Does the care, skill and diligence covenant in Stronger Super heighten existing requirements?

The Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012 will repeal section 52 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and insert four sections that set out new statutory covenants. The explanatory memorandum to the Bill (EM) refers to new section 52(2)(b) as heightening existing requirements in relation to the degree of care, skill and diligence required of trustees.1 In this article, I test that claim by looking at the current care, skill and diligence covenant, its general law origin and requirements under State and Territory trustee legislation.

Understanding the required degree of care, skill and diligence is important because, in Apostolovski v Total Risk Management, Gzell J held that the defence regarding investments, under section 55(5) of the SIS Act, does not apply if the covenant in paragraph 52(2)(b) is breached.2 Further, the Bill will amend section 55(5) to clarify that trustees must comply with all applicable covenants in order to access the defence.

Care, skill and diligence covenant

As most readers will be aware, section 52(2)(b) currently sets out a covenant:

"to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide".

I note that the statutory covenant refers to an "ordinary prudent person" and "the property of another for whom the person felt morally bound to provide".

General law origin

In Manglicmot v Commonwealth Bank, Giles JA observed, in relation to section 52(2)(b) that "[t]he terms of the covenant appear to have been taken from Re Whiteley ".3 I agree with that observation. However, as explained below, in my view, matching the language of the covenant to the decision in Re Whiteley does not mean that the covenant applies the same standard as the general law.

In my view, the best summary of the position at general law can be found in Finn J's decision in ASC v AS Nominees Ltd4. He observed:

"It is old and accepted law that in managing a trust business the trustee should exercise the same care as an ordinary, prudent business person would exercise in conducting that business as if it were his or her own: Speight v Gaunt (1883) 9 App Cas 1; Learoyd v Whiteley (1887) 12 App Cas 727; Knox v Mackinnon (1888) 13 App Cas 753. There is an equally well-accepted gloss on (or adjunct to) this in relation to trustee investments which is aptly described in Scott on Trusts, par 227.3 as the "requirement of caution", That requirement is well expressed in King v Talbot (1869) 40 NY 76 to which Scott refers:

'It... does not follow, that, because prudent men may, and often do, conduct their own affairs with the hope of growing rich, and therein take the hazard of adventures which they deem hopeful, trustees may do the same; the preservation of the fund, and the procurement of a just...