Administration, Compliance, Regulation, SMSF

Court option open for disqualified trustees

Disqualified trustees Bankruptcy Wind-up SMSF Rollover APRA fund

While the super laws state disqualified SMSF trustees are unable to act on behalf of their fund, a recent court ruling has shown there are ways they can continue to make limited decisions for the benefit of the fund.

Disqualified SMSF trustees may be able to take actions to wind up their fund, but must ensure they have sound advice before acting, according to a specialist lawyer commenting on a recent case heard by the Federal Court.

The case of Barry, in the matter of an application by Barry (2024) FCA 13 involved a situation where a two-member SMSF had purchased real estate through a limited recourse borrowing arrangement.

Both members became bankrupt and were subsequently disqualified from acting as directors of the SMSF trustee company and the bare trust company. However, the disqualified trustees experienced issues when trying to sell the asset for the purposes of winding up the fund.

“They did the right thing, they went and spoke to their accountants and lawyers. The lawyers gave them advice which basically said ‘you need to roll the entitlements to an Australian Prudential Regulation Authority (APRA)-regulated fund’, [and] they signed a contract to sell the real estate,” Cooper Grace Ward special counsel Steven Jell told attendees at his firm’s 2024 Annual Adviser Conference in Brisbane last week.

“What they didn’t do is realise that they could no longer sign the contract because they actually ceased to be directors of the entity holding the asset themselves. So they had no authority to sign the contract.”

The fund members subsequently applied to the Federal Court for orders granting them the ability to act as directors despite their disqualified status for the purpose of selling the SMSF’s assets to complete a rollover.

The ATO, Australian Securities and Investments Commission and the bankruptcy trustee did not oppose the order and the court granted the authority for the members to complete the sale of the asset and wind up the fund.

According to Jell, relying on the discretion of the courts may be one of the few options available to SMSF trustees if they are disqualified from attempting to close down a fund.

“There was a solution here and it was about getting the court’s discretion and getting them to authorise the ability of the individual to continue to act on behalf of an SMSF and roll over their entitlements to an APRA fund,” he noted.

“What was interesting in this case is everyone was on the same page and there was no indication that the parties were acting dishonestly. They got advice, they acted on that advice and they were trying to roll over their entitlements to an APRA-regulated fund to satisfy those requirements.

“That is an outcome that may be available to your clients in certain circumstances.”

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