- The Australian Annuities Pty Ltd vs Rowley Super Fund Pty Ltd case involved a company – Australian Annuities – that was trustee of a family trust which ran a financial planning business that went into liquidation in June 2009.
- The company borrowed money to make contributions to the Rowley Super Fund, which the liquidators of the company tried to claw back.
- Steven Rowley was the sole director of the company and made the contributions to the SMSF but as it could not be proved the other family members were aware of the contributions or knew they were in breach of the director’s responsibilities, the SMSF successfully defended its case.
When growing up, Hogan’s Heroes was one my favourite TV shows. Its two best characters were Colonel Klink and Sergeant Shultz who were played by outstanding actors.
I never thought that Shultz’s famous statement, “I know nothing,” when trying to deny or ignore the obvious would get a self managed super fund trustee very far. I’ve always assumed that if one SMSF trustee of a fund did anything wrong then any other trustees of the fund would get to share in any problems that arose from the wrong doing.
But a Victorian Supreme Court case handed down in October 2013 shows I may be mistaken.
The case
The case, Australian Annuities Pty Ltd vs Rowley Super Fund Pty Ltd, involved a company that was trustee of a family trust which ran a financial planning business for about 25 years but went into liquidation in June 2009. Australian Annuities borrowed $2.5 million from Macquarie Bank so superannuation contributions and employment termination benefits could be made for the principals of the business, Steven and Barbara Rowley, during the 2007 and 2008 financial years. Some of the loans were used to make super contributions for their two sons during the same financial years. Steven Rowley was Australasian Annuities’ (AA) sole director.
The super contributions were made to the Rowley Super Fund, a self managed super fund, which all the Rowleys belonged to. They were also directors of the fund’s corporate trustee after it was appointed in November 2008. Prior to its appointment, the four family members were its individual trustees.
The employment termination benefits were also transferred to this SMSF.
The liquidators tried to claw these contributions back from the super fund and Steven Rowley. When the case was heard Mr Rowley had been declared bankrupt and the case proceeded solely against the SMSF’s corporate trustee.
The judge described the borrowing of money and its use for super contributions and termination benefits as improvident and not in AA’s best interests. The judge said Steven Rowley didn’t have proper regard to the company’s interests when performing these transactions. His Honour also decided that Mr and Mrs Rowley didn’t retire and hence shouldn’t have received the termination benefits.
The arguments
AA’s liquidators argued that the SMSF received money from AA in transactions that it knew were wrong and that it should hand the money back. This argument failed because the judge said whilst Steven Rowley knew what was taking place, it was not clear the other trustees – Mrs Rowley and her two sons – had sufficient knowledge about the transactions. Further they weren’t aware they were a breach of a director’s duty to act in AA’s best interests. So just because one director had knowledge of these events then, by default, you can’t say the other directors had the same knowledge.
The liquidators also argued that the super fund should repay the bank’s debts because the super fund hadn’t provided any consideration to AA or the individuals involved. This point was also rejected.
The SMSF trustee argued that the case should fail because the case was being funded by Macquarie Bank and if successful any proceeds from the case would flow solely to that bank and no other creditor. They also argued that the bank always knew the purpose of the loan was for super contributions.
Judgement
His Honour found no evidence that Macquarie participated or encouraged Steven Rowley to breach his director’s duties. Further, there was no evidence that it advised Mr Rowley to make the super contributions or pay the termination benefits.
The final result – the self managed super fund successfully defended this case primarily because the judge believed three of the fund’s members Sergeant “I know nothing” Shultz defence. Logically this argument would have also worked if the contributions had been made to any large super fund regulated by APRA.
So if something goes wrong in your super fund and you weren’t aware of it at the time, you might find the claim “I know nothing!” extremely useful.
PS – Foxtel regularly shows Hogan’s Heroes episodes on its Fox Classics channel.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.