What to watch out for when an SMSF trustee is deregistered

Overview

A corporate trustee is strongly recommended compared to individual trustees. However, issues can arise if the company’s compliance slips, and the company is deregistered. We examine a case here to showcase the issues that can arise where the remaining fund member died without a will and without any succession plans in place for the corporate trustee and the fund. We then provide some practical tips to minimise these risks from occurring.

The Baltins case

The plaintiff in McCabe as Syndic for the Victor Chang Cardiac Research Institute Ltd (ACN 068 363 235) v The Baltins Superannuation Fund [2017] NSWSC 1671 (Baltins) was the administrator of the estate of the late Ilze Marija Baltins (Member). The Member’s estate included her interest as the sole member of the Baltins Superannuation Fund (Fund), an SMSF. 

At the time of the Member’s death in June 2015, the trustee of the Fund was I BALTINS PTY LIMITED (Company). Between the time the Member died, and the time letters of administration were granted on 8 September 2017, the Company had been deregistered. 

At deregistration, the Company held property as trustee of the Fund comprising of bank deposits and Australian shares amounting to approximately $1.2 million.

The plaintiff sought orders from the court appointing new trustees of the Fund under s 70 of the Trustee Act 1925 (NSW) (Trustee Act), being himself and the CEO of the Victor Chang Cardiac Research Institute Ltd which was the beneficiary of the Member’s estate. Alternatively, the plaintiff sought orders that ASIC reinstate the Company and appoint himself as the Company’s sole director and secretary. For the reasons outlined below, the court found that it was appropriate for it to exercise its power to appoint new trustees of the Fund.

Deregistration

Normally, when a company is deregistered any property it holds vests in ASIC, and any property it holds as trustee will vest in the Commonwealth: s 601AD(1A) Corporations Act 2001 (Cth) (CA). Where the Commonwealth acts as trustee, ASIC is empowered to act in place of the Commonwealth. However, there is some uncertainty as to whether the Commonwealth/ASIC must first exercise the power to ‘continue to act as trustee’. While this was not required to be determined in this case, this uncertainty was a factor in the Court’s decision to appoint new trustees of the Fund. 

A company can typically be reinstated by an order to the court made by a person aggrieved by the deregistration (CA s 601AH(2)). In Baltins the member and director of the Company was deceased, and the Member’s estate was the only likely beneficiary of the Fund. Thus, reinstatement was not a practical option without an aggrieved person or via an application by ASIC.

Trustee appointment power

Further compounding the complexity in Baltins, the governing rules of the Fund empowered the members of the Fund to appoint and remove trustees and provided that a member ceased to be a member upon death. Accordingly, the appointment of a new trustee could not occur under the Fund’s governing rules. This was another important factor in the court’s decision to appoint new trustees of the Fund. 

Court appointment of trustee

Section 70(2) of the Trustee Act allows the court to appoint new trustees whenever it is expedient to appoint new trustees, and where it is inexpedient, difficult, or impracticable to do so without the assistance of the court. Because of the difficulties in either reinstating the Company or appointing a new trustee under the Fund’s governing rules, the court in Baltins exercised its power to appoint new trustees. The court also ordered that the property of the Fund vest in the new trustees. 

Lessons from Baltins

1. Make sure the company’s registration is maintained and up to date with ASIC as non-payment of fees can result in deregistration.
2. Know the relevant trustee appointment/removal power and how it can be exercised in the event of death/loss of capacity. Similarly, ensure the director appointment/removal powers in the constitution are appropriate and having a successor appointor role, such as included in the DBA Lawyers’ constitution is recommended.
3. Make sure the SMSF has a quality deed that provides power to the members and, in particular, sole director/sole shareholder companies need to ensure there is a succession plan. Indeed, every trustee company should have a succession plan (refer to DBA Lawyers’ prior articles on SMSF succession below). In the case of a deceased member, their legal personal representative should be capable to represent the deceased’s interests. 

Conclusion

The deregistration of a corporate can give rise to substantial costs, time, and uncertainty. Maintaining up to date company and Fund records and ensuring quality advisers and documents are implemented minimizes the above risks. 

Related articles:

• Planning your exit: a guide to SMSF succession planning — Part 1 
• Planning your exit: a guide to SMSF succession planning — Part 2
• Preserve the intended control of a company using successor directors
• The legal minefield of BDBNs (updated)
• SMSF succession –– minimizing risk given COVID-19

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Shaun Backhaus ([email protected]), Senior Associate and Daniel Butler ([email protected]), Director, DBA Lawyers

DBA LAWYERS