There is a common belief that Self-Managed Super Fund (SMSF) contributions by an individual cannot be clawed back by an insolvency practitioner in the event of insolvency as they are protected assets. However, a recent Victorian Supreme Court of Appeal decision has examined a set of circumstances where such assets were not protected.

In Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9 it was found that contributions made to the SMSF were able to be recovered and returned to Macquarie Bank.

Australasian Annuities (AA) advanced $2.5 Million from a Macquarie Bank facility account. The sole director of AA, Mr Steven Rowley had a SMSF along with his wife and 2 sons and contributed a substantial portion of the $2.5 Million into the SMSF account. A company by the name of Rowley Super Fund Pty Ltd (RSF) was the trustee of the SMSF. Mr Rowley was also a director of RSF along with his 3 family members. Approximately 2 years after the money was advanced, receivers and managers were appointed over AA by Macquarie Bank.

Macquarie Bank made two arguments as to why the SMSF should pay back the funds;

1. The SMSF was a volunteer and had provided no consideration; and
2. It had been in knowing receipt of the funds given that Mr Rowley knew the funds were being received in breach of his fiduciary obligations to AA.

The first argument failed on the basis of an earlier High Court decision of Cook v Benson where it was held that superannuation funds provide consideration in exchange for contributions in the nature of rights and benefits under the rules governing the fund.

However, Macquarie Bank’s second argument, that the SMSF had ‘knowing receipt’ is a principle that was enunciated in the pivotal case of Barnes v Addy.

Two elements were put forward to support this argument:

1. The SMSF had received property that has been misapplied or transferred in breach of a fiduciary duty or trust; and
2. The SMSF received that property with knowledge that the property had been misapplied or transferred in breach of fiduciary duty or trust.

It was was uncontroversial that the first element was made out.  The director of AA was subject to fiduciary duties as a director and had breached those duties in borrowing money for personal benefit.

The second element was harder to prove. Macquarie Bank needed to show that RSF had sufficient knowledge to constitute knowing receipt. As noted above, the 4 directors of RSF were Mr Rowley and his 3 family members.  The court found that Mr Rowley was the most active director of RSF and that he was the directing mind and will of the trustee of the SMSF.  As a result Mr Rowley’s knowledge was imputed to be that of RSF and RSF was held to have received the money in ‘knowing receipt’ and in breach of fiduciary duty.

The Court ordered that the full amount of the contributions paid to the trustee of the SMSF be repaid  to AA plus simple interest at a rate of 6% per annum.

This case supports the authority that a trustee of a SMSF gives real consideration in return for contributions received for the fund as well as showing that transactions are not engaged in at arms length may be the subject of claw back in an subsequent insolvency.

For more information please contact ERA Legal.