Court Removal of SMSF Trustee

What happens when the trustees of an SMSF become dysfunctional and cannot manage the fund?  What happens when one of two trustees simply does not sign documents necessary to ensure the fund complies with its obligations under the SIS Act?  What happens when one trustee authorises the sale of fund assets and then takes the sale proceeds?

The solution adopted in respect of a recent court case is simply to remove the unco-operative trustee and to appoint a company as trustee in their place.

In this case, the SMSF had two members Basil and Brinos, who were brothers, and each member was a trustee.  The relationship between the two brothers had broken down due to a disagreement about a family owned property.  The property was not an asset of the SMSF.  Due to the disagreement, Brinos seems to have adopted the attitude of simply refusing to play the role of trustee and took and cashed out his super benefit.

Basil applied to the Court for an order to remove Brinos as trustee and for an order appointing a company, Bazport Pty Ltd, as a replacement trustee.  The sole director and shareholder of Bazport Pty Ltd was Basil.

The Court held that Brinos, by his refusal to act as trustee, was in breach of his fiduciary and statutory obligations and as the relationship between the brothers had deteriorated to such an extent that there was no reasonable likelihood that they could act as trustees.  Further, the Court held that Brinos had effected the sale of fund assets without prior notice to Basil and the amount he withdrew from the fund exceeded his entitlement.  On this basis, the Court was satisfied that Brinos should be removed as a trustee and that Bazport Pty Ltd be appointed as a trustee, in addition, to Basil continuing to act as trustee.  It should be noted that the Court was probably assisted to reach the view that Brinos would not be inclined to carry out his duties as trustee by his absence from the hearing even though he was notified of the Court proceedings and the hearing date.

This case illustrates that the Court has jurisdiction to remove trustees, even trustees of regulated superannuation funds.  This jurisdiction is conferred by s70 of the NSW Trustee Act.  Further, that the jurisdiction will be exercised when it is in the interests of the beneficiaries of the trust and in the interests of the efficient and satisfactory execution of the trust.

As a result of the removal of Brinos and the appointment of the company, the trustee of the SMSF will be constituted by Basil and a company.  This arrangement, although not common, is not precluded by general trust principles.  However, such an arrangement will not satisfy the SIS Act definition of “self managed superannuation fund”.  The Court was aware of this and required Basil to liaise with the ATO.  The outcome of this liaison was not reported.  Under the SIS Act, a fund which is a SMSF and which fails to satisfy the definition of “self managed superannuation fund” (other than breaching the 4 member requirement) has six months in which to “rectify” the situation and still retain its status as a self managed superannuation fund.  Presumably, Basil will resign as trustee and so the SMSF will again satisfy the definition of “self managed superannuation fund”.

Case Details: Basil Notaras v Brinos Notaras [2012] NSWSC 947.