 (1) would suggest that the Plaintiff would need to demonstrate only a prima facie case in order to exercise its powers under that section. Lastly, he made the point that by splitting 51% shares into 17% each between the three trustees the NPF would become the majority shareholder.

The Defendant’s Case

The case for the Defendant was that the critical question to be asked was whether the specified event would result in a transfer of control of the NBSI as a financial institution. To this end, Counsel for the Defendant, Mr. Sullivan, relied on section 23 (3) of the Act. He pointed out that subsection 3 defined the phrase “transfer of control” in terms of section 23 (2) (a) (b) and (c) of the Act but however said the Defendant’s case fell within the meaning of (a) and not (c) above. He argued that the plain meaning of section 23 (3) of the Act was that for there to be a transfer of control the deeds of gift/transfer must result in a person acquiring ownership of or exercising power over at least 20% of the voting stock of the financial institution. He said the “result” was to be looked at from the position of the acquirer/transferee and not from the point of view of the transferor. He argued that it did not matter that the Defendant would transfer a controlling interest so long as no person acquired a controlling interest in the 51% shareholding in the NBSI as a financial institution. However, Mr. Sullivan conceded that within the meaning of section 2 (1) of the Act that the proposed gifting to the trustees would result in each trustee acquiring ownership or exercising power over the voting stock of the NBSI as a financial institution. He pointed out that in this case, each gift to each trustee was a separate and independent transaction resulting in each trustee acquiring ownership power over 17% of the NBSI voting stock so that no one trustee acquired 20% ownership or more of the shares in the NBSI as a financial institution. He argued that the only result of the share arrangement between the three trustees was that no person would acquire 20% ownership or exercise control over the voting stock in the NBSI as a financial institution. Mr. Sullivan also argued that if the position taken by the Plaintiff was correct then the Plaintiff could veto even the transfer of a single share in a financial institution. He said that position could not be intention of Parliament because Parliament was concerned only with transfers of 20% threshold than single shares or shares below the 20% threshold. He argued that if this construction was for any reason ambiguous then section 23 must be construed in favour of the Defendant. He cited a number of cases which stand for the principle that in construing an Act of Parliament the presumption against the alteration of common law rights would be respected unless express words were used in clear terms to mean otherwise. He said it was trite law that one of the incidents of property was the right to dispose of it. He also cited cases to support this principle of the common law. He urged me to disregard a construction of section 23 which would defeat this principle in the absence of clear words to the contrary in that section because there was nothing in section 23 of the Act to support the position taken by the Plaintiff. Lastly, Mr. Sullivan pointed out that section 23 (5) of the Act was penal in nature so that if any doubt existed in the construction of that section it should be construed in favour of the Defendant.

Section 23 of the Act

I set out this section in full for the purpose of the Plaintiff’s Originating Summons. This section states-

(1) Any event specified in subsection (2) that may result in a transfer of control of a licensed financial institution incorporated in Solomon Islands shall be subject to the written approval of the Central Bank before implemented.

(2) For the purposes of subsection (1), the following events are hereby specified.

• (a) any agreed sale, transfer or other disposition whatsoever of a licensed financial institution’s share capital or issue or allotment of any new share capital;
  
• (b) any proposed compromise or arrangement that involves a licensed financial institution for which an application has been made to the Court pursuant to the provisions of the Companies Act and where the proposed compromise or arrangement is for the purposes of or in connection with a scheme for the reconstruction or amalgamation of that institution; or
  
• (c) any other event or scheme the effect of which transfers, directly or indirectly, the ownership or the powers exercisable over the voting stock of a licensed financial institution.
  

(3) For the purpose of this section, “transfer of control” refers to any event specified in subsection (2) that results in a person acquiring ownership or exercising power over twenty per cent or more of the voting stock of a licensed financial institution.

(4) No licensed financial institution incorporated in Solomon Islands shall effect a reduction of its issued share capital without prior notice to the Central Bank.

(5) Any licensed financial institution or any person who acts in contravention of this section commits an offence and is liable on conviction to a fine not exceeding thirty thousand dollars and any purported transfer may be declared null and void.

Interpretation of section 23 of the Act

I saw this Act in draft form in 1984 when I was then the Attorney- General. It was produced by a gentleman from Uganda then attached to the World Bank as Legal Counsel. He used to be the Parliamentary Counsel for the Government for Uganda. The former Governor of the Plaintiff, Mr. Hughes, was all for it but the Legal Draftsman, Mr Bhatnaghar, from India was against it on the ground that the Banking Act of 1976 was still adequate. I agreed with him. The draft had the support of the World Bank intended as a model for the countries served by the World Bank. It had taken 14 years for the draft to reach Parliament in 1998 and is now the law of the land. However, I cannot now claim that the Act is the exact replica of the draft I saw in 1984 some 18 years ago today. The intent of Parliament must therefore be gleaned from the provisions of the Act itself. Section 9 (2) of the Interpretation and General Provisions Act (Cap. 85) says each Act is intended to be read as a whole. Subsection (3) says that each Act shall be deemed to be remedial and shall receive such fair and liberal construction and interpretation as will best ensure the attainment of the object of the Act according to its true intent, meaning and spirit. Whilst section 9 above is the language of Parliament, it does not produce a magic wand but rather it contains a formula intended to be used by the Courts in the construction of statute law. In my view, section 9 above is an amalgam of all the rules of statutory interpretation developed by the Courts in the common law world. The Court has to pick the correct ingredients in the amalgam, which suit the case before it and apply them to that case. In this regard, I would agree entirely with what Daly, C.J. said at pages 148-149 of His Lordship’s judgment in the case of In re Application by the Minister for Western Provincial Affairs S.I.L.R. [1983] 141. There, His Lordship said,

”I return to the point from which I started out. That is, that the only proper approach to any problem of construction is first to read the words used in their context. If the words have a natural and ordinary meaning then the words should be given that meaning. If that is to be called a “literal approach” I do not consider it to be outdated; the function of a court in any case of interpretation is to decide the meaning of words. The intent and purpose of the legislature is expressed in those words. What other “approach” can there be but “literal”? There may be scope where the words do not have a natural and ordinary meaning or where the words are ambiguous or where the natural and ordinary meaning reveals that something has been omitted (pace Lord Diplock) for a court to apply one or other of what have been called “rules of construction”. But the starting point is always the words themselves and these “rules of construction” are merely common sense and judicial experience (if there is any distinction) applied to the task of giving a meaning to words where the draftsman has, in the view of a court, failed adequately to convey a natural and ordinary meaning that is consistent with the context in which the words are used.

For a court to wander in a twilight world of purposes and intentions whilst disregarding or avoiding the clear meaning of the words used is to introduce an element or capriciousness in the application of statute laws which I, for my part, would be most loath to introduce into Solomon Islands. Even the thought of taking such a journey in the esteemed company of such eminent jurists as Lord Diplock and Lord Denning does not tempt me to abandon what I consider to be the pursuit of consistency“.

I must therefore start by reading the words used in section 23 of the Act in the search for the intent of Parliament in that section. In my view, the critical provision in section 23 of the Act is subsection (3). It defines the phrase “transfer of control” as used in subsection (1) for the purpose of any of the events specified in subsection (2). Subsection (3) defines the phrase “transfer of control” as any event in subsection (2) which results in a person acquiring ownership or exercising power over 20% or more of the voting stock of a financial institution. As argued by Mr. Sullivan each of the gift/transfer to each trustee by the Defendant is a separate and independent transaction involving the disposition of 17% of the share capital of the NBSI to each of the trustees less than 20% threshold specified in subsection (3). This being the case, the written approval of the Plaintiff, he said, would not have been necessary in the first place. This position is inevitably the result of the plain meaning of section 23 of the Act. I see no ambiguity in the language used in section 23 of the Act in this regard. However, Mr. Radclyffe put much emphasis on the need for the Plaintiff to supervise financial institutions and the argument that the three trustees were partners in the Sol- Law firm of Solicitors in Honiara. As to his first point, I say that section 23 of the Act falls under Part VI being the miscellaneous provisions in the Act dealing with matters incidental to the main objectives of the Act. It may well be that the power to control the sale, transfer or other disposition of the share capital of a financial institution can be considered as of supervisory nature in terms of section 8 (1) (g) of the Act but in my view it is incidental only in nature because that power is limited in scope. That is to say, it can only be exercised if the sale, transfer or other disposition of the share capital of a financial institution amounts to 20% or more of the voting stock. As to his second point, I would agree with him if the trustees were partners in Sol-Law as a firm of Solicitors in Honiara. The fact as I understand the poison is that John Sullivan, John George Katahanas and Dennis James McGuire whilst are partners in Sol-Law have chosen to become individual trustees in the three trusts to be set up as intended by the Defendant. Having applied the literal rule of construction, I need not go further to consider the other rules of construction of statutes. However, Mr. Sullivan rested his case on subsection (2)(a) of section 23 of the Act, which describes the modes of disposition of the share capital of a licensed financial institution. In my view the words in subsection (2) (a) of the Act are embracive and wide indeed in scope. The use of the words “any sale transfer or other disposition whatsoever” obviously would include disposition by gift as in this case. In this regard, I would say that subsection (2)(c) is no more than an over caution on the part of the draftsman because subsection (2)(a) of the Act says it all for section 23 (3) equally applies to (2)(a) and (c). In my view, there will be some element of control exercised by the three trustees at least for now until the Articles of Association are amended to provide for seven directors. The present three directors on behalf of the Defendant will resign and replaced with three new directors nominated by the trustees although only John Sullivan will be the only trustee director and Chairman of the Board of Directors. The present general manager will be on that Board plus another to be agreed by the trustees. The voting strength in this camp will obviously be 51% combining the three trustees/shareholders. Even the proposal to amend the Articles of Association to provide for seven directors is yet to be agreed by the NPF Board. There are I suppose these matters which may be of concern to the Plaintiff. The Plaintiff through its Governor is also concerned with what it considers as being irresponsible and unethical conduct of the Defendant by transferring its 51% shareholding in small parcels of 17% each to three persons of Australian nationality residing in Solomon Islands. Its Governor reminded the Defendant that it was still responsible for the financial position of the NBSI and its depositors. I can see and feel the concern expressed by the Governor in this regard. It is a slap in the face for the Defendant to behave in this way towards the NBSI depositors. It is accepted that the Defendant is entitled to dispose of its shareholding in the NBSI but at the same time it is expected to do so in a responsible way. This is the expectation of the Plaintiff in this case. On the part of the Defendant, the going appears to be tough, there being no takers within the specified time of the 51% shareholding in the NBSI. I would liken this situation to a divorce. The party who owns 51% of the shares in the Company decides to dispose of its shares by giving them away in three parcels of 17% each to three individual trustees. In doing this, the party argues that no third party has any right to stop each of the gift/transfer of shares in the manner intended by the owner. A third party then intervenes and says it has the power to approve or otherwise the transfer of the shares under an Act of Parliament. The third party in this case is the Plaintiff. The question is therefore whether or not the division of the 51% of the Defendant’s shareholding in the NBSI into three gifts of shares amounting to 17% each to three individual trustees is caught by section 23 of the Act. For each of this disposition to be caught by section 23 of the Act, each must involve a disposition of 20% or more of the voting stock in the NBSI. On this point, I have already concluded that each disposition of 17% shares to each trustee arising from the Defendant’s 51% shareholding in the NBSI is not caught by section 23 of the Act and requires no written approval by the Plaintiff. I think the Plaintiff believes that the disposition of the 51% shareholding by the Defendant must not be fragmented in any way such as in this case. I can understand this feeling because I do know that the shareholding structure of the NBSI was a joint venture between the Government and Commonwealth Trading Bank of Australia. The Government’s shareholding was later transferred to the then Government Shareholding Agency (GSA) that subsequently became the Investment Corporation of Solomon Islands (ICSI). The Attorney-General being an ex officio member of ICSI, I sat on the ICSI Board for several years. I was also an ICSI director on the NBSI Board of Directors. When the Commonwealth Trading Bank of Australia pulled out of the joint venture the Defendant stepped into its shoes and purchased its 51% shareholding in the NBSI under the joint venture agreement. This time around the joint venture arrangement does not seem to work after the NPF purchased 49% from ICSI some years ago. The spirit of the joint venture agreement appears to have been disregarded by the Defendant if indeed both the NPF and the Defendant are still bound by that agreement. Apart from that I say nothing about the terms of that joint venture agreement nor anything about the law of trusts. The issue in the Plaintiff’s Originating Summons is specific and I have determined that issue in favour of the Defendant. Section 23 of the Act does not seem to have taken into account the existence or perhaps the intent of the joint venture agreement under which the NBSI was formed in the early 1980s if at all that agreement is still valid today. As much as I am in sympathy with the Plaintiff, I find it difficult to bend the clear language of section 23 of the Act to accord with the view taken by the Plaintiff of section 23 and its meaning. I do not think the Plaintiff is a busybody in this case. Its concern is valid because there is a vast difference between the Defendant and the trustees. The Defendant is the Bank of Hawaii whilst the trustees are private individuals with no banking experience. There may still be questions asked about the ability of the trustees to pay up further capital should it become necessary in the future. I will not penalize the Plaintiff with costs. Each party will meet its own costs.

F.O. Kabui
Judge