SMSFs are not privileged investors - they must register their securities or lose priority

If an SMSF trustee lends money and security which is taken by the SMSF trustee is not a mortgage over real estate, then the security must be registered in the Personal Property Securities Registrar.  If the security is not registered then the security will be ineffective and not bind the borrower (or administrators or liquidators of the borrower).

In this regard, a trustee of an SMSF (or indeed any superannuation fund) is not in a privileged position and must mix it with the hoi polloi to protect its securities interests.

In a recent case, the trustees of the SMSF loaned about $250,000 to a company. The terms of the loan were set out in a convertible loan agreement, a security agreement and a priority deed between the company and its other lenders.

Under the security agreement, the company agreed to mortgage personal property of the company in favour of the lenders.  

The relevant documents were signed on 24 December 2013.  The trustees only registered on the Personal Property Securities Register their security interests (which arose from the security agreement) in relation to the specified personal property in May 2014 – some 5 months later.  The company was placed in voluntary administration a week after the securities interests were registered.  Presumably, the lenders or their advisers had an inkling of the impeding voluntary administration and therefore registered their security interest.

As events turned out – the company progressed from voluntary administration to liquidation and when the trustees tried to argue that they were secured creditors in relation to the bank account of the company (which was the only asset of the company) they were unsuccessful.

The Court held that the security interest was invalid and unenforceable against the company.  This was due to the failure to register their security interest in a timely manner and also because of the voidable transaction provisions of the Corporations Act, the application of which are triggered by a company going into liquidation.  The trustees were left to be merely unsecured creditors.

The failure to register their security interest in a timely fashion (within the permitted period of 20 days) was fatal to their claim.  The SMSF trustees went from possibly secured creditor to unsecured creditor.  The fact that the lender was a superannuation trustee was irrelevant.  Superannuation trustees must be perfect, protect and enforce their securities as any other individual must.

The case is reported as Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (In Liq) [2014] FCA 1034.