Pro-Super has just released our latest SMSF deed upgrade, with comprehensive dispute resolution procedures.
The default position for all trusts (including super funds) in which there is more than one trustee, is that those trustees must make their decisions unanimously. This makes sense, when you consider that trustees are jointly responsible for ensuring that the trust is administered in the best interests of its beneficiaries. Third parties are also normally entitled to pursue and recover the whole debt owing on behalf of the trust, from any one of the trustees. This is called “joint and several” liability. It forms part of the very ancient rationale in the law of trusts that, unless the deed states otherwise, the trustees must act unanimously.
In recent years, some SMSF deed providers have started producing deeds in which trustee voting rights are determined by that trustee’s member balance. We cannot begin to tell you how dangerous this is, and what a precarious position it places the unwitting advisor in. Most scandalous of all, there is every chance that they have quietly made this change, without even telling you.
Why is this so unsafe? Consider a couple of examples:
A fund has two business partners, who have acquired the business’ premises. The intention is to keep the member balances at 50:50, however due to rounding and other anomalies over the years, one member now has $50 more than the other. The member with the slightly larger balance wants to sell the business premises, despite the other member’s objections. Under a deed where voting is based on member balances, the trustee/member with $50 more has effectively 100% of the voting rights.
Is this something which a prudent advisor should have explained to these clients, before recommending that they use this deed? Is the advisor now in a world of trouble? You bet. Did the advisor know that the deed provider had placed this form of “tie-breaker” provision in their deed? Almost certainly not!
Or, how about a couple going through an acrimonious break-up, where a cynical majority holder decides to fritter away the fund via speculative out-of-the-money option investments, rather than let their soon to be ex-spouse get any share of the fund. Not many people are so bloody-minded, but we’ve all met one or two.
What will the minority spouse’s lawyer make of an advisor who chose to recommend a trust deed which went against the standard practices of trust law, going back at least to the 16th century?
The providers who have inserted percentage-based voting rights have done so primarily to avoid the need to resolve disputes via expensive and extended court proceedings. They can certainly achieve this end, but at what cost to overall fairness and equity towards the minority member(s)?
At Pro-Super, we have chosen to preserve the requirement of unanimity, but to include a cascading sequence of dispute resolution procedures. These includes meetings, indemnities, compulsory roll-outs for very minor balance members, then on to mediations, and only as a last resort – court proceedings. They have required a great deal of thought and effort, but the objective was to attempt to balance everyone’s rights, rather than take the lazy and hazardous path of simply letting the majority member(s) carry the day.
The average advisor may only see a small number of acrimonious business or marriage break-ups involving SMSFs during their professional careers. However, when those situations invariably arise, ask yourself: would you rather have a majority voting deed, or a Pro-Super dispute resolution deed?
As always, Pro-Super has the technical expertise to discuss and explain the deeds we sell. Should you wish to discuss these matters in more detail, please do not hesitate to contact us.