27/05/2015

A recent Victorian case provides some guidance on whether a bank can recover money it loaned to a company who contributed the money to an SMSF and later went into liquidation without having repaid the loan.

The facts

Mr R was the sole director of a financial planning business company called Australasian Annuities Pty Ltd (‘AA’).  He was also one of four directors (the others being his wife and 2 children) of a company acting as trustee of an SMSF of which he was a member.

In 2007, AA took out a loan from Macquarie Bank for $2.5 million for the express purpose of making superannuation contributions. 67% of that amount was subsequently directly and indirectly contributed to the SMSF.

In 2009, AA did not meet its loan repayments and when it went into liquidation, Macquarie Bank appointed receivers and managers to AA under the loan securities.

The receivers and managers attempted to recover part of the outstanding money by bringing a claim in AA’s name against Mr R personally and the SMSF trustee.  The SMSF Trustee had taken the view that it was entitled to keep the money.

As Mr R was subsequently declared bankrupt, the SMSF Trustee became the sole focus of the claim.

The receivers and managers’ first attempt to recover the money from the SMSF failed in the Supreme Court of Victoria however that decision was overturned by the Victorian Court of Appeal earlier this year.

They made two main arguments:

Argument 1 - ‘volunteer’

The first was that the SMSF had received the money as a ‘volunteer’ and was not entitled to keep the money.  This was argued because the SMSF had not given anything in return for the contributions and therefore had an obligation to give it back.

The Court of Appeal looked at an earlier High Court decision which held that superannuation funds do provide consideration in exchange for receiving contributions. The consideration is the obligation of the trustee to provide the members with various rights and benefits pursuant to the rules of the SMSF.

The Court of Appeal agreed with the High Court and held that the SMSF had given consideration. This argument failed.

Argument 2 - ‘knowing receipt’

Their second argument was that the SMSF must refund the contributed amounts because it had received money that had been transferred as a result of a breach of fiduciary duty or trust, and the SMSF had received the money with that knowledge.  This is the principle of ‘knowing receipt’.  

The Court of Appeal found that Mr R, as the sole director of AA, had breached his fiduciary duty to the company by borrowing money, not for the benefit of the company, but rather to benefit himself and his wife.

The outcome of the case then turned on the question of whether the SMSF Trustee had knowledge that the money was received in breach of a fiduciary duty because Mr R was the ‘directing mind and will’ of the SMSF Trustee.

The Court of Appeal answered this question in the affirmative because Mr R made all the transaction-related decisions and was responsible for directing and monitoring the contributions. Accordingly, his knowledge of the bank’s money being received by the SMSF in breach of fiduciary duty (knowledge which was his by virtue of being the sole director of AA) was imputed (i.e. attributed) to the SMSF.

As the SMSF received the money with knowledge of the breach, the SMSF Trustee was forced to refund the contributed amount to the receivers and managers with interest.  
What does this case teach us?

1    Directors must act in the best interests of and for the benefits of the company – this should not conflict with any obligations arising out of any other capacities in which they may be acting eg trustee or director of a corporate superannuation fund trustee.
 
2    If a director acts improperly, his knowledge of it can be imputed to other companies of which he is a director if he was the ‘directing mind and will’ of both companies.
 
3    Family businesses should always act at arm’s length with their shareholders and other related entities.

4    A SMSF trustee does give consideration in exchange for contributions (it appears that had the ‘volunteer’ argument been the only one put forward, the SMSF is likely to have been entitled to retain the money).

Although a member’s super benefits are generally protected from their bankruptcy, this case shows that there are instances where those benefits could be sourced by a third party creditor.

If you need advice on super and bankruptcy, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.