Ratifying an incorrectly executed SMSF document
Court decision confirms that a Deed of Ratification and Variation is and remains an effective tool.
The recent Queensland Supreme Court decision regarding Narumon QSC 185, decided on whether a Deed of Ratification and Variation (DoRV) of the fund’s deed was valid and effective given that an earlier variation to the fund was not properly executed by the trustee. The Court confirmed that it was valid and effective – confirming for practitioners and clients alike, that a DoRV is and remains an effective tool.
The fund’s deed was varied on a number of occasions including in years 2004, 2007 and 2014. The purpose of the 2014 DoRV was to replace the terms of the current deed with the provisions set out in that document, and ratify a previous execution issue.
2007 execution issues
The 2007 Deed of Variation was supposed to be executed by Narumon Pty Ltd, the corporate trustee at the time. The Deed of Variation was expressed as executed by its member, Mr Giles, as ‘authorised representative’ of the corporate trustee. It did not state that Mr Giles executed the document as the director and secretary of the corporate trustee, which he was. Accordingly, the Deed of Variation was not executed as required under s 127(1) or (3) of the Corporations Act 2001 (Cth). The effect was that the 2007 Deed of Variation did not amend the fund's deed as intended.
Can you ratify these issues?
In 2014, the fund’s accountant noticed that the 2007 Deed of Variation was not properly executed. Accordingly, a subsequent DoRV was entered into in 2014, which sought to:
- ratify the execution of the 2007 Deed of Variation
- vary the terms of the fund’s current deed by replacing the existing terms with those contained in the DoRV.
Having regard to the particular wording of the DoRV, the Court found that the DoRV was valid and effective. It found that:
- notwithstanding its recitals referred to the power to amend the DoRV contained in the ineffective 2007 deed, the operative amending provision in the DoRV made no reference to a specific amendment provision on which the trustee was relying
- accordingly, this allowed the court to accept that the amending provision was a valid and effective variation in accordance with the power as it appeared in the earlier (and validly executed) 2004 Deed of Variation.
Although the court confirmed that the later entry into a deed which ratifies the ineffective execution of an earlier deed, is valid and effective, careful drafting is required.
Had the operative clause referred to the power to amend the deed as contained in the ineffective 2007 Deed of Variation, then a different result may have occurred altogether.
Trustee(s) and professional advisers should ensure that when entering into deeds of ratification the power to amend the deed is described as is required by the fund’s last valid and effective deed, and the amending party does not rely on the amendment power in the deed being ratified.
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