Winding up SMSF's and LRBA Trusts
More and more money is being advanced into Australia’s ever increasing number of Self-Managed Superannuation Funds (SMSF), but what if it is to pursue commercial opportunities?
This is not what SMSFs were intended or designed for. The risk in pushing boundaries to pursue such investment opportunities within the “protection & tax efficient vehicle” of a SMSF means there is a need to accept that commercial ventures sometimes fail.
Consequently, insolvency practitioners get involved and they will challenge the sanctity and thus protection of the assets contained within a superannuation fund. This adds further complexity to insolvency matters regarding SMSFs due to the need for insolvent SMSFs to remain compliant.
Here’s a case in point
In SMP Consolidated Pty Ltd (in liq) v Posmot Pty Ltd as Trustee for the Posmot Super Fund [2014] FCA 1382, the Federal Court appointed a liquidator to SMP Consolidated Pty Ltd (‘SMP’) and subsequently ordered the Liquidator be appointed as Receiver to the assets of Posmot Pty Ltd (‘Posmot’), which was acting as Trustee for the Posmot Super Fund, a Self-Managed Superannuation Fund, to realise the assets of the SMSF.
The dilemma faced by the Liquidator was that in realising the assets he wasn’t authorised, under section 120 of the Superannuation Industry (Supervision) Act 1993 (‘SISA’) as a “qualified person” to deal with the assets of the SMSF.
The objective of the subsequent appointment as Receiver was to provide a mechanism enabling the Liquidator, as Receiver, to enforce the indemnity over the trust’s assets located in the super fund.
The Federal Court, by granting the Liquidator’s application to change his role to Receiver meant that both, the SMSF’s assets could be realised in compliance with s 556 of the Corporations Act 2001 (Cth) and further, comply with SISA’s “qualified person” requirements – which corporate trustees of SMSFs must comply with. In this case, all the liabilities of Posmot were incurred by it in its capacity as trustee for the SMSF.
The chain of events
On 30 June 2010, SMP entered into a limited recourse borrowing arrangement (LBRA) in respect of the purchase of a property. SMP additionally entered into Deed with Posmot, in which SMP would hold real estate on trust for Posmot. Posmot entered into the Deed as Trustee of a Self-Managed Superannuation fund that was regulated under SISA.
SMP had no other role in the assignment other than to act as Posmot’s trustee.
On 24 April 2014 the liquidator was appointed to SMP by the Supreme Court of NSW as a consequence of debts owed by SMP whilst acting on behalf of Posmot.
The Liquidator sought to realise the assets of the SMSF, a property located in Castle Hill, NSW, recognising the indemnity SMP held over the assets of Posmot and the debts that were held and incurred on behalf of Posmot. The Liquidator was advised by a real estate agent that potential buyers could be expected to pay an amount which exceeded the indebtedness to arm’s length mortgagors. Accordingly, the Liquidator authorised a marketing campaign resulting in locating a buyer for the property. The Liquidator had SMP sign a contract on 14 November 2014 to sell the property with settlement on 29 December 2014.
But there was a problem
The Liquidator became aware of the licensing requirements under section 29 of SISA and the offence provisions contained in the SISA (in particular Part 26). As SMP was a body corporate being wound up it was now a “disqualified person” under s 120(2)(e) of SISA and therefore, for the Liquidator to continue running SMP would be a breach.
Under s 120(2)(e) it is an offence for a body corporate to act as a trustee, investment manager, or custodian of a superannuation entity while being a ‘disqualified person’.
Section 10 of SISA defines custodian relative to such an entity, as a person other than a trustee, who, under contract with a trustee or an investment manager of the entity, performs custodial functions for any of the entity’s assets.
Thus, the Liquidator wanted to remedy apparent contravention of s 29 of SISA by seeking appointment as SMP’s Receiver and Manager – a role in which he was willing to act to complete the sale of the property held in trust.
The Court held that the reasons for the request were consistent with established authority whereby a receiver and manager can be appointed over trust property to secure the trustee’s right of indemnity out of the assets of the trust: Re Indopal Pty Ltd (1987) 12 ACLR 54 at 57: Kerr, in the matter of Angel’s Castle Pre-School Pty Ltd (In Liq) [2010] FCA 786 at [25]; In the matter of Gramarker Pty Ltd [2014] NSWSC.
Here’s how the court ruled
Under s 126K of SISA, SMP would commit an offence by continuing to act as custodian of the property, but appointment of a receiver and manager would enable lawful completion of the sale.
A court-appointed receiver and manager is an officer of the court, not an agent of SMP, which would no longer be the property’s custodian. His Honour Justice Yates, quoting Justice Brereton in Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 148 at [36]:
“[B]y continuing to be, and act, as trustee while a disqualified person, the company contravenes section 126K [of SISA] and thereby commits an offence. Moreover, it must notify the regulator that it has become disqualified under subsection 126K(7) [of SISA]. If the company in liquidation were to exercise any of the trustee’s powers under the trust deed – including the power of sale – it would be acting as trustee in contravention of section 126K [in SISA], and the liquidator would probably be liable as an accessory”.
Again, quoting Brereton J at [45]:
“[The Liquidator] would be justified in applying to be appointed receiver and manager of the trust assets. This would enable the liquidator, as receiver, to realise trust assets to enforce the (former) trustee’s indemnity and apply the proceeds to discharge the liabilities of the company, all of which were incurred in the capacity of trustee. In addition, he would be entitled to recover costs of the receivership and, because of the company’s sole function was to act as trustee of the super fund, the general costs of liquidation.”
Things to bear in mind
Whilst the finding makes it clear that companies in similar situations to SMP (being in liquidation and the trustee of assets) can resign, it raises a vexed question. Who now in SMP’s case – or any similar such case -- would be willing to assume the role of trustee of the property involved particularly where the Trust was insolvent?
Even if a suitable replacement for SMP as trustee were available, there would be costs associated with conveying the property to that new trustee.
Furthermore, time taken in conveyancing becomes an inevitable delay in completing the property’s sale that may well jeopardise it.
Because of an increasing volume of significant changes and legislative reform together with increasing volatility in the economy, Macks Advisory urges readers to continue watching this space.
While company directors should always strive to keep themselves informed, they should at least do their best to ensure their business advisers (solicitors and accounts) are abreast of the times.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office at Level 8 West Wing, 50 Grenfell Street, Adelaide SA 5000.
