By Domenic Festa (Accredited Tax Specialist and Chartered Tax Adviser)
Bankruptcy law excludes some assets from being available to meet liabilities owing to creditors: for example, certain kinds of household property, a motor vehicle worth less than $7,500, and an interest in a regulated superannuation fund. For asset protection planning, the most relevant category is that applying to superannuation.
The exclusion of superannuation often leads to the assumption that superannuation accounts are protected in bankruptcy.
This assumption was recently challenged in the Victorian Supreme Court decision in Australasian Annuities Pty Ltd v Rowley Super Fund Pty Ltd.
In the facts of Australasian Annuities Pty Ltd v Rowley Super Fund Pty Ltd, the sole director, Steven Rowley, arranged for Australasian Annuities Pty Ltd to borrow $2.5 million from Macquarie Bank claiming the funds were taken as a business loan. Rowley treated this money as though it was his to spend freely and had the company make super contributions for himself and his family members with a large portion of the loan, on the assumption that this money would be protected in the event of bankruptcy or insolvency. The majority of these contributions were fraudulent, such as paying ‘termination payments’ without actually terminating any employment.
The extent of protection provided to superannuation requires two elements to be considered:
- Whether the superannuation account balance is an asset that is available to meet claims of creditors; and
- The application of clawback provisions, which operate to unwind or reverse the effect of transactions entered into in the period leading up to bankruptcy.
The main clawback provision applies to transactions where consideration is less than market value. The High Court decision in Cook v. Benson held those provisions do not apply to super contributions made in the period leading up to bankruptcy. Following that decision, the bankruptcy laws were amended to extend the clawback provisions to super contributions.
The bankruptcy laws apply to the insolvency of individuals, company law contains largely equivalent provisions that apply to the insolvency of companies. One point of difference is the amendments made following the decision in Cook v. Benson were only made to the bankruptcy laws, and were not made to the equivalent insolvency provisions applying to companies.
The Victorian Supreme Court acknowledged that the reasoning in Cook v. Benson applied to the company. However that was not the end of the matter.
Steven Rowley orchestrated the super contributions as a director of Australasian Annuities Pty Ltd. Directors are subject to fiduciary obligations in favour of the company. The Court held that as a director of the company, he was in breach of his fiduciary duty by causing the company to make superannuation contributions to himself and his family (directly and indirectly).
The Court held that as Rowley was the directing mind of the corporate trustee of the superannuation fund, it knowingly received property as a consequence of the breach of Rowley’s fiduciary duty. As a result, the superannuation fund was knowingly concerned in the breach and was ordered by the court to repay the super payments.
This case highlights the need to fully understand legal obligations when creating legal structures. Regardless of whether you are a company director, trustee or advisor, what can appear to be an effective structure in one situation may be lacking in another. It is also the case that this decision was based on a set of facts that may not be present in all cases involving companies making super contributions in the period leading to insolvency.
It highlights that expert legal advice should be obtained when implementing asset protection strategies.