A pertinent question to ask in the case of SMSFs where trustees cannot agree is: Can the trustee be removed, other than by a court?
In order to avoid a costly court process and likely time delays, a properly drafted trust deed and governing rules can provide for a procedure by which a trustee can be removed, and a new one appointed. An appropriate process may be that the member or members who have greater than half the total account balance are able to appoint a new trustee and remove an existing one. Again, not all governing rules are the same, and many will not provide for this.
Interestingly, Notaras did not contain any discussion of the trust deed or governing rules of Basil and Brinos’ SMSF. It appears that under the governing rules of Basil’s SMSF, he did not have adequate power to remove Brinos, despite Basil clearly being the member with the majority account balance.
Additionally, the governing rules also determine whether the power to hire and fire a trustee (i.e., the appointor power) comes with fiduciary obligations attached, such as the obligation to exercise the power in good faith (Berger v Lysteron Pty Ltd [2012]).
Unless the rules provide that the power does not have to be exercised in good faith, the decision to remove and appoint a trustee may be subject to attack on various grounds.
Accordingly, to protect the interests of the members with the majority of benefits, governing rules should ensure that the appointor power can be exercised without associated fiduciary duties (these duties would be similar to those of a trustee). Few governing rules will provide for this.
A trustee who cannot agree with fellow trustees is also likely to be a member of the SMSF. This individual may not reply to correspondence and may generally refuse to participate in management of the SMSF. The question then arises: Is it possible to forcibly remove the person as a member?
The governing rules can provide for a mechanism to remove a member. However, the larger hurdle is the requirements under the regulations, where, broadly, prior consent of the member to be removed is required. Of course, this may be impossible to obtain where there is a falling out.
Going forward, a strategy for SMSFs to consider to overcome this potential impasse is for the member with the larger account balance to obtain a signed consent up-front from the other member (in their capacity as both trustee and member) that, upon the occurrence of certain events (e.g., disagreement about a material SMSF decision, relationship breakdown or legal dispute), the trustee can remove the other member from the fund and transfer their benefit to another complying superannuation fund.
Another option for a person ‘stuck’ in an SMSF with a trustee/member who will not cooperate is to remove themselves from that fund (and roll over funds into a new SMSF). However, legally and (sometimes) practically, this itself may require the consent of the other trustees (for example, authority to deal with the bank).
The problem of an uncooperative trustee can prove extremely difficult due to the law of trusts, as well as laws protecting the interest of members of superannuation funds. This can be made more difficult by documents that do not confer strategic powers.
In closing, a wise initial step is to consider carefully who to share an SMSF with.
Further, strategically drafted trust deeds and governing rules, as well as good initial planning, can assist to cure problems, or better yet, prevent them.
Lastly, for those already part of an SMSF, it worth considering whether the current structure is prone to problems, and whether a restructure would be worthwhile.
David Oon and Daniel Butler are lawyers at DBA Lawyers.
Andrew Sadauskas is a former journalist at SmartCompany and a former editor of TechCompany.
