Great news about SMSFs and bankruptcy: a recent decision

Introduction

What happens when a business borrows from a bank to make extremely large super contributions to an SMSF and then the business folds? Can the bank get its money back?

A recent case — Australasian Annuities [2013] VSC 543 — suggests that the answer is no: the bank misses out and the SMSF can keep the money.

The reasoning will surprise you!

The facts

Australasian Annuities Pty Ltd (‘AA’) carried on a financial planning business. More specifically, AA acted as trustee of a family trust, and in that capacity acted as a service entity, providing management, administration, accommodation and staffing services to another entity, which held the relevant financial services licence and received financial planning client commissions and the like.

On 7 May 2007 a facility with a limit of $2.5 million was signed with Macquarie Bank. Security for the loan included a registered first ranking fixed and floating charge over the whole of the assets and undertakings of AA.

Ten days later Macquarie Bank advanced $2.5 million to AA pursuant to the facility.

The sole director of AA had an SMSF along with his wife and sons. A significant portion of the $2.5 million was contributed to the SMSF.

The fortunes of AA appear to have waned and on 29 June 2009 receivers and managers were appointed in respect of AA. The receivers and managers were appointed by Macquarie Bank under securities conferred on the bank securing the advance made by Macquarie Bank to AA.

The receivers and managers of AA brought a claim in AA’s name against both the SMSF trustee and the financial planner who was the sole director of AA, to recover at least some of the $2.5 million. As the financial planner had since been declared bankrupt, the claim only proceeded only against the SMSF trustee.

The argument to claw the money bank

The receivers and managers of AA appeared to have tried to claw back the money based on the following steps (although the judgment does not make all of these steps entirely clear so there is some conjuncture on my part and I have somewhat simplified them, possibly at the risk of oversimplifying):

• Step 1 — directors of companies owe fiduciary duties (eg, to the company).
• Step 2 — the sole director of the company breached his fiduciary duties owed by promoting his personal interests by causing the company to, among other things, make the large super contributions, which were not necessarily in the company’s best interests.
• Step 3 — the SMSF trustee received the money while knowing that it was being transferred inbreach of fiduciary duty.
• Step 4 — the SMSF trustee received the money without providing any consideration.
• Step 5 — the SMSF trustee is therefore liable to AA (who presumably would then return the money to Macquarie Bank) either under a personal claim called ‘money had and received’ or because the SMSF trustee holds the money as a constructive trustee.

How successful was AA?

AA was successful in the first two steps.

This might come as a shock to many, especially regarding step 2, that is, AA borrowing money from Macquarie Bank and then making large superannuation contributions was a breach of the director’s fiduciary duties.

The Supreme Court found that the financial planner (ie, the then sole director of AA) facilitated the distribution of the money to his SMSF to benefit himself and certain members of his family as though the money was his to do with as he pleased. The Supreme Court noted that the interests of AA are not necessarily the same as the interests of the shareholders (who were the financial planner and his wife). Also, AA acted as trustee of a family trust. Although the financial planner and his wife were beneficiaries of the trust, there were many other beneficiaries including various other family members and corporate entities. Naturally, such a wide class of beneficiaries is very common in family trusts.

However, at the risk of oversimplifying, this where the tides turned and the SMSF trustee started winning.

The Supreme Court held that step 3 was not made out. That is, the SMSF trustee did not know that the money was being transferred pursuant to a breach of fiduciary duty. This is because the financial planner was not the only director of the SMSF trustee. The other directors included his wife and sons. The Supreme Court held that his wife ‘had only a vague idea of transactions effected by the company in the years 2007 and 2008’. Although one director of the SMSF trustee (ie, the financial planner) knew what was going on, the knowledge of that one director was not to be imputed to the other directors of the SMSF trustee.

Very importantly, step 4 was also not made out. The Supreme Court held that the SMSF trustee did provide consideration in exchange for the contributions. In a previous decision 10 years earlier (Cook v Benson [2003] HCA 36) the High Court had held that large super funds provide consideration in exchange for contributions. However, to the best of my knowledge, this is the first case that confirmed that the same is true of SMSFs.

More specifically, the valuable consideration given by the SMSF trustee in exchange for contributions is ‘the obligations [of the SMSF trustee] to provide him with the rights and benefits to which he would in due course become entitled under the rules of [the SMSF’s deed]’. These rights and obligations included that the SMSF trustee must:

• administer contributions in accordance with the terms in the deed
• keep and provide records and accounts to members
• credit contributions to the appropriate accumulation account
• effect policies with an insurer
• invest money in accordance with the investment strategies of the fund and
• give members certain entitlements to death and retirement benefits.

The contribution was made by AA yet the SMSF members received the consideration. However, this did not stop the Supreme Court finding that valuable consideration was given (albeit to the SMSF members rather than the actual contributor).

Moral

Many different implications can be drawn from this decision, depending on which angle the reader approaches the case.

However, one important aspect is the robustness of the SMSF structure during a bankruptcy related claw back attack. Granted that, had the facts been different, the outcome might have been different, and the mere fact that an SMSF was involved was not a silver bullet cure. Further, had the other SMSF trustee directors been more aware, the outcome might have also been different.

That being said, this case is still an illustration of significant amounts of money being borrowed from a bank and contributed to an SMSF, and then the bank being apparently later unable to claw them back.

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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.