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Insolvent Superannuation Funds – unforeseen consequences

19 Feb 2013

With the reduction in returns from standard investments and the relaxation of rules relating to superannuation investment, it is understandable that investors will look to expand the scope of their superfund's operations.  While superannuation is intended to be a nest egg for the future, these factors can lead to failed investments and complex consequences of insolvencies.

Hynes Legal have recently been involved in a legally complicated issue that has arisen in relation to the administration and liquidation of the corporate trustee of a self-managed superannuation fund (SMSF).

Background

In brief, a Company was the trustee of the SMSF (the Company).  The Company's only purpose was to perform the functions as trustee of the SMSF and was created specifically for this purpose.  After losing an appeal against a ruling by the ATO, earlier this year the Company appointed Voluntary Administrators, who subsequently became the liquidators of the Company the following month.

The Company in its capacity as trustee of the SMSF was the registered proprietor of several motor vehicles and real property. The Company in its own capacity had no assets, income, creditors or debtors.  All assets and liabilities were that of the SMSF’s.

Effect of external administration

The complications that arose were threefold:

  1. by virtue of the specific terms of the Trust Deed, upon the Company appointing Administrators, it was automatically removed as trustee of the SMSF;
  2. by operation of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) the Company under external administration became a ‘disqualified person’ within the meaning of that Act and could not perform the functions as trustee of the SMSF;
  3. The Commissioner of Taxation as regulator of the SMSF, did not subsequently take steps to appoint an Acting Trustee pursuant to the SIS Act to aid the situation.

Accordingly, at the time our clients were appointed administrators, the Company:

  1. was automatically removed as trustee;
  2. became a disqualified person pursuant to the SIS Act; and
  3. was merely a ‘bare trustee’ of the SMSF or Trust with no authority to sell the property.

No other person was willing to act as Trustee and the members did not seek to appoint an alternative.

Why this was an issue

Our clients, unaware that the Company was no longer the trustee of the SMSF (and regrettably, reliant on erroneous advice from another party), began to realise and distribute the assets of the Trust as per the standard winding up procedure.  During that period, motor vehicles were sold and sale of the real property negotiated.

Upon our engagement, Hynes Legal discovered that the Company was no longer trustee of the SMSF and as such, did not have the ability to complete the sale of real property and the liquidators may have been in technical breach of a variety of legal principals and legislation.

An urgent application was made to the Federal Court for orders permitting the liquidators to sell the real property.  That relief was granted allowing the settlement of the Real Property to proceed as scheduled.

In addition to seeking the Court’s approval to transfer the Real Property, our clients also sought declarations that they acted honestly, and ought fairly be excused for any apprehended breaches, failures or omissions relation to the sale of assets of the Company.  That is, the liquidators were at all times acting properly, albeit misguided as to their ability to sell the property and they ought be excused for selling the trust assets on behalf of the SMSF as only a bare trustee.

It was submitted to the Court that such orders be granted by the Court for the following reasons:

  1. All of the creditors of the Company were creditors of the Company in its capacity as trustee of the SMSF.
  2. The Company did not hold any assets or have any creditors in its own capacity.
  3. The Company only acted as trustee of the SMSF and in no other capacity.
  4. Neither the Commissioner of Taxation as Regulator nor the members of the SMSF had appointed a new trustee to the Trust.

The Commissioner of Taxation appeared at the hearings as a Court ordered contradictor, but at no stage took issue with the honesty or reasonableness of our clients conduct.

After two interim hearings and a final hearing, the Federal Court ultimately provided that:-

  1. our clients' actions in selling the real property and other assets of the company were declared honest and such action ought be excused for any breaches of either the Corporations Act 2001 (Cth) or the SIS Act. The Company was also excused for any breaches of the Trusts Act 1973 (Qld);
  2. the sales of trust assets by our clients (before they were aware of any possible breaches of legislation and before Court proceedings were commenced) were deemed to be sales within the power of the Company;
  3. future distributions to priority unsecured creditors and secured creditors be permitted and are to be deemed valid distributions by the Liquidators in the winding up of the Company;
  4. our clients are entitled to be indemnified out of the assets of the Trust in respect of any debts owing by the Company incurred in its capacity as trustee of the Trust; and
  5. the costs and expenses of our clients, including their remuneration, in relation to realising the Trust assets and otherwise dealing with the Trust be permitted (including payments already made) and paid from the assets of the trust in the course of the winding up.

How this could affect you?

If you are a liquidator or administrator of a company which is a trustee of a Trust (either a regular Trust or a SMSF), immediately upon appointment you should:

  1. Check the relevant trust deed to determine whether the company has been automatically removed, and if so arrange for a new trustee to be appointed (if appropriate);
  2. Take steps to ensure compliance with the SIS Act in respect of the fact that the Company is a disqualified person. This may mean liaising with the regulator to appoint a replacement trustee if required;
  3. Consider whether the appointment of a receiver is appropriate;
  4. Consider whether the Court’s intervention is required.

A failure to undertake these steps prior to dealing with the assets of the trust, may result in contraventions of the Trusts Act, the Corporations Act and/or the SIS Act.

How we can help

If you have been appointed as an administrator of liquidator of a company as trustee, or are a member of a trust concerned that there are issues regarding the validity of the trustee, please contact our dispute resolution team who will be able to provide advice in relation to these issues.