In a recent article, Alex Aktepe from DBA Lawyers explained that traditionally there have only been two options when an SMSF member becomes insolvent under administration or bankrupt.
“The member had to roll their benefits to an APRA fund or the SMSF had to be converted to a small APRA fund,” said Mr Aktepe.
“However, a new case illustrates that a previously untested option might be practically viable for some.”
In the case, Macalister, in the matter of an application by Macalister [2021] FCA 1455, an SMSF member who was insolvent under administration applied to the Federal Court for leave to continue to act as the director of the trustee corporation, Aktepe explained.
The applicants in this case, Mr and Mrs Macalister, established an insurance agency business in the UK back in 1987.
In 2004 they formally emigrated from the UK to Australia. In approximately 2007 they established an SMSF, the corporate trustee of which is Kircam Pty Ltd. Kircam Pty Ltd does not carry on any activity other than to act as SMSF trustee.
In 2014 they sold their shares in the business under the terms of a share purchase agreement.
In 2016 the business purchaser brought proceedings against the Macalisters in respect of breaches of warranties under the share purchase agreement. The business purchaser obtained judgment against them in the High Court of Justice of England and Wales for the amount of £2,386,247.50
The Macalisters were unable to satisfy the debt. Accordingly, on 21 December 2020 they were subsequently made bankrupt pursuant to sequestration orders made by a registrar of the Federal Court.
Typically in this kind of situation, Mr Aktepe said the Macalisters were left with the two options of either rolling over to a large super fund or converting the SMSF into a small APRA fund.
“However they sough orders permitting them to continue to act as directors of Kircam Pty Ltd,” he said.
Justice Banks-Smith stated that one of the main considerations was the interests of third parties, shareholders, creditors, employees, and the public at large.
Other factors impacting the decision, he said, may include the nature of the disqualification, their character and conduct since the disqualification, the structure of the company and the nature of the business, the potential for repetition, and the risk of survival of the company.
Given the Macalisters were the only members of the SMSF, were the only directors of the Kircam Pty Ltd, Kircam did not carry on any other activity other than that as trustee of the SMSF, and the assets in the SMSF were not derived from the proceeds of the sale of the business, he decided it was appropriate to grant leave.
Justice Banks-Smith also noted that the Macalisters had not received any SMSF benefits since certain freezing orders and that the Macalisters have no intention of managing any company apart from Kircam Pty Ltd.
Mr Aktepe reminded SMSF professionals that when an SMSF member becomes bankrupt, prompt action needs to be taken.
“The fund will be faced with various options. One option now includes considering whether their facts make it appropriate to seek leave of the court to still be allowed to run the fund themselves,” he said.
Does this override the SIS Act requirement that a trustee is not a disqualified person? Does the Court saying you can stay on as director change the fact that the person is an undischarged bankrupt and thus prohibited from acting as trustee?