Compliance, Regulation

Third option for bankrupt trustees

bankrupt SMSF trustees

Trustees may not have to roll over their SMSF if declared bankrupt, with a court decision showing the conditions of bankruptcy may be a deciding factor.

SMSF trustees who have been declared bankrupt through no fault of their own may be able to avoid being disqualified based on the outcome of a Federal Court application by two individuals in Western Australia.

SMSF Alliance principal David Busoli said directors of a trustee company who have been declared bankrupt usually only have two alternatives – to roll over their assets to an Australian Prudential Regulation Authority (APRA)-regulated fund or convert the SMSF into a small APRA fund.

“If an individual is an insolvent under administration, that person can’t be a member of an SMSF or a director of its trustee unless the Federal Court grants leave for the insolvent under administration,” Busoli said.

However, he noted the case of Macalister (2021) resulted in a successful application by two bankrupt directors of a single purpose SMSF trustee company to be exempted from disqualification.

The trustees, Mr and Mrs Macalister, who had emigrated from the United Kingdom to Australia in 2004, were declared bankrupt after they were sued for more than £2.3 million in 2016 by the new owners of a company they had sold in 2014 for alleged breaches of warranties under the share purchase agreement pertaining to the sale. The Macalisters were unable o pay this liability and were subsequently declared bankrupt.

Having been declared bankrupt, they sought leave under section 206G of the Corporations Act to continue as directors of their SMSF and of its single purpose corporate trustee.

“The court’s primary consideration was the protection of the interests of third parties – shareholders, creditors, employees and the public at large – the applicants’ character and conduct and any risks to the company generally,” Busoli said.

“Neither the shareholder of the trustee company, the Macalisters’ daughter, the Australian Securities and Investments Commission nor the ATO objected to the application.

“Essentially, Mr and Mrs Macalister did nothing ‘sinister’ or illegal to cause their bankruptcy. They have otherwise conducted their affairs appropriately.

“The order was sought only in relation to the [single] purpose trustee company of their SMSF of which they were the only members. They were successful.”

While he noted the circumstances of the case were unique, “there is now cause to consider the option of seeking leave from the Federal Court, instead of the standard two default options, when a member/trustee becomes bankrupt”.

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