New decision highlights options for disqualified persons
A recent court ruling emphasises the importance of understanding the implications of bankruptcy or any circumstance in which an individual may become a disqualified person, says a leading legal specialist.
Bryce Figot, special counsel for DBA Lawyers, said the case Barry, in the matter of an application by Barry [2024] FCA 13 also provides a reminder that even after disqualification, there may be avenues via the court to allow disqualified persons to assist with certain SMSF actions.
In this case, which was brought as an urgent matter before the court, an SMSF needed orders to allow disqualified members to act to wind up the fund, as all members had become disqualified bankrupts.
“The case highlights the importance of seeking expert legal advice as soon as disqualification becomes a possible outcome,” Mr Figot said.
“It also serves as a warning for members, directors/trustees and advisors to be aware of the requirements that surround disqualification and the ways that courts can assist SMSFs to ‘remain’ compliant, especially when trustees/directors become disqualified.”
The facts of the case state that the two-member SMSF purchased real estate via a limited recourse borrowing arrangement before both members became bankrupt and were then also deemed to be disqualified persons under s 206B(3) of the Corporations Act 2001 (Cth) (Corporations Act) and s 120(1)(b) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).
Upon their bankruptcy, the members ceased to be directors of the SMSF trustee company and the bare trustee company, however, they still believed they could take steps to sell what appears to be the SMSF’s principal asset and to wind up the fund.
“They signed a contract to sell the property which was ‘unsound’ because, among other things at the time, they signed the contract, they were not directors,” Mr Figot said.
“The members signed the contract either unwittingly or under a misapprehension of the legal position but they did not take such steps dishonestly and after realising their mistake they applied to the Federal Court for orders granting them the ability to act as directors despite the immediate disqualification for the restricted purpose of liquidating the SMSF’s assets to complete a rollover.”
He added that while the orders were granted and the members were allowed to act as directors of the corporate trustee of the fund and the related bare trustee company they were limited only to actions that would bring around the wind-up and rollover.
“These orders did not ‘remove’ the disqualification entirely and heavily rested upon the intention to wind up the SMSF and to comply with the law,” Mr Figot said.
“The judge considered the fact that the members had been misguided, but honest in their actions since disqualification and their obvious commitment to winding up the fund and complying with the law to the best of their ability.”
He added the court considered the members’ intentions in taking the course that they had taken and proposed to take.
“It appeared to the judge that their intentions were ‘bona fide’ and not intended to defeat creditors and he was satisfied that ‘there would be no risk to third parties including former and current creditors by taking this course’.”
Mr Figot said there are not many of these types of applications to the court, and this decision adds “meat to the bones” of the preceding decisions.
“It emphasises that if you are going to apply to the court for special consideration, it is important to show to the judge your intention is ‘bona fide’ and not intended to defeat creditors,” he said.
