Staying in the know – Imputing knowledge to claw back payments made to a SMSF

It is common for directors to transfer company funds to a self-managed superannuation fund as an asset protection strategy.

A recent judgment of the Victorian Court of Appeal illustrates how insolvency practitioners can claw-back these funds by establishing that:

• the company director breached his or her fiduciary duties to the company by making the payments; and
• the superannuation fund received the funds with knowledge of the breach, by imputing the company director’s knowledge to the fund’s trustee.

In Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9, the receivers of Australasian Annuities Pty Ltd (in liq) succeeded in clawing back over $1.6 million from the superannuation fund controlled by the former director of AA and other members of his family.

This was despite the bank who appointed the receivers being aware that the express purpose of the loan from the bank was to make the payments to the director’s superannuation fund.

A copy of the decision is available here.

Background

Steven Rowley (Rowley) was a director of Australasian Annuities Pty Ltd (AA).

Rowley, his wife and his two sons were initially the trustees of the Rowley Super Fund (Super Fund). They were replaced as trustees by Rowley Super Fund Pty Ltd (RSF), a company of which they were each directors.

In 2007, AA borrowed $2,500,000 from Macquarie Bank for the express purpose of ‘assist[ing] with superannuation contribution’.

Rowley channelled approximately $1,675,000 of those funds both directly and indirectly to the Super Fund, first through his family members and then RSF.

Macquarie appointed receivers and managers after AA failed to repay the loan. Subsequently, AA went into liquidation and Rowley was bankrupted.

The receivers caused AA to commence proceedings against RSF for knowing receipt of trust property (the first limb of Barnes v Addy), claiming the $1,675,000 transferred under Rowley’s instruction. AA, through the receivers, alleged that Rowley had breached the fiduciary duties he owed to AA as its director and that RSF knew this when it received the funds.

By pleading the claim in this manner, the receivers:

• could seek to recover funds held by the Super Fund directly, rather than pursuing Rowley personally;
• ensured that the claim fell within the scope of the bank’s security (since the proceeds of a voidable transaction claim under Part 5.7B of the Corporations Act are generally payable to a liquidator, not the secured creditor); and
• avoided the need to prove that AA was insolvent at the time of any payment.

Almond J held that by causing AA to transfer the funds, Rowley breached his fiduciary duties to the company including the duty to act in good faith, to act in the best interests of the company, not to act for an improper purpose and to avoid conflicts of interest. His Honour held that the loan from the bank was manifestly imprudent and not used for the benefit of AA.

However, at first instance, Almond J found that RSF did not have knowledge of the breach of duties. The other members of Rowley’s family were not aware of most transfers, therefore no actual knowledge was present. Further, Almond J found that there was not sufficient evidence to support the conclusion that Rowley was the directing mind of RSF and therefore it was not possible to impute knowledge of the breach of fiduciary duties to RSF.  For this reason, AA’s claim failed at trial.

Decision on appeal

AA successfully appealed the decision, with the Court of Appeal ruling 2-1 that Rowley’s knowledge as AA’s director could be imputed to RSF.

Key points

The key points from the appeal judgment are:

1. Despite the split decision, each Justice agreed that Rowley had breached his fiduciary duties toward AA. It did not matter if AA’s shareholder (Rowley’s wife) ratified the breach – the Bell Group litigation tells us that in an insolvency context, these duties require consideration of the interests of creditors.
2. Garde AJA (Neave JA agreeing) held that RSF was liable to AA on the basis of the first limb of Barnes v Addy because it received the funds from AA knowing they were transferred in breach of Rowley’s fiduciary duties. Overturning the trial judge’s decision, the Court of Appeal found that by “overwhelming inference” Rowley was the directing mind and will behind RSF and the “principal and prime mover” of the loan strategy.  He made all the transaction related decisions, with RSF’s other directors having no meaningful role or knowledge. As a result of this finding, Rowley’s knowledge of his own breaches of duty toward AA could be imputed to RSF.
3. Warren CJ dissented on this issue, holding that AA failed to discharge the burden of proving the relevant knowledge was imputed to RSF. AA’s evidence focused on Rowley’s role as AA’s director, not RSF’s controlling mind.
4. Since knowledge of the breaches of duty could be imputed from Rowley to RSF, AA could recover the entire amount of $1,675,000. AA would also have been entitled to make a claim for a proprietary remedy, which can be particularly useful in an insolvency context.
5. Simple interest was awarded at 6% per annum, representing a balance between the higher rates available prior to the global financial crisis and the subsequently lower rates. Compound interest was not awarded because AA led no evidence as to whether RSF invested the funds profitably.

Establishing a claim

Insolvency practitioners (both liquidators and receivers and managers) can consider pursuing claims where:

• A company paid funds directly or indirectly to a self-managed superannuation fund – Consider what evidence is available to prove the funds were transferred from the company to the fund.
• The payments were made in breach of the director’s fiduciary duties – Did the director act in the best interests of the company? Relevant considerations include the financial position of the company and why were the payments made. Were the payments to the superannuation fund unusual and in excess of the employee or director’s entitlements? How were the payments funded? It is not necessary to establish insolvency, although this will be a relevant factor.
• The recipient, such as a trustee of the self-managed superannuation fund, knew or ought to have known that the payments were made in breach of these duties – Are there common directors between the company and the trustee? As a matter of substance, who engineered the payments and controlled the trustee?

Self-managed superannuation funds must be audited and are prevented from dissipating funds other than to another superannuation fund or once its members have reached retirement age. Accordingly, insolvency practitioners may form the view there are good prospects of recoverability for these types of claims.

We expect this will be a growing area of litigation.