Uncertain forms of SMSF trust spark deeper implications in court conflicts

In the case of M & L Richardson Pty Limited [2021] NSWSC 105, the problem arose where the trust has been administered for a number of years in accordance with the terms of an unexecuted trustee; however, when the need to locate the originally executed trustee, no one concerned with the administrational trust was able to find it.

Mr Figot said that it is actually “super common for SMSFs to be in this scenario”.

“They could find an unexecuted copy of the trustee or a document that would have represented a trustee once it was executed, but they couldn’t find an original executed deed and they went to court for that,” Mr Figot said.

Mr Figot said the common strategy would be to assume that the SMSF might get a court to declare that the unexecuted deed is a true copy of the deed.

“No, that would not work; a lot of people think a court can declare that and that is wrong. I will say that with complete confidence it’s unlikely,” he warned. 

“In Sutton v NRS(J) Pty Ltd [2020] NSWSC 826, there was a lost deed, but a photocopy was available, yet the Supreme Court held it would not make such a declaration because (among other things), the court makes a declaration so as to determine formally a legal state of affairs. A declaration should not be made as to a mere matter of fact.

“So, you can’t go to court and say, ‘Court, could you please say that this is what the deed looked like?’”

As the Richardson and Sutton cases are family trust cases that would apply all around the country, Mr Figot said that the approach is you can go to court and say, “Court, could you please order that the trustee is justified to administer the trusts on the basis of the unexecuted documents or photocopy, respectively?”

“In Richardson, they had an unexecuted document and suddenly they had a photocopy upon an excluded document on the basis that those things represent the governing rules of the trusts.” 

But Mr Figot said this begs several questions for SMSFs to consider and leads to uncertainties in this scenario when it comes to understanding the relationship between approaching the court and the trust deed.

Risk considerations when approaching the court

If an SMSF has a missing original deed, which is very commonly seen across the year, and the SMSF doesn’t seek a court order, it could lead to a very severe scenario, and this commonly arises when someone dies, according to Mr Figot.

“Consider Mike is the member of an SMSF and Mike makes the binding death benefit nomination (BDBN), saying pay money upon my death to my spouse Sally,” he said.

“Mike dies and Sally is left running the fund of the trustee and wishes to follow the BDBN.”

But Mr Figot said when considering the general law, she can’t do that when you take into consideration the original deed.

“At general law, she can’t — why not? Because at general law, fetters of trustee’s discretion, such as the fetter on discretion regarding how to pay superannuation death benefits, are invalid.

“Another reason is trustees must avoid conflicts of interest; for example, avoiding a conflict of interest is a very fundamental duty to being a trustee and what could be more conflicted than paying a death benefit to yourself — that is the epitome of conflict.

“Now, of course, both of those things are pretty common with SMSFs, but when you think about it, what documents must you typically rely upon in order to override those two general law provisions? It is the deed.”

Mr Figot said the problem begins if you’re missing a deed and if you don’t seek a court order, that means there is no authorisation to do that.

“What if a potential recipient, even someone who never puts money in a super fund, who never receives money from an SMSF, might still be a beneficiary in the sense that they can go to court and compel proper administration,” he said.

“So, if Sally just paid the death benefit for herself and then she got a letter from Mike’s kids or the executor of Mike’s estate and said, ‘On what basis do you feel justified in doing that?’, it would be a really an uh-oh moment and she would be in significant trouble.”

Mr Figot said the well-known implications of the Burgess v Burgess [2018] WASC 279 and the Marsella v Wareham (No 2) [2019] VSC 65 could stand in authority where Sally might have to return money to the fund and get fired as a trustee, which is pretty severe and dramatic.

In the alternative, if the SMSF has a missing original deed and they do seek a court order, Mr Figot said there is no guarantee what a court is going to say. 

“What you have to do is you’ll need to convince the court to a reasonable standard,” he said.

“More specifically cited in the Richardson case, for the SMSF there must be evidence that the executed deed actually existed to constitute the trust and also there must be evidence of the terms of the trust deed.”

In the Richardson decision, Mr Figot said the court was ultimately satisfied that the executed deed did exist and of the terms of the trustees.

“In Richardson, there is evidence from the bank, that the bank would not have allowed a bank account to be opened without seeing at least an executed copy of the trustee,” he said.

“So that’s evidence that the executed deed did exist and continuous administration of trust in accordance with an identified unexcluded copy of the trustee is also sufficient to provide clear and convincing proof of the second element, being the terms of the trust.

“Also, the people who sold the deed was back in 2009, so it wasn’t so old and the judge said as part of the enquiries that have been made, the deed supplier that sold the deed in 2009 has provided from its records what it says is a copy of the original trust deed, albeit unsigned and so it was enough to satisfy the court.”

However, Mr Figot said is it definitely possible that with slightly more complicated facts, a court might not be satisfied.

“There are no certainties when going to court. You never know what a judge might say, there are no certainties when you go to court and you might just get a judge to believe something which can be a little bit wrong and wacky,” he said.

“So, when you go to court, there is a standard of evidence you need to convince the judge of, but there are no guarantees.

“Even if considering an alternative strategy when SMSF starts collecting all evidence — e.g statutory declarations — for a future court order so that evidence exists, there is still no guarantee into what outcome you can get.

“You’d like to think that if a potential recipient does back up and say you weren’t properly justified and you’ve got all this great evidence and records to prove what the terms were, you would hope that the judge would see that and be very satisfied, but you never quite know.”