Last Thursday, the Court of Appeal delivered a judgment in a case involving the interpretation of the entities that are subject to the jurisdiction of the Integrity Commission.
The case was brought by TSTT, the majority state-owned telecommunications provider, which wanted the High Court to interpret whether the sentence: "Members of all statutory bodies and state enterprises including those bodies in which the State has a controlling interest," in paragraph 9 of the Schedule to the Integrity in Public Life Act 2000 applied to TSTT directors.
In other words, would TSTT directors be required to disclose their assets to the Integrity Commission.
High Court judge Judith Jones found that the schedule referred to the members of the management or decision-making body of organisations established by statute and all businesses or companies owned or controlled by or on behalf of the State.
In determining control by the State, Justice Jones sought assistance from section 119 (9) of the Constitution, which states that "an enterprise shall be taken to be controlled by the State" if:
�2 The Government exercises or is entitled to exercise control directly or indirectly over the affairs of the enterprise;
�2 The Government is entitled to appoint a majority of directors of the board of directors of the enterprise; or
�2 The Government holds at least 50 per cent of the ordinary share capital of the enterprise.
The learned judge also argued that the phrase "controlled by or on behalf of the State" was in accord with the purpose and intent of the Integrity in Public Life Act which is to promote and preserve the integrity of persons exercising executive functions on behalf of the State.
The Court of Appeal–comprising Chief Justice Archie and Justices of Appeal Allan Mendonca and Gregory Smith–heard arguments at the end of June 2010 and reserved its decision, which was delivered on Friday last by Justice of Appeal Smith.
After deliberating on this straight-forward matter of interpretation for almost exactly three years–and more than eight years after the matter was first filed in the High Court, Justice of Appeal Smith delivered a 20-page judgment.
Both Chief Justice Archie and Justice of Appeal Mendonca wrote that they agreed with the judgment and "have nothing to add" to it. This could mean that the Chief Justice and Justice of Appeal Mendonca felt that the judgment was so compellingly correct that there were no changes they would or could have suggested.
In his judgment, Justice Smith argued that TSTT is not a state enterprise because in 1999 the State transferred its 51 per cent shareholding in TSTT to National Enterprises Ltd (NEL) and that if one were to apply a legal control test, it would show that NEL controlled TSTT and not the Government.
Justice of Appeal Smith looked at the same section 119 (9) of the T&T Constitution as did Justice Jones and concluded that after the formation of NEL, the Government was no longer entitled to appoint a majority of the directors to the TSTT board. Those directors were now appointed by NEL. He concluded, as well, that the Government no longer held the 51 per cent shareholding in TSTT. Those shares were now held by NEL.
Most compellingly, it is important to note that the Court of Appeal was asked to interpret whether the sentence: "Members of the boards of all statutory bodies and state enterprises including those bodies in which the State has a controlling interest," would have covered TSTT directors.
On this point, in my view, the important question that the Court of Appeal should have analysed was whether TSTT is a company "in which the State has a controlling interest."
Instead, the Court of Appeal concluded that TSTT is not a state enterprise for the purpose of the Integrity provisions and based its judgment on a false dichotomy between NEL and the Government.
Justice of Appeal Smith argued:
1) "NEL and not the Government is now the holder of the 51 per cent shareholding in TSTT;"
2) NEL and not the Government is entitled to appoint a majority of directors to the board of TSTT because "...it is at least very arguable that the Government can exercise control indirectly over TSTT by the use of its majority shareholding in NEL;" and
3) "With respect to TSTT, an examination of the legal sources of control, namely the shareholding and the shareholders' agreement reveals that NEL and Cable & Wireless have control of TSTT, not the Government. As such, TSTT is (prima facie) not a state enterprise."
Instead of viewing NEL and the Government as almost two separate entities, what should have been clear to the Court of Appeal is that NEL is a company that was created to hold the State's shares in five profitable companies–three majority stakes and two minority positions.
NEL is the State vehicle–the proper description is an investment holding company–that was established to allow T&T individuals and institutions to own shares in local companies in which the State has an ownership interest.
There can be no doubt that the State has a controlling interest in TSTT, by virtue of the 51 per cent of the company that is held by NEL and the 83 per cent of NEL is owned by the State–66 per cent by Corporation Sole and 17 per cent by NGC, 100 per cent of which is owned by the State.
By virtue of these facts, which are easily verifiable, it is beyond dispute that TSTT must be defined as a company "in which the State has a controlling interest." It follows, therefore, that the Court of Appeal erred in concluding that TSTT is not a state enterprise and its directors are not subject to the Integrity provisions.
Why did the Court of Appeal err on this important point?
In my view, the reason for the error was a lack of understanding of NEL's raison d'�tre.
According to the Court of Appeal, at page 8 of the judgment: "The purpose behind NEL was for the Government to divest itself of its shareholdings in three companies namely, National Flour Mills, Tringen and TSTT."
And, again at page 12 of the judgment, in deciding that there were no exceptional circumstances that warranted the application of the de facto or factual test of control to be applied, the Court of Appeal stated: "There is no suggestion that the Government's divestment of its shareholding in TSTT to NEL was anything other than a bona fide divestment of its 'control' over TSTT."
The suggestion that in creating NEL the Government undertook a "bona fide divestment of its 'control' over TSTT" is a total misreading of the purpose for which NEL was established.
NEL was NOT a bona fide divestment of the State's controlover TSTT, NFM and Tringen. Far from it. The rationale behind the creation of NEL was for the State to maintain control over TSTT, NFM and Tringen–plus minority holdings in Phoenix Park Gas Processors and Atlantic LNG Train 1–by transferring the shares in these five companies into an investment holding company, which could then facilitate investment by T&T individuals and institutions.
The idea was to create an opportunity for the population to own shares in the commanding heights of the economy while at the same time retaining control of the telecommunications backbone, two profitable ammonia plants, a flour miller as well as shares in Atlantic LNG and Phoenix Park Gas Processors.
To repeat for emphasis, the State DID NOT "divest itself of its shareholdings in NFM, Tringen and TSTT" and however the Court of Appeal arrived at that conclusion, it did so in error. What the State did was transfer its shares in NFM, Tringen and TSTT to a company it controls, which attorneys representing TSTT really ought to have known.
The Court of Appeal, therefore, misdirected itself when it concluded that "NEL and not the Government is now the holder of the 51 per cent shareholding in TSTT" as TSTT is clearly a company "in which the State has a controlling interest."
The Court of Appeal may have erred on this important point because it may have been too quick to discount the test of direct and indirect control as being "not an appropriate one to be applied to the Integrity Act and sections 138 and 139 of the Constitution" because it is "too wide and produces an unintended consequence as well as too much vagueness in the application of the Integrity Act to the members of the board of state enterprises."
Assistance from Constitution
The High Court judge had sought the assistance of Section 119 (9) of the Constitution, which referred to the State "exercising control directly or indirectly" to assist her in defining what is a state enterprise.
The 2013 budget document, State Enterprises Investment Programme, identifies 56 companies that are defined as state enterprises.
Of those 56 companies, 45 are wholly owned, seven are majority owned and four are considered to be state enterprises even though the State owns less than 50 per cent of the shareholding of the companies.
Of the seven majority-owned companies, Alutrint must be discounted as the Government cancelled the contract with the Chinese shortly after it came to power. The six majority owned companies are: ADB–97.2 per cent, Business Development Company–64.4 per cent; NEL; Plipdeco–51 per cent; CAL 84 per cent and National Helicopter Services–82.3 per cent.
The four minority-owned companies that are considered to be state enterprises are:
�2 DFL Caribbean Holdings Ltd–28.1 per cent Government; 38.8 per cent International Financial Institution; 33.1 per cent private
�2 TT Mortgage Finance–49 per cent Government; 51 per cent NIB
�2 Metal Industries Company Ltd–46.7 per cent Government; 14.9 per cent DFL; 38.4 per cent other
�2 LIAT–2.9 per cent Government; 29.2 per cent BWIA; 26.6 per cent regional governments (one doubts the accuracy of BWIA's shareholding in LIAT)
Given the small number of companies over which the State exercises indirect control, can the argument about the test of direct or indirect control being too wide be sustained?
The Court of Appeal seems to agree with TSTT that the judge of first instance was wrong to resort to section 119 (9).
One of the reasons for the Court of Appeal opting to reject 119 (9) as an aid to interpretation is that if Parliament had intended the section to apply to the Integrity provisions, Parliament would have done so, as it did with sections 116 (3) and 119 (8). But it seems to me that all 119 (9) does is define a state enterprise for the purposes of subsection 119 (8) and 116 (3).
In refusing section 119 (9)'s offer of assistance, the Court of Appeal does the clause the additional discourtesy of misreading her.
In his judgment, Justice of Appeal Smith quotes section 119 (9) thus: "For the purposes of subsection 8 and section 116 (3) an enterprises shall be taken to be controlled by the State if the Government..." (exercises control etc). The sentence actually reads "...an enterprise shall be taken to be controlled by the State if the Government or any body controlled by the Government...."
In my view, the omission of the seven words "or any body controlled by the State" by the Justice of Appeal, throws an entirely different light on how a state enterprise is to be defined. Inclusion of the seven words allows the Government to exercise control over a state enterprise by way of another company/entity/enterprise that the State controls. In other words, it allows for the State exercising its control indirectly as well as directly.
And indeed, the Government exercises its control over TSTT through NEL, as it exercises its control of Tringen through NEL and as it exercises its control of NFM through NEL.
One of the three reasons the Court of Appeal chose to apply the de jure or legal test of control as its "first guide" (rather than the de facto or factual test of control) was because section 119 (9) only subjects an enterprise to the Auditor General, while the Integrity provisions directly affect individuals and expose them to "onerous person duties."
(It is noted, with absolutely no comment, that the appeal court judge uses negative phrases such as "onerous duties," "heavy duties" or "heavy burdens" on six occasions in this short judgment to describe the requirement to file the annual Integrity returns.)
In its arguments, the Integrity Commission's attorneys suggested that "resort may be had to the de facto or factual control test in cases where for instance the de jure test is being used as a ruse to evade the statute," (page 10 of the judgment).
The Court of Appeal argued that "given the uncontested evidence, there are no exceptional circumstances here which call for the application of the de facto or factual test to be applied."
I take this to mean that it did not occur to the Justice of Appeal that the mere fact that TSTT sought an interpretation of whether it was a company "in which the State has a controlling interest," may have been indicative of an attempt by its directors to escape the Integrity provisions.
If, as the learned judge argued, "it is at least very arguable that the Government can exercise control indirectly over TSTT by the use of its majority shareholding in NEL," could Prime Minister Kamla Persad-Bissessar have announced on October 7, 2010 that former police commissioner Everald Snaggs would be the new chairman of TSTT?
The announcement by the Prime Minister followed a lengthy Cabinet session where over 300 nationals were approved for appointments to 38 state boards, statutory bodies and regional health authorities, according to a story by Guardian political reporter, Gail Alexander.
Could the Prime Minister have announced the new TSTT chairman–along with four other government-appointed TSTT directors–if the Government did not "exercise control indirectly over TSTT by the use of its majority shareholding in NEL?"
For all intents and purposes, NEL is the Government and TSTT is simply a state enterprise that is controlled by another state enterprise (NEL), which is an investment holding company for the State.
As then Minister of Finance, Brian Kuei Tung said of NEL when he delivered the 2001 budget: "Through this mechanism the public and especially the employees of the enterprises concerned could participate in ownership and build assets."
And as then Minister of Finance, Gerald Yetming, added when he delivered the 2002 budget on September 14, 2001: "This initiative would allow our citizens to share in the wealth of some of our most profitable enterprises."
What about CL Financial?
Were Mr Kuei Tung and Mr Yetming–the current chairman of CL Financial, Clico, Angostura and Home Construction Ltd–wrong about NEL?
And on the issue of Mr Yetming, if a state enterprise is defined as companies "in which the State has a controlling interest," can it not be argued that the shareholders' agreement between the Government and CL Financial makes the group once controlled by Lawrence Duprey a state enterprise for the life of the agreement?
Is the deciding factor the fact that the shareholders' agreement entitles the State to appoint a majority of the CL Financial directors? Even though the State does not own one share in CL Financial, does the fact that four of the seven directors are appointed by the Government not make CL Financial a state enterprise?
And if TSTT is not a state enterprise, subject to the political control of Cabinet, why did Sam Martin submit his resignation as the chairman of TSTT on June 23, 2010, one month after the 2010 general election?
In fact, if TSTT is not a state enterprise, would the Cabinet, meeting on November 3, 2005, have been able to appoint Mr Martin as chairman, while disappointing Christian Mouttet, with absolutely no reference to NEL.
If TSTT is not a state enterprise, Cable & Wireless would be justified in negotiating exclusively with NEL to sell its 49 per cent stake in TSTT, rather than having to negotiate with the Minister of Public Utilities and the Minister of Finance.
The judgment of the Court of Appeal also has serious implications for the Government's control of the state enterprise sector as, if TSTT is not a state enterprise, neither are Phoenix Park Gas Processors, Tringen or NFM, which are also controlled by NEL.
Phoenix Park is 20 per cent owned by NEL and 31 per cent owned by NGC. Fifty-one per cent of Tringen, like TSTT, is owned by NEL, while 49 per cent is owned by a foreign company, Yara. NFM is 51 per cent owned by NEL and 49 per cent owned by local individuals and institutions.
And if TSTT is not a state enterprise, can Trinidad & Tobago Mortgage Finance (TTMF) and the Home Mortgage Bank–which are both 51 per cent owned by the NIB and which both serve public purposes–be defined as state enterprises?
It is interesting that TTMF in included in the State Enterprises Investment Programme document referred to earlier, but HMB is not.
Does the fact that the Government's own document not consider HMB to be a state enterprise cast any doubt on the proposed merger of HMB and TTMF and the initial public offering of shares in the merged entity?
Indeed, is the NIB itself a state enterprise?
The NIB was established by an Act of Parliament. It serves a public purpose. Its accounts are audited by the Auditor General and it is subject to the Public Accounts Committee. The NIB board comprises 11 directors, three each from government, business and labour, the executive director who is an ex-officio member of the board and an independent chairman (Calder Hart was once its chairman).
If control by the State, either directly or indirectly, is crucial to the definition of a state enterprise, then it is clear that NIB is not controlled by the State and therefore is not a State body.
One hopes that the Government appreciates the slippery slope that the Court of Appeal judgment presents for the definition of state enterprises and that the State acts appropriately by directing that the judgment be appealed to the Privy Council.
It seems to me that if the judgment is allowed to stand, it sets a precedent for the definition of state enterprises for the purposes of the Integrity provisions and it can then be argued that TSTT, Tringen and NFM (and other companies) are not state enterprises for other purposes.
This could result in ostensibly state-owned companies arguing that they do not need to subscribe to the Auditor General, the Public Accounts (Enterprises) Committee, guidance from the Chief Personnel Officer or directions from the line minister.
Is that what the country wants?
?