Conflict resolution paramount to SMSF member disputes
Exiting an SMSF is not as easy as just deciding to split the assets and moving on, warns a leading legal expert.
William Fettes, senior associate for DBA Lawyers, said in a recent webinar, it’s not uncommon for a situation to arise in an SMSF where a member was admitted without potentially anticipating the possible issues that might arise where there’s a relationship breakdown.
“One of the key points is that SMSFs are really a vehicle that is not well designed by default for split decision-making,” he said.
“They’re really designed mostly for unanimous joint decision making and part of that is to do with the trust vehicle.”
Mr Fettes said an SMSF, to be a regulated fund and a complying fund, has to be established and structured as a trust.
“The assets have to be held in trust by the trustee and with the general trust law,” he said. “The starting point is individual trustees must act jointly and unanimously.
“Some of that aspect comes from just the general law presumptions. You can have a trustee that will modify that, but it is the general trust law starting point that everyone has to decide unanimously and jointly in relation to making legally effective decisions.”
When a situation arises where there is a dispute and there is a departure from that, Mr Fettes said the trustee may not be able to make decisions unless the deed has something in it to overcome that issue.
“This can include things such as majority voting rules in relation to meetings, or resolving things at the trustee level, and potentially deadlock and dispute resolution mechanisms,” he said.
Even with a corporate trustee structure difficulties can arise, he said, although in a more modern-type of constitution, there may be more flexibility in regard to decisions not having to be unanimous.
“For example, many modern constitutions would allow for some sort of majority vote concept, but there’s more to it than that, of course, because there are protocols around how decisions are made,” Mr Fettes said.
“That might include meetings or circulating resolutions and observing those protocols.
“When things do go pear-shaped, we need to think about constraints and options for legally effective decision-making.”
The goal of any dispute resolution is to find a compromise to ensure the SMSF does not lose all its members if things deteriorate.”
Mr Fettes warned that for advisers and lawyers it is essential they are mindful of whom they are representing in any dispute.
“When you’re representing the trustee, you’re generally having to act for all the members, essentially, so sometimes these things with relationships with the client might have a predominant contact or the more wealthy or active or involved person who’s driving things, so we do need to be careful about who we’re acting for and the conflicts that can arise in that context,” he said.
