In an urgent matter brought to Shariff J as the vacation duty judge this January, the risks to SMSF compliance, where all members of the fund become disqualified persons, were on full display with orders needing to be granted simply to allow the disqualified members to act to wind up the fund.
The case, Barry, in the matter of an application by Barry  FCA 13 (Barry), highlights the importance of seeking expert legal advice as soon as disqualification becomes a possible outcome. It also serves as a warning for members, directors/trustees and advisors alike to be aware of the requirements that surround disqualification and the ways that courts can assist SMSFs to ‘remain’ compliant, especially when trustees/directors become disqualified.
A two-member SMSF purchased real estate via a limited recourse borrowing arrangement.
Both members became bankrupt. As soon as this occurred, they were also deemed to be disqualified persons under s 206B(3) of the Corporations Act 2001 (Cth) (Corporations Act) and s 120(1)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).
Upon their bankruptcy, the members ceased to be directors of the SMSF trustee company and the bare trustee company.
However, the members laboured under the misapprehension that they had the capacity to take steps to sell what appears to be the SMSF’s principal asset, certain real estate, and to wind up the SMSF. They signed a contract to sell the property. This was ‘unsound’ because (among other things) at the time their signed the contract, they were not directors.
The members signed the contract either unwittingly or under a misapprehension of the legal position. But they did not take such steps dishonestly. After realising their misapprehension, the members applied to the Federal Court for orders granting them the ability to act as directors despite the immediate disqualification for the restricted purpose of liquidating the SMSF’s assets to complete a rollover. Such orders were granted.
Relevant to this matter was that the orders were granted at the court’s discretion and that the ability to act as directors of the corporate trustee of the fund (and the related bare trustee company) were limited only to actions that would bring around the windup and rollover.
The members received the orders they sought. However, these orders did not ‘remove’ the disqualification entirely and heavily rested upon the intention to wind up the SMSF and to comply with the law. Shariff J considered the fact that the members had been misguided, but honest in their actions since disqualification and their obvious commitment to winding up the fund and complying with the law to the best of their ability.
Shariff J also considered the members’ intentions in taking the course that they had taken and proposed to take. It appeared to him that their intentions were ‘bona fide’ and not intended to defeat creditors. Shariff J was satisfied that ‘there would be no risk to third parties including former and current creditors by taking this course.’
The orders provided were restricted to allowing the members to act as directors, but only for the limited steps of selling the property and winding up the SMSF.
This case emphasises the importance of understanding the implications of bankruptcy or any circumstance in which an individual may become a disqualified person. It also provides a reminder that even after disqualification, there may be an avenue via the court to allow disqualified persons to assist with certain SMSF actions.
Some other recent articles on SMSF related decisions are:
- Court confirms capacity to make a BDBN: van Camp v Bellahealth Pty Ltd  NSWSC 7
- Latest AAT decision on regulation of approved SMSF auditors: Townshend and ASIC
- Lost deed case – Lawyer gives expert evidence on likely terms of missing trust deed
- Re Rentis Pty Ltd  QSC 252 — Court considers attorney power to ‘renew’ a BDBN
- New SMSF case demonstrates how not to have non-arm’s length income
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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 2001 (Cth).
Note: DBA Lawyers hold SMSF CPD training throughout the year. 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.
7 February 2024