Tongasat not entitled to receive multi-million Chinese grant-aid for Tonga, court decides [1]
Tuesday, August 21, 2018 - 17:09
Tongasat unlawfully received over USD$46 million of public money gained from the government's relinquishing of Tonga's 130o East satellite slot to China, a Supreme Court action has determined.
Lord Chief Justice O. G. Paulsen stated that the circumstances that arose in this case with the Kingdom of Tonga conceding its priority to an orbital position and receiving directly grant aid funds, were not contemplated by the parties when they entered into an Agency Agreement with Tongasat.
"In my view, the difficulty facing Tongasat and the Kingdom of Tonga is that the Agency Agreement is concerned only with the sharing of revenue received by Tongasat as a result of 'Tongasat's operations'. There is no term in the agreement which requires the KoT to share grant aid or other revenue it receives upon an outright sale or other disposition of an orbital position nor can such a term be implied," the judge stated in his decision on 17 August in the Supreme Court at Nuku'alofa.
"The Kingdom of Tonga's failing was in spending a very substantial sum of public money without the required oversight of the Legislature or other lawful authority," Lord Chief Justice Paulsen stated.
Public law claim
The public action was lodged in 2014 by the plaintiffs, the Public Service Association Incorporation (PSA) and Samuela ‘Akilisi Pohiva against the Kingdom of Tonga (KoT) and the Friendly Islands Satellite Communications (Tongasat).
The plaintiffs challenged the legality of two tranches of Chinese grant aid money to Tonga that was paid to Tongasat by the Tonga government in 2008 and 2011.
Lord Chief Justice Paulsen ruled that the plaintiffs were substantially successful in their public law claim and entitled to "declaratory relief", the terms of which will be finalised under a further ruling.
The plaintiffs were represented by Dr Rodney Harrison QC.
Mr 'Aminiasi Kefu SC represented the first defendant, the Kingdom of Tonga; and Mr W. Edwards Jr. represented the second defendant, Friendly Islands Satellite Communications (Tongasat).
The judgment also noted that the Kingdom of Tonga has not made any claim for recovery of the payments to Tongasat, even though the second plaintiff is now the current Prime Minister.
Chinese satellite
The case started with the fact of Tongasat's discovery in 2006 that a state agency the China Electronic System Engineering Company (CESEC) had placed a satellite into a Tongan-registered orbital position at 130o East. Difficult negotiations began involving representatives of Tongasat, the government (Lady Dowager Fusitu'a), and the PRC.
Tonga eventually agreed to concede its priority in the orbital positions in favour of the PRC. Tongasat bore all the costs of the negotiations.
Justice Paulsen stated that, “Arising out of the negotiations, the PRC agreed that rather than it paying compensation to the Kingdom of Tonga for the orbital position it would provide KoT with grant aid totaling USD$49.9 million. This sum was to be paid in two tranches.”
The first payment of USD$24,450,000 was made in July 2008, followed by USD$25,450,000 in June 2011.
Upon receipt by the KoT the first and second tranche payments were, almost entirely, paid to Tongsat or applied to satisfaction of Tongasat's debts owed to the KoT.
Important issues
The 49-page judgment reveals how the long difficult negotiations between the superpower and the tiny Pacific island nation over the rights to the orbital position, led to tangled political and private commercial deals, and assumptions going back to 2006, involving decisions made by two successive Tongan Prime Ministers and a Princess.
"The issues raised are important and involve a very substantial sum of public money," Lord Chief Justice Paulsen stated.
The judgment examined how Tongasat ended up with 93% of the proceeds from the eventual relinquishing of Tonga's orbital position at 130o East to China.
The judgment declared that the USD$49.9 million payments received from China were in fact public money and could only be received and expended in the manner authorised by Tonga's Public Fund Management Act.
The judge rejected the argument by the defence that the payments were trust money.
The judge recognised the Plaintiffs standing to bring the public law claim for declaratory relief. "The first plaintiff represents a substantial number of public sector employees and the second plaintiff was at the time a People's Representative and now Prime Minister."
Exclusive agent
In the beginning, Tongsat had, on behalf of the KoT, filed for and secured rights to use the orbital slot 130o East. There was no dispute that the rights belonged to Tonga and not Tongasat, or that in respect of 130o East Tonga had priority rights over filings by other countries to use that orbital position, stated the judge.
Friendly Islands Satellite Communications Ltd. (Tongasat) is a privately owned company. In 1994 it was appointed the exclusive agent of the Kingdom of Tonga to enter into contracts with third parties for the launching or operating of satellites in orbital positions registered with the International Telecommunications Union (ITU). Tongasat and the government of Tonga shared in the revenue generated by the use of the Tonga's orbital positions.
"At all relevant times HRH Princess Salote Pilolevu Tuita owned 80% of the shares in Tongasat and 20% of the shares were held by Dr. [Matt] Nilson but they were subject to an arrangement with HRH to acquire them The directors of Tongasat were HRH (Chairperson), Mr Semisi Panuve (Managing Director) and Ms. Lucy 'Ilaiu."
The judgment examined correspondence between Tongasat in 2008 and the then Prime Minister Lord Sevele.
Tongasat managing director Mr Panuve, in a 2008 letter to the Prime Minister [now known as] Lord Sevele, proposed sharing the USD $49.9 million and requested that the deal with China/CESEC be treated as a special one-off revenue split between Tongasat and the KoT. The letter assumed a 50/50 split of the first tranche payment.
It also noted that Tongasat owed the KoT outstanding revenue share of over USD$7.46 million and a further USD$1.3 million plus interest was owed to the Tonga Trust Fund. Mr Panuve requested that 'these amounts owing are offset against the Government's share of the 50/50 split on the first payment to be received from China'.
After further communications from Lucy 'Ilaiu and HRH Princess Pilolevu, Lord Sevele in 2008 advised that sharing 50/50% of the first payment was acceptable and that regarding Tongasat's debts to government "from Government's 50% share, we would clear Tongasat's outstanding debts."
Lord Sevele said in evidence he believed that the Agency Agreement was unfair to Tongasat because it paid all the costs of managing the orbital positions while the government contributed nothing and collected a disproportionate share of the income.
Grant aid funds
Lord Chief Justice Paulsen stated that the case was concerned with whether the expenditure of the two tranche payments to or for the benefit of Tongasat was lawful.
"I am satisfied that Cabinet resolved to accept grant aid funds from the PRC in respect of the settlement of 130o East but not that Cabinet approved the sharing of the first tranche payment as agreed by Lord Sevele and HRH. I am also satisfied that Lord Sevele believed he had authority to make agreements with HRH on behalf of the KoT in respect of the division of the tranche payments."
HRH did not give evidence.
Second payment
In 2011, a new Prime Minister Lord Tu'ivakano had a meeting with HRH and Ms 'Ilaiu and was satisfied with what he was told that the former government had made a binding decision for the payment of the second tranche payment to Tongasat. Mr Panuve and Ms 'Ilaiu met the Ministers of Finance and Justice of the new government to inform them of what they regarded was Tongasat's entitlement to the second tranche payment.
On 30 May 2011 the Minister of Finance wrote to the National Reserve Bank of Tonga directing that upon receipt of the second tranche payment there be a transfer to the Government's Operating Account of TOP$11,559,683 (being Tongasat's tax arrears of TOP$15.68 million less penalties previously imposed but now waived) with the remaining balance to be transferred to Tongasat.
"There is no document which records any earlier Privy Council, Cabinet or Ministerial approval for this direction," stated Lord Chief Justice Paulsen.
The second tranche payment was received by KoT on 9 June 2011 and it was deposited into the government's special USD account with the National Reserve Bank of Tonga.
"In accordance with the Minister of Finance's directive of 30 May 2011, of the USD25,450,000 aid grant from the PRC, USD$6,789,001.83 was deposited in the government's operating account in satisfaction of Tongasat's taxation liabilities. The balance of USD$18,660998.17 was paid to Tongasat.
"In effect Tongasat received the entire second tranche payment either by way of a direct payment or in satisfaction of its existing taxation liabilities.
"As noted earlier Tongasat received 85% of the first tranche payment. It received 100% of the second tranche payment. In total it received 93% of the first and second tranche payments combined.
"On 24 June 2011 representatives of the Governments of the PRC and the KoT signed a hand-over certificate which recorded that the payment of USD$25,450,000 was a grant aid to assist the KoT in its economic and social development," stated the judgment.
Public money
For the defendants, 'Aminiasi Kefu SC, raised three defences that (1) the plaintiffs had no legal standing to bring the claims; (2) that the tranche payments were not public money but were trust money paid by the PRC to KoT specifically for Tongasat; and that (3) the payments were Tongasat's entitlement under its agreements with the KoT.
The judge statd that he was satisfied that both the first and second tranche payments were public money within the meaning of the Public Fund Management Act and could only be received and expended in the manner authorised by the Act.
"I am satisfied that the first and second tranche payments were expended in breach of s.9 of the PFMA... I am also satisfied that the use of the payments to satisfy the liabilities of Tongasat ...breached the prohibition in s.30 of the PFMA.."
Lord Chief Justice Paulsen ruled that the plaintiffs are entitled to "declaratory relief", the terms of which will be finalised under a further ruling to be issued by the Judge after receiving memoranda from Counsel over the next two weeks. The plaintiffs are entitled to the costs of the action against both defendants which are to be fixed by the Registrar if not agreed.
At the same time a private law claim by the plaintiffs, which sought an order for Tongasat repay the Kingdom of Tonga the full amount of the first and second tranche payments, was dismissed by the judge because the plaintiffs had no standing to pursue the claim.
No recovery claim
It is understood that the Kingdom of Tonga has not made any claim for recovery of the payments to Tongasat.
"Had a claim for recovery of the tranche payments been made by the Kingdom of Tonga they would (subject to any cross claims) be recoverable as ultra vires payments of public money ...," stated the judge. "But no such claim is advanced by the KoT. The reason why it does not advance a claim, partcularly given the second plaintiff's position as Prime Minister, was never explained."
Other actions
Justice O. G. Paulsen also stated that there are five actions, which are being held pending the issue of this ruling. He direct that they are to be called at 9am on 6 September 2018 at which time counsel must be in a position to advise the Court if they will be pursued. There involve defamation allegations involving parties to the case.