Court ruling sparks concerns around SMSF borrowing
A recent decision by the Supreme Court of NSW regarding a loan arrangement has raised questions around how SMSFs manage conflicted interests when guarantors are used in limited recourse borrowing arrangements.
Speaking to SMSF Adviser, AMP SMSF administration head of technical services, Phillip La Greca, said the Supreme Court of NSW ruled last week in the case of Alceon Group Pty Ltd vs Rose that a guarantee does not need to be called in where the borrower defaults on a loan and the asset used as collateral does not cover the value of the loan.
“Basically what happened in this case is there was a borrower who needed to refinance a large debt and guarantees were given by the entity itself, its major shareholder and two individuals. The guarantees were backed by mortgages over their home,” he said.
Mr La Greca said that when the loan effectively defaulted, the lender wanted to enforce the guarantees.
“[However,] one of the things noted was that the [people] who gave legal advice to the guarantors, were the same people who gave legal advice to the borrowers and in this particular case there was a question about whether or not the conflict of interest was managed properly between those two elements,” he said.
The case could have implications for SMSFs since there could be a conflict of interest if the people providing advice to the fund are also dealing with the potential outcome of the guarantee, said Mr La Greca.
“It might seem like the SMSF trustees and the people providing the guarantee are the same people in their own right but you still have an exposure [to conflicted interests],” he said.
“SMSF trustees may want to ensure that the person who is providing legal advice around the borrowing arrangement doesn’t, shall we say, gloss over the SMSF trustee’s responsibilities as a guarantor just so they can do the work on the borrowing arrangement.”
Mr La Greca said an SMSF trustee may want to consider having two separate SMSF practitioners or lawyers to avoid these conflict of interest issues around guarantees.