National Provident Fund Final Report [Part 50]
Below is the fiftieth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
NPF Final Report
This is the 50th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Executive Summary Schedule 4N Continued
Preparation Of ACOM contract Involves Protracted Negotiations
In his capacity as executive director of ACOM, Haro Mekere was in regular contact with Odata, which was calling for the release of “mobilisation costs” from ACOM even before there was a signed contract between ACOM and Odata.
Mr Mekere had been promised a trip to India paid by Odata to visit the company that would manufacture the mill. Mr Mekere put pressure on Herman Leahy, the NPF legal counsel, to draw up a simple turn key contract between ACOM and Odata but Mr Leahy insisted on briefing this out to Carter Newell lawyers to draw up a far more sophisticated and all encompassing document.
Mr Mekere then put forward a draft contract, which had been prepared by Odata for consideration. At Mr Copland’s insistence, Mr Mekere obtained a breakdown of Odata’s mobilisation costs in the form of an invoice.
Payments To Odata Through NPF’s Off-shore Account With WILSONS HTM In Breach Of Foreign Exchange Regulations
The first payment of $A40,282.65 was paid on June 1, 1998 by using NPF’s account with its share brokers Wilson HTM to avoid the requirement for foreign exchange approval by BPNG. Mr Copland apparently authorised the payment, which was beyond his authority and Mr Wright gave instructions to Wilson HTM for payment from that account. Mr Wright and Mr Copland and also Wilson HTM should be referred to the Controller of Foreign Exchange to consider action against them for breach of BPNG foreign exchange regulations.
Mr Leahy refused to be rushed into the preparation of the contract and insisted that NPF’s initial equity contribution should be made subject to approval by the Minister for Finance, as it was now in excess of K500,000.
The commission finds that failure to seek and obtain Ministerial approval for the initial equity contributions was a breach by the board of trustees of section 61(2) of the PF(M) Act.
Misrepresenation To NPF Board Lead To Signing Of Contract Between ACOM And Odata Committing ACOM To Pay K1,500,000 To Odata
Mr Wright also misled the board in November 1998, by setting a target date of early 1999 for pouring the first copra oil. At that time, there was no contract with Odata, no sub-contract for manufacturing the mill and no agreed funding in place.
By the beginning of November 1998, the contract was still not finalised (and negotiations were still continuing) and ACOM had not yet succeeded in obtaining a license from the CMB to export copra oil. On November 12, 1998, Mr Mekere advised the ACOM board that he held a completed contract document executed by Odata and sought approval for the chairman or a delegate to sign on behalf of ACOM.
Mr Mekere pointed out that the export licence had still not been obtained and that the contract should be made conditional upon the grant of that licence.
He also pointed out that ACOM had not yet obtained a bank loan to enable it to fund the project and meet the proposed commitments to Odata. He failed to recommend that the contract also be made subject to ACOM obtaining finance.
When the contract was signed by Mr Fabila on behalf of ACOM on about November 23, 1998, ACOM thereby became liable to pay Odata $US25,000 immediately and to find $US1,525,000 in the longer term. NPF met the first payment by cheque for K48,623.02 payable to Odata on November 25, 1998.
Breach Of Fiduciary Duty By Trustees And Mr Fabila and Mr Mekere
It is likely that Mr Fabila and Mr Mekere, who witnessed the contract, are personally liable for losses suffered by NPF under this contract as it is doubtful they could claim “good faith” as they were clearly aware of the financial obligations being undertaken and of the lack of funds to meet it.
Likewise, all trustees in office at the time were in breach of their fiduciary duty by authorising management to execute this contract.
The trustees also face personal liability for all losses incurred by NPF as a direct result of entering into this contract.
Further Payments By NPF On Behalf Of ACOM To Odata Without NPF Board Approval
On December 10, 1998, Mr Wright authorised the payment of a further K302,393 to Odata with no NPF board approval and well in excess of his financial delegation.
Mr Wright was in breach of his duty to the NPF board and could be personally liable for this amount. It brought NPF’s payments to Odata to K417,500 at that time. The NPF trustees may also be personally liable for not having controlled this unauthorised expenditure by Mr Wright.
On January 18, 1999, Odata claimed a further $US290,000, saying “we have already started implementing the project ahead of schedule”.
This amount was paid without question and with no project engineer in place to verify the work done.
There was no authority from the NPF board to advance this sum as “bridging finance” pending ACOM obtaining bank financing. NPF management and Mr Fabila and Mr Mekere were in breach of their duty and may be personally liable.
They must have known that the requisite NPF approval had not been given and they would not succeed in a “good faith” defence.
Similarly, the trustees failed in their fiduciary duty to the members of the fund to exercise control over management and this may expose each trustee to personal liability for this loss.
It is important to note that in January 1999, Mr Wright was forced to resign from the NPF and ACOM, amidst mounting criticism of his conduct as finance and investment manager for NPF. His position was filled temporarily by the unqualified and inexperienced Haro Mekere.
In his report to the ACOM board dated January 18, 1999, Mr Mekere understated the amount which had been paid to Odata (K417,000) by claiming only K380,000 had been paid.
On January 29, 1999, there was a further request from Odata, this time for K60,000 to be paid into the personal account of Odata director, Krishna Prasaad.
The amount was paid, without question, into Mr Prasaad’s personal account.
External funding: Bank Loan
From February 1999, Mr Mekere sought the assistance of Deloittes to obtain a loan facility for ACOM, preferably from the Bank South Pacific (BSP).
Without any authority from the NPF board, he discussed a guarantee and the possibility of NPF providing security for the proposed facility.
Bridging Finance From NPF
In April 1999, Odata demanded a further drawdown and threatened legal action.
In his April report to the NPF board, Mr Mekere sought board approval to advance between $US50,000 to $US100,000 by way of bridging finance for Odata to proceed with site preparation.
Request To PNGBC
On April 15, Mr Fabila sought approval from PNGBC to advance K2.750 million to ACOM at ILR +2 per cent.
This was a time of extreme financial crisis for NPF itself, which was unable to meet its own massive borrower’s commitments to ANZ and PNGBC.
Mr Fabila’s uncritical support for this proposal was a gross breach of his fiduciary duties to the members of the fund.
Suspicions About Mr Mekere’s Motives In Supporting Odata
Mr Mekere’s continued active involvement to obtain funding for Odata is also highly questionable. At this time, it was not known that his own wife had been appointed to the board of the recently incorporated Odata (PNG) Ltd. The explanations given for this appointment are most unsatisfactory and Mr Mekere’s failure to disclose her appointment to either ACOM or NPF was improper conduct.
At this stage, Mr Mekere had become aware that Deloittes had revised cash flow projections for ACOM, which showed a clear cash deficit in the first two years and an overall cash deficit after six years. Mr Mekere’s failure to advise the NPF board of these unfavourable projections was another gross failure of his duty to give professional objective advice to the board. It again raises serious questions about Mr Mekere’s motivation.
NPF Board Guarantees BSP Loan Facility Of K3,150,000 T0 ACOM
On April 30, 1999, at a special meeting, the NPF board, without the benefit of any independent expert advice or professional analysis of the viability of ACOM and the copra oil process, resolved to guarantee a loan facility of K3,150,000 to be provided by BSP.
By passing this resolution at a time when NPF was in financial crisis, the board of trustees were in serious breach of their fiduciary duty to the members of the NPF.
At this time, the trustees had been well briefed about NPF’s acute cash flow problem and financial crisis.
The trustees were aware of the endeavours being made to sell off NPF’s investments to enable the repayment of the ANZ debt and of the attempts to reduce the burden of its crippling PNGBC loan facility.
The trustees must be severely criticised for following with such docility, the unsupported and fiscally irresponsible recommendation from Mr Fabila and Mr Mekere, to guarantee this BSP facility to ACOM, without seeking any independent investment advice.
The NPF sought Ministerial approval for this guarantee but it was “put on hold” by Secretary Tarata of the Department of Treasury.
Meanwhile, NPF paid an additional K157,977 to Odata on June 14, 1999, on the authority of Mr Fabila, without any board approval. Again, Mr Fabila faces personal liability for this breach of his fiduciary duty to safeguard the member’s funds. This brought the amount paid by NPF to Odata to K647,000.
Continuing Negotiations For BSP Loan Facility Without NPF Board Authority
Throughout June and July 1999, Mr Mekere was involved in negotiations with BSP regarding the security that NPF would provide for the ACOM loan facility.
These discussions had no board authority whatsoever and were at odds with the endeavours of Rod Mitchell and PwC to stabilise NPF’s haemorrhaging debt problems.
The conditions imposed by the NPF board, as a prerequisite for providing bridging finance to ACOM pending finalisation of its proposed BSP loan facility, had not been met but Odata was continuing to ask for on-going funding.
Further Payments By NPF To Odata To Fund Construction Of The Mill
At the NPF board meeting of July 29, 1999, the board approved payment of $US78,000 for Odata and the K31,500 loan processing fee for BSP. These amounts totalling K214,303, were paid by cheque to Odata on August 3, 1999.
ACOM Binds Itself In A Management Contract With Odata
While the scramble to fund construction continued, with no project engineer to give independent verification of the funds being claimed by Odata, ACOM proceeded to bind itself into contractual arrangements with Odata for management of the project and marketing of the product.
At a special NPF board meeting on August 15, 1999, the ACOM management was authorised to “negotiate and finalise the contracts” for circulation to the board before signing.
This resolution was passed despite discussion among the trustees, which recognised the lack of expertise in either NPF or ACOM, to ensure the best price would be obtained.
This was another serious failure of the NPF trustee’s fiduciary duty to members of the fund and indicates their lack of awareness about the fiduciary duties they owed to the members.
By August 10, 1999, Mr Mitchell was expressing concerns about the project and successfully arranged for BSP to apply a strict deadline of August 31, 1999, for ACOM to satisfy the required conditions for granting the facility. The deadline was not met, although Mr Mekere attempted to obtain the loan facility, offering further securities to be provided by NPF, without board authorisation.
The documents in evidence indicate an increasing sense of urgency amounting almost to desperation, characterising Mr Mekere’s conduct.
BSP Loan Facility Negotiations Discontinued
On October 28, 1999 Mr Mekere gave in, and on instructions, notified BSP that ACOM was not able to proceed with the loan facility.
NPF Withdraws Construction And Odata Sues ACOM
On November 3, 1999, Mr Mekere formally advised the directors of ACOM that the NPF board “withdrew its commitment to construct the proposed 30 tonne per day copra processing facility . . .”. The letter also alleged that Odata was in breach of its contractual obligations to ACOM and that if this was redressed “NPF may revisit this investment in six months time”.
Odata subsequently claimed $US612,000 from ACOM for costs incurred under the contract. This was not paid and court proceedings have been instituted.
Findings In Accordance With Terms Of Reference
The commissions findings are set out in the text of the report on Ambusa and at Paragraph 11 of that report. In summary:
(a) Mr Wright, Mr Mekere and Mr Fabila were in breach of their duty to the NPF board by putting forward a recommendation for the board to invest as a joint venture partner with Ambusa Pty Ltd, without carrying out any due diligence on Ambusa or Odata or the personalities involved and without instigating an independent expert analysis of the business proposal put forward by Ambusa, Odata and Mr Valu, Mr Ryan and Mr Gavuli;
(b) The NPF trustees failed their fiduciary duty by approving this investment in principle in December 1997 and then approving its implementation and investment of K400,000 in February 1998; and
(c) Both the management and the trustees continued to breach their duty to the NPF members throughout 1998 and 1999 by continuing to meet progress claims by Odata prior to finalising the turnkey construction contract and without appointing a project engineer to verify the claim for payment.
On several occasions, management authorised these payment to Odata without NPF board approval, knowledge or authority.
The NPF board of trustees accepted management’s recommendation that ACOM should execute the contract with Odata knowing that it would obligate ACOM to pay $US25,000 immediately and to provide long term funding of more than K3 million, with no protective “subject to finance” clause in the contract.
As a result of this foolish and poorly managed investment, NPF suffered actual loss in terms of payments to Odata, board fees and expenses and legal fees of more than K1.1 million.
NPF also faces potential liability to Odata in the outstanding court proceedings.
The trustees in office during this period were Brown Bai, Henry Fabila, Michael Gwaibo, John Paska, Abel Koivi, Vele Iamo and Tau Nana, all of whom were in breach of their fiduciary duty to the members of the fund.
All face potential personal liability for the losses incurred by NPF because of their serious failure to seek even basic expert advice and their failure to reprimand or control management for making repeated unauthorised payments.
The officers involved were Mr Fabila, who, as managing director, had both a common law duty to the board and a fiduciary duty to the members.
The other officers involved were Mr Wright and Mr Mekere.
These officers face personal liability for losses suffered by NPF generally by entering into the investment on the basis of their woefully inadequate investment advice and for the various payments made to Odata on their unauthorised direction. It is unlikely they would succeed in a defence of “acting in good faith”.
Executive Summary Schedule 4O Plantations and Agriculture Investments
This introduction covers NPF’s investments in New Guinea Plantation Holdings Limited (NGPHL), New Guinea Plantations Limited (NGPL) Walmetke Ltd (Walmetke) and New Guinea Islands Produce Ltd (NGIPL).
These investments were made well before the period covered by this commission of inquiry. Very few records are easily available about the initial investments, which is outside the time frame of the commission’s terms of references.
The early history of this investment has been put together on the basis of available documents and from evidence given by Mr Robert Bolling (Transcript pp.5763-8) who was previously the finance manager of the company Kina Gilbanks.
TO BE CONTINUED