Can a bankrupt be a director of a corporate trustee of an SMSF?

Usually, a bankrupt will be disqualified from acting as a director of a company. Bankruptcy is the legal process where an individual is declared unable to repay their debts. This can complicate the operation of a self-managed superannuation fund (SMSF) if a director of a corporate trustee becomes bankrupt.

Bankrupt directors of SMSF corporate trustees

A SMSF is a superannuation fund with fewer than five members. The Trustee of a superannuation entity is required to ensure that the prescribed standards in this legislation are always complied with. If a company is the trustee of a SMSF, all members of the funds must also be directors of the trustee company.

Compliance with SMSF laws can become complicated when a SMSF member and director of the trustee company becomes ineligible to be a company director due to bankruptcy. If the SMSF only holds liquid assets, like cash, the cash can be rolled over into a public super fund in the event the director or trustee goes bankrupt. However, problems can arise if assets held by a SMSF with a bankrupt trustee company director are not liquid. For example, the SMSF might hold real property, assets that are time consuming or difficult to sell, or assets that the other fund members do not wish to sell.

When can a bankrupt be the director of a company?

Usually a bankrupt would be disqualified from being a company director, but the court can grant leave for a bankrupt in some circumstances. In the recent Western Australia Supreme Court decision in GRD v BJD (2018) WASC 374, leave was granted for a bankrupt member of an SMSF to act as a director of the fund’s corporate trustee. This allowed the fund to meet Superannuation Industry (Supervision) Act 1993 compliance requirements.

Under Section 206G of the Corporations Act 2001, the court can grant leave to allow certain disqualified persons to act as a director of a corporation. This section states a person who is disqualified from managing a company may apply to the court for leave to manage either:

  • corporations;
  • a particular class of corporation (financial products or services); and
  • a particular corporation.

For the court to grant an order to allow permission for a bankrupt to act as a director or manager, the court must be satisfied that making an order would not be contrary to public policy. The court will have consideration of surrounding issues such as circumstances of the bankruptcy and the bankrupt’s role in a company.

For example, the court may grant leave for a member of a SMSF to remain a director so that the SMSF does not become a non-compliant fund. If a SMSF becomes a non-compliant fund, this could result in taxation consequences for all members For example, for every year the fund is non-compliant, the assessable income of the SMSF may be taxed at the highest marginal tax rate.

Looking for an experienced solicitor in Newcastle, Sydney or the Hunter to assist you with a bankruptcy or SMSF compliance matter? Call us on (02) 4929 7002, or email us at