Electronic signatures ideal for SMSF deeds

Self Managed Super magazine recently published an article title "Digital signatures still not ideal for deeds" (27 October 2020).

The article makes reference to draft legislation which has been released that would make the electronic signing of SMSF trust deeds legally valid on a permanent basis.

The Corporations Amendment (Virtual Meetings and Electronic Communications) Bill 2020 modernises the Corporations Act 2001 and associated regulations to enable companies to utilise technology to satisfy their legal obligations.

The reforms make permanent the temporary relief granted by the Treasurer via the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 which will end on 21 March 2021. The temporary Determination allows companies to hold meetings virtually, send meeting-related materials electronically and validly execute documents through technology neutral electronic means.

There has been some uncertainty whether the temporary Determination enables the electronic signing of SMSF trust deeds electronically. This is specifically addressed in the Explanatory Memorandum:

"The temporary measures do not expressly state that the relief applies to execution of deeds by companies, creating some uncertainty. The permanent reforms will make clear that companies will be able to create and sign deeds electronically."

Physical deeds should not be abandoned

In the Self Managed Super article, Bryce Figot from DBA lawyers states "electronic document execution should not be seen as a reason to abandon current practices around physical documentation".

Whoa. Who says anything about abandoning physical signing via wet ink signatures? The proposed changes to the Corporations Act allow for the option of electronic execution of a range of documents (including deeds). They don't mandate it!

Having run an SMSF administration business that implemented electronic signing of financial statements, annual returns and numerous other ancillary documents more than a decade ago, approximately 40% of clients still preferred to sign via physical document (either during a meeting with their accountant / adviser or upon receipt via snail mail).

So although it is more convenient, efficient and secure for SMSF documents to be signed electronically, it also needs to be fit for purpose and the trustees themselves need to be comfortable with the process. And in case you're wondering - no - it wasn't necessarily the more mature baby-boomer cohort who avoided electronic signatures. It was just as likely to be a younger trustee or business owner who preferred to paw through physical documents.

Electronic signing of deeds haven't been tested by the Courts

My friend Bryce was also quoted as saying “This change was only designed to be temporary due to the coronavirus and has yet to be tested by the courts.”

True, to my knowledge, there haven't been any cases of the electronic execution of a deed, much less an SMSF trust deed, being tested via the Courts as a result of temporary relief.

And why would there be? It's been in force for such a short period of time any potential dispute wouldn't have worked its way through the system yet.

Come to think of it, have there been any cases where the valid execution of an SMSF trust deed has been called into question? No?

What about deeds in general? Yes, there has been a few. The most interesting ones are the Bendigo and Adelaide Bank cases. It's worth reading the commentary from Professor Sharon Christensen, Gadens Professor of Property Law, QUT:

"While the electronic signature in this case lacked the critical element of ‘authentication’, the decision provides some further insights into a likely judicial approach."

Furthermore, in her introduction, Professor Christensen states "Only New South Wales, has taken steps to modernise their legislative provisions validating electronic deeds and there has been no indication the federal government will move to resolve the uncertainty for corporations."

Looks like the Professor's wish has been granted!

We also have a catch-22 with the uncertainty surrounding the electronic execution of SMSF trust deeds. As lawyers and other professionals err on the side of caution, very few electronically signed deeds enter the SMSF population. Meaning there are fewer 'opportunities' for the Courts to challenge their execution. So how can legal precedent be established without any cases upon which to base precedent on?

Anyone who has spent any time researching the electronic signing of deeds would understand that legal precedent is extremely 'thin on the ground' when it comes to this topic.

When you look at SMSF related cases they typically come about for one reason: Payment of death benefits. I could be accused of being cynical, but any lawyer representing a beneficiary with a claim on an SMSF death benefit would look to use any angle available to them, including the validity of the execution of the SMSF trust deed.

My point is this: The most obvious way the electronic execution of an SMSF deed is going to be challenged in Court is where the payment of a death benefit is going to be challenged in any case, therefore the possibility of some future challenge shouldn't prevent electronic execution.

The only other time I can see a challenge occurring is a dispute between members / trustees who are party to the SMSF deed.

But what about the states?

One thing that 2020 has shown is that Australia is a Commonwealth, except where state Premiers see an opportunity to score political points by exerting their authority.

Again, mi amigo Bryce wants all the states to line up and an consistently allow the electronic signing of SMSF deeds before using them. Don't hold your breath.

Alignment between the states and Commonwealth is more likely to occur where the legislation is first passed at a Federal level, which then provides guidance and direction for the respective state legislators. As we've seen with COVID, temporary measures can become permanent.

From a practical perspective, if an SMSF is being established for a specific purpose, for example the purchase of a commercial property, and its know that the particular state revenue office will only accept a psychical copy of a deed for stamping, don't sign electronically! While there is uncertainty relating to the states catching up and aligning their legislation, take a pragmatic approach.

Managing electronically sign trust deeds

My homeboy Bryce also makes a point around how records will be kept and managed.

DBA Lawyers, like many specialist SMSF lawyers and any professional working in the SMSF space has undoubtedly had to deal with many instances of lost SMSF trust deeds. It's painful. Deeds of confirmation and ratification, estoppel and all that fun stuff.

The great thing about electronically signed SMSF trust deeds is that they are bloody difficult to lose!

When a deed is signed electronically, all parties receive a digitally certified copy via email - so each director of the corporate trustee as well as whoever has organised the deed such as a lawyer, adviser or accountant.

When a digital signing platform such as DocuSign (and others) is used, there is an added level of validation that enables 3rd parties to independently verify the authenticity of the document to show it's not been modified since signing.

Combined with the requirements in the respective Electronic Transaction Acts in regard to identification and intent of the signatories, electronic signatures of SMSF trust deeds are in many ways more secure, robust, permanent and legally defensible than wet ink signatures on paper, parchment or vellum!

One potential solution around an independent permanent storage solution and permanent record for electronically signed SMSF trust deeds (and their amendments) is via the 'Modernising Business Registers Program'

The ATO is going to take over, re-build and combine 31 registers administered by ASIC. Potentially SMSF trust deeds and amendments could be uploaded and indexed much the same way that company documents and disclosures are uploaded to and indexed by ASIC.

Such a system would ensure an electronically signed SMSF trust deed would never be lost.

Overseas changes to electronic signing of deeds

The UK is currently undertaking a review of the electronic signing of deeds. This is very relevant as much of the common laws around Trusts and Deeds originate there. The Chancery Bar Association (UK) recently said:

"Modern technology should be able to capture the solemnity of the act, proof of identity and delivery without the need for a written document executed with the formality currently required of deeds."

If the birthplace of trust deeds can modernise and adapt to the electronic signing of trust deeds, so can we.

Electronically signed SMSF deeds - fit for purpose!

The parties to an SMSF trust deed are the trustees themselves (i.e. the members and directors of the corporate trustee). Provided the parties consent to execute the deed electronically, and an appropriate platform is used to ensure identification of the signatories and their intent to sign and to be bound to the deed can be verified, electronic signing is completely appropriate.

I support there being some formality around signing of an SMSF deed - it's a very important step to create an SMSF that will in most cases hold significant wealth and be in existence for decades.

What I reject however is that in this day and age we are forced to follow antiquated and outdated rules that are centuries old. The law evolves and adapts to suit the needs of society and any professional in the SMSF space needs to adapt as well. Even if it makes us uncomfortable. Especially when it makes us uncomfortable