Part 1: Understanding the Gainer Associates Decision: A Critical Examination of SMSF Governance
The New South Wales Supreme Court's decision In the matter of Gainer Associates Pty Limited [2024] NSWSC 1138 marks a pivotal moment in the governance of self-managed superannuation funds (SMSF). This case intricately weaves issues of trustee responsibilities, compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act), and judicial oversight in potentially contentious situations.
Background
A husband and wife, Mr and Mrs Thelen established the Gainer Associates Superannuation Fund (Fund), with Gainer Associates Pty Ltd (Gainer) acting as the corporate trustee. The Fund held approximately $7 million in assets. Following the death of Mr. Thelen in 2014, Mrs. Thelen became the sole member of the Fund. Mr and Mrs Thelen did not have any children.
After Mrs Thelen passed away in 2021, Gainer faced legal scrutiny initiated by Mr Bone, Mrs Thelen's partner from 2014 to 2019. Mr Bone and Mrs Thelen developed a long-distance relationship where they lived in their respective countries and spent considerable time together. Mrs Thelen made a Will which described Mr Bone as her partner and left Mr Bone a legacy of $1 million together with her car, furniture, artworks, and a life estate in her home. Mr Bone was not appointed as executor for the estate of Mrs Thelen.
Mrs Thelen also completed a binding death benefit nomination (BDBN). Under the BDBN signed a week before she died, she nominated her legal personal representative to receive 100% of her superannuation. However, the BDBN was missing the signature of a second witness and, as a result, was held to be invalid. Presumably, this was on the basis that the Fund’s trust deed required two independent witnesses for each BDBN.
New South Wales Trustee and Guardian (NSWTG) was the surviving executor of the estate of Mrs Thelen. NSWTG, as an entity, could not be appointed as director of Gainer, whereas it could become a shareholder. NSWTG also declined to be appointed as the trustee of the Fund. NSWTG, therefore, engaged a chartered accountant and registered liquidator, Mr Heesh, to administer and wind up the Fund, which included being appointed as sole director of Gainer.
On 13 February 2024, Mr Bone commenced proceedings seeking to remove Gainer as trustee of the Fund, arguing that the trust deed of the Fund had been breached on account of SIS Act non-compliance issues. Mr Bone also challenged Mr Heesh's role as a non-legal personal representative director under section 17A of the SIS Act. This prompted questions about compliance with the Fund deed and the SIS Act as Mr Heesh was not the legal personal representative for Mrs Thelen. Orders were sought by Mr Bone to prohibit Gainer from being indemnified from the assets of the Fund for its fees and charges and prohibiting any remuneration of Mr Heesh.
Issues in Dispute
Two primary issues arose:
Distribution and payment of Mrs Thelen’s death benefit entitlements; and
SIS Act non-compliance of Mr Heesh, a chartered accountant who is not a member of the SMSF nor the legal personal representative of the deceased, as the sole director of Gainer (Part 2 of our articles on the Gainer decision will provide a more detailed explanation regarding SMSF trustee compliance).
Key Findings
The Death Benefit Decision
Here, in circumstances where the BDBN was invalid (on the basis of non-compliance with the Fund’s trust deed), the SMSF trustee (with Mr Heesh being the sole director of Gainer) had the discretion to determine who would receive the death benefits and in what proportion. As noted above, ultimately, Mr Heesh, as director of Gainer, resolved to pay one-third of the death benefits to Mr Bone and the remaining two-thirds to Mrs Thelen’s estate. The court’s decision supports other recent cases (e.g. Marsella, and Owies) that trustee discretionary decisions must be conducted in proper manner. This includes the trustee properly informing themselves (i.e. a claim staking process) and acting in a proper and considered manner.
Defending the Trustee Removal Proceedings
The court ruled in favour of Gainer’s ability to defend against the removal proceedings. It acknowledged the legitimacy of Mr Bone's concerns regarding Gainer's governance but noted that Bone's claims lacked sufficient detail and urgency. The court emphasised the necessity for the party seeking removal to substantiate their claims adequately. Mr Bone made a number of allegations without properly particularising his claims and not meeting deadlines set by the court.
Concerns Over Trustee Independence
One of the core issues revolved around Mr Heesh’s independence. Given his role as the sole director and his non-legal personal representative status concerning the deceased member, the court highlighted the potential conflicts of interest inherent in such a structure. Despite these concerns, the court maintained that substantive evidence was required to support claims of mismanagement or impropriety. Mr Heesh was able to provide a substantial amount of evidence showing that he took steps to obtain the necessary advice and indemnities expected of a trustee acting in the best interests of the Fund.
Judicial Advice on Indemnity
Central to the court’s analysis was Gainer’s right to indemnification from the assets of the Fund for expenses incurred in the legal proceedings. The court reaffirmed that trustees have a statutory right to be indemnified from the trust assets, provided they have acted within the bounds of the law and their governing documents (i.e. SIS Act and the trust deed of the Fund).
Conclusion
This case serves as a cautionary tale for future trustees regarding the importance of compliance and the need to maintain clear documentation and communication with all stakeholders involved in the SMSF. Trustees must balance their rights with responsibilities owed to the Fund to ensure sound governance and compliance.
For more information on superannuation funds, please contact us.
Alasdair Woodford
Principal
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E: awoodford@ha.legal
Tayla Berger
Senior Associate
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E tberger@ha.legal
Joseph Flanagan
Senior Associate
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E: jflanagan@ha.legal
