Lender can recover contributions from SMSF after bankruptcy

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lender recover contributions to SMSF following bankruptcy, Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9 (12 February 2015)A recent court case has shown that receivers of a company are able to recover money which was borrowed and contributed to a superannuation fund.

The ruling (Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9 (12 February 2015)) describes how London Partners Pty Ltd was a financial planning business, but all the management and administration services were provided under a service trust arrangement by Australasian Annuities Pty Ltd (AA), as trustee of the Rowley Family Trust. Mr Rowley was the sole director of AA, and also a member of the Rowley Superannuation Fund, an SMSF.

During 2007 arrangements were made to make large contributions to the Rowley Superannuation Fund. At the time the government was allowing up to $1 million of non-concessional contributions, for a short period of time. The total loan was $2.5 million, for which security was taken over AA and London Partners.

This money was then directed into the SMSF via a range of contributions and Eligible Termination Payments (ETPs), which the individuals then contributed into the fund. The ruling, which was an appeal of aspects of an earlier decision: Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2013] VSC 543 (17 October 2013), says:

Moreover, a substantial amount of the loaned funds was used as eligible termination payments. The Trial Judge was critical of these payments as he made a finding that Steven Rowley had no intention to retire at the time the payments were made. Such actions were clearly imprudent, not in the best interests of AA or the beneficiaries of the Rowley Family Trust, and give rise to a conflict of interest between the interests of Steven Rowley and those of AA. Further, the payment of the eligible termination payments may have been in breach of relevant tax legislation.

Subsequently receivers were appointed to AA, who sought to recover the contributions made to the SMSF, as Mr Rowley had declared bankruptcy.

One argument was that the SMSF should pay the money back to AA because the fund had not given anything in return for the money. The court said that the SMSF had given consideration for the contributions, in terms of the obligations of the fund under the deed to provide rights and benefits.

However there was another argument, that the SMSF should return the money on the basis of the legal principle of ‘knowing receipt’. The court found there was a breach of the fiduciary duty to the company, and the knowledge of this carried over to the SMSF, as Mr Rowley was director of AA and a director of the corporate trustee of the SMSF.

A total of $1,674,744.99 was paid by Steven Rowley out of AA’s account over the period of 18 May 2007 to 18 June 2008 into the Super Fund for his personal benefit and for the benefit of other members of the Rowley family. It makes no difference that RSF [Rowley Super Fund Pty Ltd, trustee of the SMSF] at the direction of Steven Rowley put some funds into the names of family members….The amount of $1,674,744.99 should be repaid by RSF to AA.

A discussion of the legal arguments in the case can be found in this article by DBA lawyers: Good news for SMSFs and bankruptcy comes with a caution.

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