In the Matter of South Australian Perpetual Forests Limited 1964 Trust Deed: IOOF Australia Trustees Limited No. SCGRG 94/275 Judgment No. 5037 Number of Pages 17 Trusts and Trustees (1995) 64 Sasr 434

[1995] SASC 5037

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA BOLLEN J

CWDS
Trusts and trustees - powers, duties, rights and liabilities of trustees - applications to the court for advice and authority - Trustee - advice and directions - power and duty of trustee to insure trees against risk of damage by fire - Trustee Acts25(1) does not speak only of property of which the trustee is legal owner - Trustee Acts4 - definition of "property". Administration and Probate Acts 69 and Trustee Actss.4, 25, 25(1), 91. Pateman v Heyen (1993) 33 NSWLR 188, applied.

HRNG ADELAIDE, 27 March 1995 #DATE 12:4:1995 #ADD 23:5:1995

Counsel for applicant:         Mr M F Blue

Solicitors for applicant:     Fisher Jeffries

Counsel for other party Seas Safford Forests:         Mr D J Bleby QC

Solicitors for other party Seas Safford Forests:         Piper Alderman

ORDER
Questions answered.

JUDGE1 BOLLEN J This is an application by a trustee for advice and directions. The application is made under s69 of the Administration and Probate Act and under s91 of the Trustee Act.

2. Eleven questions, or requests, for directions (with some subsidiary questions therein) are before the court. But I am asked by the parties to answer the first four only. Of these, Mr Blue, for the Trustee, said:
"The application made by the trustee is based on two
    alternative provisions. The first is that it is based on,
in effect, s.69 of the Administration of Probates Act which
is applied by s.91 of the Trustee Act to trusts and is
    seeking directions on certain questions that have arisen.

3. In the alternative, the trustee is seeking that certain
    questions both under the trust deed and under statute, and
    in relation to the trust generally, be determined under Rule
    63 of the Supreme Court rules. I will come back to this.

4. It is our submission that the first four questions upon
    which we are seeking directions from your Honour are
    appropriate questions for your Honour to give directions.
    That, the trustee is truly in doubt about the answers to
    those questions and seeks the guidance of the court."

5. The parties agreed on facts. A "Statement of Agreed Facts" was filed. I should set it all out. It is:
    "THE SCHEME

1. IOOF Australia Trustees Limited (the 'Trustee') (previously
    Farmers Cooperative Executors and Trustees Limited) is trustee
    of a forestry scheme pursuant to the terms of the Southern
    Australian Perpetual Forests Limited 1964 Trust Deed (the 'Trust
    Deed' (annexure 1).

2. SEAS Sapfor Forests Ltd ('SEAS/the Forest Company')
    (previously Southern Australian Perpetual Forests Limited) is
    the manager of the forestry scheme.

3. The constituent documents of the forestry scheme are the
    Trust Deed, a Tripartite Agreement to which the Trustee, the
    Forest Company and SEAS Sapfor Harvesting Pty Ltd (the 'Milling
    Company') (previously Sapfor Timber Mills Ltd) are parties
    (annexure 2), prospectuses pursuant to which covenants are
    issued to the public and the covenants issued to the public
    (example annexure 3). Each covenant is issued subject to the
    provisions of the Trust Deed.

4. The forestry scheme operates by members of the public
    purchasing covenants, the purchase price of which provides funds
    for the Forest Company to plant, maintain and tend pine
    plantations. When the timber attains appropriate maturity, it
    is sold. Certain deductions in favour of the Forest Company and
    Milling Company are made from the gross timber proceeds and the
    net balance is paid to the Trustee for distribution to the
    covenant holders. In addition, and prior to clear felling, the
    standing timber is thinned in a manner which is designed to
    enhance the potential for the remaining stock of timber.

5. There are approximately 26,000 covenant holders holding
    covenants in respect of planting years 1956 to 1985 in the
    forestry scheme the subject of the Trust Deed.

6. The value of the covenant holders' plantations is
    approximately $82 million net of salvage. A map showing the
    geographical location of covenant holders' plantations is
    annexure 4.

7. Clause 2(c) of the Trust Deed provides:

'(c) That for the purpose of making provision against any
    timber losses by fire ...

(i) the Forest Company shall plant with pine trees an area
    of five (5) per centum in excess of the area which the Forest
    Company undertakes to plant with trees for the Covenant holders
    in each planting and should the timber in any such planting
    during such period be damaged by fire the Trustee may at any
    time within a period of twelve (12) months after such occurrence
    call upon the Forest Company to survey and prepare plans of such
    damaged areas whereupon all or part of the damaged areas up to
    the abovementioned proportion of five per centum shall be
    dedicated to the Forest Company in satisfaction of its timber
    interests therein and the Forest Company shall then have the
    right in any such area to cut down, replant and in any way deal
    with them without giving any account to the Trustee. The Forest
    Company shall not be held accountable for any loss by fire,
    however caused in excess of the abovementioned five per centum
    for or in respect of any particular planting.

(ii) The Forest Company shall within two months after the
    31st day of October in each year issue to the Trustee:

(a) for each twenty (20) one Acre Covenants or their
    equivalent in Half Acre Covenants sold on an acreage basis
    for which it shall have received full payment during the
    year ended on such 31st day of October one (1) fully paid
    one Acre Covenant relating to such planting years; and

(b) for such twenty (20) one Hectare Covenants or their
    equivalent in Half Hectare Covenants or Quarter Hectare
    Covenants sold on a hectare basis for which it shall have
    received full payment during the year ended on such 31st day of
    October one (1) fully paid one Hectare Covenant relating to such
    planting year each of which said Covenants shall be called and
    legibly endorsed 'RESERVED AREA COVENANT NOT TRANSFERABLE'. The
    Trustee will be entitled to hold all such Reserved Area
    Covenants and all monies payable to it as holder thereof (save
    and except the proceeds of thinnings which shall be payable to
    the Company for the purpose of making good to holders of
    Covenants relating to the said planting year to the extent of
    the value of the said Reserved Area Covenants and monies any
    loss resulting from damage to the said planting caused by fire
    during the said period of supervision from the end of the said
    planting year but subject as aforesaid will hold the said
    Reserved Area Covenants and monies for and on behalf of the
    Forest Company.'

8. The covenants issued to members of the public provide:
    'In order to provide against losses by fire the Company
    agrees that within two (2) months after the 31st day of
    October it will issue to the Trustee:

(a) for each twenty (20) one Acre Covenants or their equivalent
    in Half Acre Covenants sold on an acreage basis for which it
    shall have received full payment during the year ended on such
    31st day of October one (1) fully paid one Acre Covenant
    relating to such planting year; and

(b) for each twenty (20) one Hectare Covenants or their
    equivalent in Half Hectare Covenants or Quarter Hectare
    Covenants sold on a hectare basis for which it shall have
    received full payment during the year ended on such 31st day of
    October one (1) fully paid Hectare Covenant relating to such
    planting year each of which said Covenants shall be called and
    legibly endorsed 'RESERVED AREA COVENANT NOT TRANSFERABLE'. The
    Trustee will be entitled to hold all such Reserved Area Covenant
    certificates and all monies paid to the Trustee as holder
    thereof (save and except the proceeds of thinnings, which shall
    be paid to the Company) for the purpose of making good to
    holders of Covenants relating to the said planting year to the
    extent of the value of the said Reserved Area and monies any
    loss resulting from damage to the said planting caused by fire
    during the period of twenty (20) years from the end of the said
    planting year, but subject as aforesaid will hold the said
    Reserved Area Covenant certificates and monies on behalf of the
    Company. The Company shall not be held accountable for any loss
    by fire however caused in excess of the abovementioned five (5)
    per centum reserved area for or in respect of any particular
    planting'.

9. Covenants issued for planting years to 1973 were issued
    for a twenty five year period. Covenants issued for
    planting years 1974 to 1985 were issued for a twenty year
    period.

10. Although covenants are issued only for a period of
    twenty or twenty five years depending on the planting year,
    clause 24 of the Trust Deed provides a mechanism for a
    plantation to be left to mature.

11. In some planting years the reserve area has been reduced
    or eliminated because of fires which have occurred from time
    to time.

RECOMMENDATION TO INSURE

12. SEAS as Manager of the forestry scheme recommended to
    the Trustee that fire insurance be effected at the expense of
    the covenant holders over covenant holders' plantations in
    respect of plantations. Initially that proposal related to fire
    insurance in respect of covenant holders plantations both in and
    beyond the covenant period. Subsequently that proposal, or
    alternatively a separate proposal, was recommended by SEAS as
    manager to the Trustee to provide fire insurance over covenant
    holders plantations in respect of plantations only in the beyond
    covenant period.

13. Other than as set out in paragraphs 1 - 12 above, the
    facts deposed to in the affidavits sworn by the parties in
    this application have not been agreed between the parties
    and remain the subject of disagreement."

6. SEAS proposed that fire insurance be taken out. It now says that that cannot be done without amendment of the Trust Deed.

7. SEAS applied to intervene in the proceedings. It was joined by order of Master Anderson made on the 31st of March 1994.

8. In his Outline of Argument Mr Blue wrote:
    "As SEAS is effectively the other party to the trust deed,
    the trustee does not accept that SEAS has a right to be
    heard in relation to directions to the trustee."

9. Mr Blue spoke to these submissions. I think that the joining of SEAS carries with it a right to be heard in relation to the directions sought. And I welcome the submissions made by Mr Bleby QC for SEAS. They are most helpful.

10. Before I leave the order of Master Anderson made on the 31st of March 1994, I should say that at the same time he ordered that the trustee give notice of these proceedings by advertisement published in "The Advertiser" and "The Australian" newspapers and required advertisements to give appropriate particulars. It has been proved by affidavit that that was done and that no covenant holder has sought to intervene in these proceedings or to be joined in any way.

11. There was some coming and going about what was asked of the court. The making of the request had varied from time to time in affidavit and in notes of the questions asked which Mr Blue had prepared. The latter went into one or two editions. In the end all that coming and going came to nothing. The substance of what the trustee wanted the court to direct was constant.

12. The four questions in which directions are sought are:
    "1. Does IOOF Australia Trustees Limited ('the Trustee')
    have power under the Trust Deed, the general law or Section
    25 of the Trustee Act to effect fire insurance in relation
    to the proceeds of the trees?

2. Is the Trustee obliged to obtain fire insurance in
    respect of covenant holders plantations?

3. Is the Trustee obliged to effect insurance in respect of
    those plantation years when no or insufficient monies are
    held by the Trustee in respect of those plantation years?
    If so, how is the Trustee to pay the premium?

4. If the Trustee is obliged to effect insurance cover, is
    the Trustee, pursuant to a right of indemnity, able to
    recover from timber proceeds held by it any premium and
    other costs associated with placing the insurance?"

13. It is at present impossible for the court to answer the second question asked in Question 3. That was conceded.

14. Mr Blue spoke of the nature of insurance which he said the trustee had power to take out as including either insurance of the trees as trees growing on the land or insurance against loss of income caused by destruction by fire of the income producing things, i.e. trees.

15. I do not find the phrase "in relation to the proceeds of trees" in question 1 helpful. I read the question as if that phrase were not there. I think the object of it will be met if I remember that Mr Blue wants a direction that the trustees may insure the trees against risk of fire and may insure, additionally or alternatively, against loss of income caused by destruction of the trees by fire.

16. Fire with its consequences is, of course, the big risk. Let it be noted that Mr Bleby emphasised that SEAS wants the trees to be insured but says that it can be done only after an amendment to the trust deed. Of course, the existence of 26,000 covenant holders would not facilitate the process of amending it if that task were essayed.

17. Clause 2(c) of the Trust Deed provides a measure of insurance (see Agreed Fact 7). Mr Blue said of it:
    "One matter of relevance is clause 2C of the trust deed. It
    does provide a form of insurance to the covenant holders against
    fire. That mechanism is that in any planting year - if we take
    for example the 1960 planting year, if SEAS plants 100 acres of
    timber and sells covenants in respect of that 100 acres to
    covenant holders and, on top of that, plants another 5 acres and
    sets that aside. If a fire should destroy some of that 100
    acres, then those five acres are applied in replacement of the
    acres in respect of which the timber is destroyed. If 5 out of
    the total 100 are destroyed by fire, there is a replacement of
    those 5 acres. So that, the covenant holders go back up to
    their original 100 acres. But, that is the limit of it. So, if
    the whole 100 acres are destroyed, the covenant holders only get
    5 acres in return for the 100. They have to share. A form of
    partial and limited insurance, insurance against a limited fire
    but not against a catastrophic fire.

That form of insurance, which is in place under the trust
    deed, is limited to the period of covenant. If the period of
    the covenant is 25 years, and it is decided that the trees
    should be left to mature beyond that 25 year period, then this
    reserve area disappears. In fact it is appropriated by SEAS and
    becomes its absolute property. After year 25, no form of
    insurance at all."

18. All this seems correct.

19. I do not think that it can be said that Clause 2(c) amounts to a provision for insurance which excludes any thought of further power in the trustee to insure. Clause 2(c) is of limited operation and does not cover the whole range of risk by fire.

20. Mr Bleby offered a most thoroughly prepared outline of argument and spoke with equal thoroughness in making his submissions. I have studied the outline, the transcript of his submissions and the cases to which he refers on one point. I set out (not to the detriment of others parts) that part of the outline called "The Effect of the Trust Deed". This is valuable to all his submissions but it is also a "lead in" to his primary submission. That part of the outline is:
    "THE EFFECT OF THE TRUST DEED

8. When properly analysed, the trust deed sets up and
    governs a number of different relationships and different
    trusts for different purposes and persons.

8.1 The trustee is trustee of the maintenance fund, the income
    of which is to be paid to SEAS unconditionally, the corpus being
    paid to SEAS upon SEAS 'having duly and faithfully performed all
    and singular the obligations of the forest company to the
    trustee and to the holders of the said covenants' (Clause 4(b)).
    This is the only fund which could be said to be held for the
    benefit of covenant holders generally, but is to be applied in a
    specific way, and that includes the trustee having access to the
    fund if default is made by SEAS (see Clause 14).

8.2 The trustee is trustee of certain covenants for the purpose
    of applying them (up to a certain limits) for the benefit of
    covenant holders whose trees are damaged by fire. Those
    covenants are not held for covenant holders generally, but each
    covenant is held for the benefit of a particular group of
    covenant holders (see Clause 2(c)).

8.3 Proceeds from the sale of timber eventually end up in the
    hands of the trustee in accordance with the provisions of Clause
    12. When received by the trustee they are to be held 'in the
    interests of the respective covenant holders' (Clause 12(e))
    whose plantings have produced the sales revenue from which those
    proceeds are derived. Those proceeds are to be held in separate
    timber proceeds accounts for each planting and are to be
    distributed to those particular covenant holders in accordance
    with the subsequent provisions of Clause 12. The timber
    proceeds accounts are not held for the benefit of covenant
    holders generally.

8.4 There is a trust in respect of the titles to the planted
    land, to the extent that the trustee has to join in an order for
    delivery of the titles to anyone else for the duration of the
    covenant. In this respect the trustee is not the custodian of
    the titles. That is a function of the State Bank.

8.5 The trustee is the trustee of certain rights to be exercised
    if the occasion arises for the benefit of covenant holders
    generally. In that respect it holds no particular assets or
    funds, but in the exercise of those rights it may become the
    trustee of and take possession of certain assets of SEAS (Clause
    13) upon SEAS being in default in compliance with its
    obligations. Any resort to those assets by way of indemnity for
    expenses incurred would only be in relation to expenses incurred
    in the exercise of that aspect of the trusteeship.

8.6 The trustee has no interest in the trees or the covenants
    (other than the limited interest provided for in Clause
    2(c)(ii); it has no specific power to insure; it has no
    authority conferred on it which would authorise the trustee to
    effect insurance on behalf of covenant holders; and it cannot
    act generally as attorney for covenant holders other than in the
    exercise of the specific powers mentioned."

21. I emphasise the peroration in Clause 8.6. As I say these submissions, and particularly that peroration, "lead in" to the submissions in Clauses 9, 10, 11 and 12 of the outline. They are:
"9. Section 25 of the Trustee Act, 1936 is of no relevant
    assistance, as it is plainly speaking of the insurance of
    property of which the trustee is the legal owner. In this
    case there is no such property.

10. While the trustee may be able to effect insurance
    although it has no insurable interest in property (Insurance
    Contracts Act, 1984, sections 16 and 17) it cannot do so as
    agent of covenant holders, and will suffer no conceivable loss
    if fire occurs, other than in respect of the covenants referred
    to in Clause 2(c)(ii) of the Deed.

11. The Deed sets up its own form of protection for loss against
    fire (Clause 2(c)), and makes no provision whatever regarding
    the source of payment of insurance premiums or the method of
    allocation of the proceeds of any claims - provisions which are
    essential in a scheme of this complexity.

12. This whole application is therefore misconceived and should

    never have been made, as the applicant is not relevantly a trustee
    of any property in respect of which directions are sought.
    Accordingly, the Court should therefore decline to answer the
    questions posed."

22. As I have said Mr Bleby spoke to all this. Of course, Mr Blue spoke in opposition to the submissions offered by Mr Bleby. Mr Blue, too, offered a most thoroughly prepared outline and spoke equally thoroughly in making his submissions. He wrote, in relation to the four questions asked:
    "14. The first and most important question which the trustee
    requests the Court to determine is whether the trustee has
    power to insure the trees or proceeds of the trees against
    loss or damage to the trees caused by fire.

Trust deed

15. The trust deed gives no express power to the trustee to
    insure. The only reference to insurance is in clause 2(c) which
    refers to the reserve areas as a form of 'insurance' during the
    covenant period only.

General law

16. It has been said that, apart from statute, it is not
    clear as a matter of law whether a trustee has a power to insure
    if it is not conferred by the trust deed. Pateman v Heyen
(1993) 33 NSWLR 188 at 194.

Statute

17. Section 25 of the Trustee Act gives a statutory power to
    trustees to insure property against fire. Two issues arise.

18. First, neither the trustee nor the covenant holders
    appear to be given a direct right of property in the trees or
    land (eg profit a prendre). It might be argued that there is
therefore no 'property' within the meaning of Section 25 which
    the trustee is empowered to insure. Three possible answers to
    this need to be considered. First, 'property' is defined very
broadly by section 4(1) of the Trustee Act to include 'personal
    property ... and anything in action, and any other right or
    interest, whether in possession or not'. It therefore includes
    a chose in action, which might be argued to include the right
    (as against SEAS) to the proceeds of the trees. Indeed, the
    whole purpose of the trust deed is to vest the legal chose in
    action in the trustee as trustee for the covenant holders.
    Second, neither the Section nor the Insurance Contracts Act
    requires the trustee to have an insurable interest in the trees
    to insure the trees themselves. Third, it may be that 'risk or
liability' is not tied in Section 25 to 'property'. The trustee
therefore considers it is arguable that Section 25 does empower
    the trustee to insure the trees or proceeds against fire. As
    the question is a vexed one, the trustee seeks a determination
    by the Court of that point. Again, the question is a vexed one.

19. Secondly, do the provisions in the trust deed providing for
    a form of insurance by the reserve areas (clause 2(c)) negate a
    power which would otherwise arise? In support of such an
    argument, it might be said that each covenant holder
    contemplated that there would be no expense incurred for
    insurance (see eg clause 20D), and that the sole form of
    insurance would be provided by clause 2(c). On the other hand,
    it might be argued that clause 2(c) merely provides one form of
    insurance, and does not exclude a power to insure with an
    underwriter, particularly in 1995."

23. I have disposed of the questions asked in Clause 19.

24. Mr Blue says that s25 of the Trustee Act gives power to the trustees to take out insurance here. Mr Bleby denies it. He wrote (as I have said) that s25 speaks of insurance of property of which the trustee is the legal owner only. The trustee is not the legal owner here.

25. Section 25(1) of the Trustee Act is:
    "A trustee may insure any building or other insurable
    property against loss or damage whether by fire or otherwise
    and against any risk or liability against which it would be
    prudent for a person to insure if he were acting for
    himself."

26. During the submissions of Mr Blue I became very excited about whether you should read "other insurable property" eiusdem generis with "building". Mr Blue said no and argued that, in any event, trees and buildings were here of the same family. But Mr Bleby took no point on interpretation. Amongst other things Mr Bleby said:
    "The trustee's role is essentially a passive one of approval
    and policing. The active role, the managing and acting in
    the best interests of the covenant holders in the management
    of the forest, is that of the manager or the forest company
    as the deed describes.

So, the trust deed did not authorise the trustee to do
    anything about insurance. It didn't even contemplate insurance.
    Because, at the time the deed was entered into, it was not
    possible. Correspondence makes it clear that insurance of
    forests of this nature is a relatively recent phenomena. It has
    only been available in the last few years. But, it has its own
    in-built somewhat limited form of protection for covenant
    holders in clause 2C. So, if insurance was to be effected in a
    scheme of this nature and complexity, it would demand something
    be written down in the scheme for amount of premiums and what
    you would do with the proceeds of claims. Because, it is a very
    complex matter of distribution. There is no particular acre or
    hectare which is nominated for a particular covenant holder,
    they are in planting years. So, you need to devise some scheme
    for appropriating the proceeds. You would possibly even need to
    make allowance or make some provision in the deed for adjustment
    to the existing clause 2C scheme or at least some provision as
    to how the two interact.

So, it is not surprising in our submission that the initial
    proposal for the insurance of these trees indeed came from a
    forest company with a request to the trustee to agree to the
    effecting of such insurance. It was always recognised that that
    would require substantial amendment to the deed and the
    covenants which of course requires the trustee's approval. When
    that request was made, the trustee said no. The point is, it
    was for the manager to devise the scheme, the trustee in its
    passive trustee role to approve it or not or, if in doubt as to
    whether it should approve the scheme, to seek the directions of
    this court at that stage.

So, with that analysis of the deed, and what the respective
    rights and responsibilities are, it is our submission that the
    whole application to this court is misconceived.

S.25 of the Trustee Act does not assist in any way. I take
your Honour to s.25 of the Trustee Act. It can't assist the
    plaintiff in these proceedings in any way because it provides
    that the trustee may insure any building or other insurable
    property for purposes of argument. The fact of the matter is
    that the only property the trustee is trustee of, and which it
    can insure pursuant to that given power to insure pursuant to
    that section are two funds, the maintenance fund and the
    proceeds distribution account, which are moneys which it holds.
It does not have any interest in the trees. So, s.25 doesn't
    give it any power to insure the trees.

As I pointed out, there is no general authority or general
    power of attorney given to the trustee by the covenant holders.
    So, it can't act as their agents. We would also submit that the
    phrase 'against any risk or liability which it would be prudent
    for a person to insure if they were acting by themselves',
    relates back to buildings or other insurable properties. The
    construction of the section in our submission requires that
    there must be properties or buildings to insure, either against
    loss or damage by fire or other ways - it could be burglary, it
    could be all sorts of other things - the section is not to be
    construed in our submission as though it reads a trustee may
    insure against any risk or liability against which it would be
    prudent for a person to insure if he were acting for himself.
    The whole thrust of this is directed to the care, maintenance
    and insurance and other obligations relating to trust property.
    So, given that there is no property to insure under this deed,
of course s.25 doesn't assist.

In para.10 of our outline we recognise that since the
    enactment of the Insurance Contracts Act there is no need to
    have an insurer's interest. So, technically I suppose the
    trustee can insure somebody else's property but it will suffer
    no loss. It will be the covenant holders who suffer the loss if
    there is a fire other than in the limited case of the covenant,
    perhaps of which it is trustee in the s.2C type situation, which
    are held otherwise for the covenant holders or ultimately for
    SEAS. There has still got to be a loss against which the
    trustee can insure which is just not there.

We also note that the deed, as I pointed out, sets out its
    own form of provision for loss against fire. Makes no provision
    at all about the source of payment of insurance premiums or how
    the proceeds of any claim are to be allocated which would be
    essential in a scheme of that perplexity. Because of that, it
    is our submission that the whole application is really
    misconceived. There is nothing - there never was - that the
    court could properly give directions about particularly in
    relation to the plantations of covenant holders which is what
    the original question is all about, nor can it properly give
    directions in relation to fire insurance in relation to the
    proceeds of sale of the trees. That is not an interest which
    you could insure against fire anyway, except as I say for a
    piece of paper or if it happens to be in bank notes, the bank
    notes which are to be handed over. But, apart from that, the
    proceeds of sale - if it does mean proceeds of sale - can be an
    infinitely variable figure. It may turn out to be nothing
    anyway by the time the costs of marketing and processing and
    everything else are taken out. A decision would have to be made
    in any one year whether it was worth harvesting at all. There
    may be no proceeds of sale. You can't talk about insuring that.
    If we are talking about insuring covenant holders' plantations,
    the trustee has no interest in them and no authority to act on
    their behalf.

It is our submission in relation to question 1 the court
    must decline to answer it because the application should never
    have been brought. But, if it is inclined to answer it at all,
    the answer should plainly be no, but not for the reasons my
    learned friend has advanced through the discussions of the
    various cases."

27. I cannot agree with Mr Bleby that s25 does not apply.

28. Given the lack of need for an insurable interest, I think that s25 does apply here. I think that the section does empower the trustee here to insure in the sense mentioned earlier. I think that the definition of property in Section 4 of the Trustee Act is helpful. But over and above all else I think that the words in s25 permit the taking out of the relevant insurance. Section 25 tells the trustee that he may insure against any risk or liability against which it would be prudent for a person to insure if he were acting for himself. Risk of loss of fire is something against which a prudent owner would insure. I cannot see any reason to deny the words in the section their full meaning on the score that the trustee is not the legal owner. Mr Bleby said that s25 is plainly speaking only of insurance of property of which the trustee is the legal owner. It does not say so. I think it applies here because it says that it does. And I think that the submissions of Mr Blue in Clause 18 of his outline, quoted above at page 11, are all sound.

29. On this question and on the second question (duty to insure) I have been much assisted by the (if I may say so) admirable reasons for judgment of Cohen J in the Supreme Court of New South Wales in the case of Pateman v Heyen
(1993) 33 NSWLR 188. I first quote from the headnote:
    "Held: (1) Where an executor and trustee of a deceased
    estate is holding property for the benefit of other persons for
    a period of time and there may be a risk of suffering loss or
    damage by fire then, providing that funds are available to the
    executor and trustee, he or she has a duty to act prudently and
    to effect an insurance policy; failure to do so will make the
    executor and trustee liable for any loss suffered.

(2) The executor and trustee is only required to ensure that
    the value of the property which was held on trust would be
    retained."

30. This is an accurate summary of the reasons for judgment.

31. Cohen J said:
    "Section 41 commences as follows:

32. 'Insurance
    41. (1) A trustee may insure against loss or damage, whether
    by fire or otherwise, any insurable property, and against any
    risk or liability against which it would be prudent for a person
    to insure if he were acting for himself.

(2) The insurance may be for any amount, provided that,
    together with the amount of any insurance already on foot,
    the total shall not exceed the insurable value or
    liability.'

This may be contrasted with s19(1) of the English Trustee
    Act 1925, where there is power only to insure up to
    three-quarters of the value of the property.

If the trust instrument gives no express or implied
    direction concerning insurance of trust property, it has been
    said that a trustee is not under a duty to insure against loss
    or damage by fire, and consequently will not be liable for loss
    arising from a failure to insure: see Jacobs' Law of Trusts in
    Australia, 5th ed (1986) at 540; Pettit, Equity and the Law of
    Trusts, 6th ed (1989) at 394; Riddall, The Law of Trusts, 3rd ed
    (1987) at 317; Sheridan and Keeton, Law of Trusts, 11th ed
    (1983) at 262. The last three of those text writers rely for
    the statement as to there being no duty on Re McEacharn; Gambles
v McEacharn (1911) 103 LT 900, to which I shall refer later. No
    authority is given in Jacobs.

A number of other commentators however have been critical of
    this position, some recommending to trustees and executors that
    they insure trust property wherever prudent management or normal
    business practice would require it, providing that there are
    funds available to pay the premiums: see Ford and Lee,
    Principles of the Law of Trusts, 2nd ed (1990) at 572; Williams,
    Mortimer and Sunnucks on Executors, Administrators and Probate,
    17th ed (1993) at 733-734; Underhill's Law of Trusts and
    Trustees, 14th ed (1987) at 495; Mason and Handler, Wills
    Probate and Administration Service New South Wales, Sydney,
    Butterworths at pars (1249.2.4), (10, 105). In a footnote (at
    495), Underhill suggests that no prudent trustee would fail to
    see that trust premises are fully insured. In Mason and
    Handler, it is said that the correctness of the statement in
    Jacobs, above, is to be doubted in view of the widespread
    practice of insuring property of virtually every description.

It is necessary therefore to look at the authorities upon
    which the earlier statements are based. Re McEacharn dealt with
    the question of whether under a particular will the trustees
    were bound to insure a property which had been left on a series
    of life interests and which required the trustees to pay all
    necessary expenses out of the income. The point argued before
    the court was whether insurance ought to be maintained at the
    expense of the tenant for life. Eve J found that this was not
    required, either under the description in the will of necessary
    expenses or by way of a general duty on the part of the
    trustees. He did not extend that principle to the question of
    whether the trustees ought to insure the property at the expense
    of the estate generally. He said (at 902):

'... Although I apprehend that most persons having property
    subject to loss or damage by fire would agree in considering an
    insurance against fire to be a prudent and proper precaution to
    adopt, I cannot bring myself to hold that it is an expense
    necessary to be incurred by trustees in the face of authorities
such as Bailey v Gould (4 Y and C 221) and Fry v Fry (27 Beav 144,
    146), which go to show that the court will not hold an executor
    or trustee liable on the footing of wilful default for losses
    occasioned by fire on premises left uninsured by him.'

Those two authorities referred to by Eve J did not establish
    a general principle that there is never a duty on the part of
    trustees to insure property under their control. In Bailey v
Gould (1840) 4 Y and C Ex 221; 160 ER 987, the deceased had
    carried on a partnership business in premises held under a long
    lease. The executors of his will continued the business with
    the remaining partner but failed to insure the premises (the
    previous policy having expired shortly before the death of the
    deceased). The remaining partner, described as a reasonable man
    taking reasonable care of the property, had not himself
    reinsured the property. In those circumstances, which Alderson
    B described as material, the court would not charge the
    executors for wilful default in not insuring the premises. Fry
v Fry (1859) 27 Beav 144; 54 ER 56 concerned trust property
    consisting of leased premises, where there was a covenant to
    insure in the lease. The deceased had complied with that
    covenant by obtaining a policy of insurance which expired on 25
    March and the deceased died two days later. Fire destroyed the
    premises on 26 May before the grant of probate. The issue was
    really whether an allegedly intermeddling executor had a duty to
    comply with the covenant by taking out an insurance policy. No
    reasons were given by Sir John Romilly MR in Beavan's Reports
but in the report in 28 LJ Ch 593 it was said that it would be a
    strong measure to make the executor liable in negligence in
    failing to cure the testator's default where the facts were in
    any case not clear. This could hardly be regarded as an
    authority that there is no general duty of a trustee to insure
    property if a prudent person would do so.

The only reference to the principle in Australia that I have
    been able to find is contained in an obiter remark of Brereton J
    in Davjoyda Estates Pty Ltd v National Insurance Co of New
Zealand Ltd (1965) 69 SR (NSW) 381 at 390; 85 WN (Pt 1) (NSW)
    184 at 192, where he said: 'While a trustee is not bound to
    insure the trust property, he should do so in the interests of
    the beneficiaries.' This somewhat ambiguous comment was
    followed by a reference to Re Betty; Betty v Attorney-General
(1899) 1 Ch 821 at 829, where North J expressed the view that in
    that case the executrix and trustee ought to insure certain
    furniture at the expense and for the benefit of the estate
    because it belonged, subject to the tenancy for life, to the
    estate. There was no issue in the Davjoyda Estates case as to
    the duty of a trustee to insure.

There are however other authorities which suggest that a
    trustee might be liable for the loss sustained by a beneficiary
    by virtue of a failure to insure. In Garner v Moore (1855) 3
Drew 277; 61 ER 909, a deceased was owed money and the debt was
    secured by a promissory note and a life assurance policy over
    the debtor. After the death of the creditor the executor paid
    premiums on the life policy for some years but then decided not
    to continue with that policy. The debtor shortly afterwards
    died. Kindersley V-C found that it was a wise and sound
    discretion for the executor to continue to pay the premiums but
    it was not a sound exercise of that discretion to allow the
    policy to lapse without consulting the beneficiaries. The

    executor was found liable for the amount which would have been
    realised had the policy been kept on foot, on the basis that
    there was a duty not to unreasonably abandon insurance
    previously obtained. Although this decision was referred to in
    argument in Fry v Fry, it was not mentioned in the judgment.

A question similar to that raised in Re McEacharn, was
considered in Kingham v Kingham (1897) IR 170. The executors
    sought the advice of the court as to whether the widow of the
    deceased who was a tenant for life of premises of the deceased
    was liable, whilst she occupied the house, for various expenses,
    including fire insurance premiums. Having found that the widow
    was bound to pay the rent due under the head lease and the
    rates, Chatterton V-C said (at 174):

'... I think the trustees are bound to take care that the
    premises are insured against fire, so as to preserve the
    property for their cestuis que trust, and that they cannot
    require these premiums to be repaid them by the widow.'

He made declarations, including one that it was the duty of
    the trustees to keep the premises sufficiently insured against
    fire.

In Canada it has been held that executors were liable for
    loss arising from their failure to insure certain farm buildings
    against fire: Re Gamble (1925) 57 OLR 504. Mowat J declined to
    follow Re McEacharn and Bailey v Gould and said (at 505):

'A trustee's duty is not to take such care only as a prudent
    man would take if he had himself alone to consider; but rather
    to take such care as an ordinary prudent man would take if he
    were minded to provide against loss to people for whom he felt
    morally bound to provide.'

This decision was followed with approval in a more recent
    case in the Supreme Court of Ontario, namely Jeffery Estate v
    Rowe (1989) 36 ETR 217, where Granger J found that it was the
    duty of the executors in that particular case to insure and
    maintain property until it was conveyed to the beneficiaries.

This view has been followed in the United States of America.
    In Scott on Trusts, 4th ed (1987) vol II A, at 484, it is
    said:

'... In the United States it would seem clear today that
    since it is a general custom among prudent men to insure
    buildings against a loss by fire the trustee under ordinary
    circumstances is under a duty to take out such insurance and is
    subject to liability if he has failed to do so and the building
    is damaged or destroyed by fire. Where the trust, however, is
    one under which the trustee has no active duties of management,
    he is not under a duty to insure the premises.'

A similar view is expressed in Bogert, Trusts and Trustees,
    Revised 2nd ed, s599. Support for those propositions is
    obtained from a small number of cases. Willis v Hendry 20 A
    (2d) 375 (1941) was an appeal from an application by trustees of
    a will for judicial advice. It was held by five members of the
    Supreme Court of Errors of Connecticut that in the circumstances
    it was the duty of the widow of the deceased, who had a life
    estate in a house, to insure the buildings, but if she failed to
    do so the trustees should insure them and charge the premiums
    against the interest of the widow. In that case there had been
    a requirement that the widow pay the expenses of the upkeep of
    the house. In a later decision of the same court, Merchants
    Bank and Trust Co v New Canaan Historical Soc 54 A (2d) 696
    (1947), it was held that there was a general duty of a trustee
    to insure in such a way and in such an amount as would an
    ordinarily prudent person. Re Estate of Lychos 470 A (2d) 136
    (1983) was a decision of three members of the Superior Court of
    Pennsylvania. It confirmed on appeal that a bank which was
    trustee of an estate had a primary duty to preserve the assets
    of the trust and that this required the taking out of adequate
    insurance of trust property. At the same time the court
    rejected an argument that the trustee was under a duty to insure
    the building concerned for its full replacement cost value. It
    was said that the duty of the trustee is to preserve the corpus
    of the trust but was not under a duty to replace an asset in a
    new condition in the event of a loss.

In my opinion the principles referred to in the American
    cases are correct. The basic duties of executors and trustees
    are not in doubt. Jacobs, 5th ed, at 610, cites with approval a
    passage from the 3rd ed of Scott on Trusts which says that a
    trustee is 'under a duty in administering the trust to exercise
    such care and skill as a man of ordinary prudence would
    exercise, and he is liable for a loss resulting from his failure
    to comply with this standard, even though he does the best he
    can'. In Underhill, 14th ed at 485 it is said that 'unpaid
    trustees are bound only to use such due diligence and care in
    the management of the estate as men of ordinary prudence and
    vigilance would use in the management of their own affairs'.

It would be part of normal commercial practice for persons
    to insure their property, particularly buildings, against fire.
    A prudent person would normally take out fire insurance, the
    exact nature of which may depend on the circumstances. Although
    it would seem appropriate in some cases to insure on a
    replacement value basis, there may be other circumstances where
    it is sufficient to insure for the present value of the
    property. I see no reason why a trustee should not be required
    to act in respect of insurance in the same way as it would be
    expected that a prudent person would do in respect of his or her
    own property. There may of course be circumstances in which it
    would not be reasonable to expect the trustee to take out an
    insurance policy, as would be the case where there is no income
    available to pay the premiums. There may be other circumstances
    in particular cases. Where however a trustee is holding
    property for the benefit of other persons for a period of time
    and there may be a risk of suffering loss or damage by fire
    then, providing that funds are available to the trustee, he or
    she has a duty to act prudently and to effect that policy."

33. These remarks are addressed mainly to "duty" but there can be no duty if there is no power. In this case there will be difficulties as mentioned by Mr Bleby. But they are difficulties of exercise of power and duty.

34. I respectfully adopt the reasoning of Cohen J in Pateman v Heyen. During a luncheon adjournment of the hearing before me solicitors for the trustee were good enough to make enquiries of solicitors who had acted in Pateman v Heyen to discover that no appeal had been instituted in that case.

35. In his outline Mr Bleby wrote:
    "In the further alternative, the Court should not answer the
    questions referred to in paragraph 16 as they seek directions as
    to the exercise of the trustee's discretion which the Court will
    not give: Re Osborne (1863) 2 SCR (NSW) Eq.89 at 91-92; Re
    Gilchrist (1867) 6 SCR (NSW) Eq.74 at 78 and 80; Gisborne v.
Gisborne (1877) 2 AC 300 at 307; Re Driller and Nebenson
(1972-1973) ALR 735. Furthermore, directions will not be given
    in relation to an ongoing discretion based on facts not yet
    known or subject to possible change: Re Allen-Meyrick Will
Trusts (1966) 1 WLR 499; Re Green (1972) VR 848, and the Court
    will certainly not give advisory directions where matters are in
    dispute between the relevant parties: Harrison v. Mills (1976) 1
    NSWLR 42."

36. The cases there mentioned may be taken to support the proposition advanced by Mr Bleby. But, with all respect, I do not think that the Court in answering questions 1-4 will be giving directions about exercise of discretion. It will be saying whether or not power and duty exist.

37. I have reached the conclusion that I should answer the questions asked, should give the directions sought. When I had reached the stage of having a tentative view that I should answer I reviewed all submissions offered to me in this matter. But that which was tentative became firm.

38. I think for the reasons given by Cohen J and which I adopt, that both under s25 of the Trustee Act and, setting that aside, at common law the trustee has the power to "effect fire insurance". I answer the questions asked and give directions thus:
    (1) Yes. The trustee has power to insure against risk of
    damage or loss of income caused by fire.

(2) Yes, subject to reasonable terms of insurance being
    found and provided the trustee has sufficient funds for the
    purpose of insurance.

(3) (The first question asked)
    No (see per Cohen J in Pateman v Heyen (supra) at p198).

(4) Yes. I think this must follow on ordinary principles.

39. I adjourn all other questions to a date to be fixed.