STEVEN JOHN SHERMAN AS LIQUIDATOR OF COMPASS MINING PTY LTD (IN LIQUIDATION) (ACN 099 550 259)

DARREN GORDON WEAVER AS LIQUIDATOR OF COMPASS MINING PTY LTD (IN LIQUIDATION) (ACN 099 550 259)

MARTIN BRUCE JONES AS LIQUIDATOR OF COMPASS MINING PTY LTD (IN LIQUIDATION) (ACN 099 550 259)

HNC (AUSTRALIA) RESOURCES PTY LTD (ACN 124 647 829)

Equity and trusts - Loan facility agreement - Term of agreement that at least 70% of loan funds must be used for stated purposes - Whether creates 'Quistclose trust' - Test for necessary intention to create a trust - Whether necessary intention established

Ausintel Investments Australia Pty Ltd v Lam (1990) 19 NSWLR 637

Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) [1978] HCA 45; (1978) 141 CLR 335

Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604

Barclays Bank Ltd v Quistclose Investments Ltd [1970] 1 AC 567

Commonwealth v Booker International Pty Ltd [2002] NSWSC 292

General Communications Ltd v Development Finance Corp of New Zealand Ltd [1990] 3 NZLR 406

Jessup v Queensland Housing Commission [2001] QCA 312; [2002] 2 Qd R 270

McManus RE Pty Ltd v Ward [2009] NSWSC 440

Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; (1999) 161 ALR 105

Quince v Varga [2008] QCA 376

Re Australian Elizabethan Theatre Trust [1991] FCA 344; (1991) 30 FCR 491

Re Global Finance Group Pty Ltd (in liq); Ex parte Read [2002] WASC 63; (2002) 26 WAR 385

Re Goldcorp Exchange Ltd [1994] UKPC 3; [1995] 1 AC 74

Salvo v New Tel Ltd [2005] NSWCA 281

Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164

Walker v Corboy (1990) 19 NSWLR 382

1 The plaintiff (Compass) seeks a declaration in relation to funds it holds in a bank account. Those funds were paid to it by the second defendant (HNC) pursuant to a convertible note facility agreement (the Facility Agreement) made between Compass and HNC. By cl 6 of the Facility Agreement, Compass agreed to use at least 70% of the loan funds for specified purposes. The issue is whether terms of the Facility Agreement, in particular cl 6, meant that the funds were received by Compass as trustee of a Quistclose trust (Barclays Bank Ltd v Quistclose Investments Ltd [1970] 1 AC 567).

2 The background facts are not in dispute. The following facts emerge from the affidavits in support of this application. None of the defendants have filed any affidavits.

3 Compass is a publicly listed Australian company. It is the head of a consolidated group of entities which own and operate mining and mining-related assets in Australia and Peru. Its main business activity is the exploration for mining and development of minerals in Australia.

4 Most of Compass' business is conducted pursuant to three joint ventures with the third defendant (HAR).

5 HAR is a wholly owned subsidiary of HNC. HNC is a Chinese company.

6 The first defendant, Compass Mining Pty Ltd (CMPL) is a wholly owned subsidiary of Compass. Until about 30 April 2009, CMPL was the operator of two of the joint ventures between Compass and HAR.

7 On 29 January 2009 Compass and CMPL each appointed Mr Martin Jones, Mr Stephen Sherman and Mr Darren Weaver (together the Administrators) as voluntary administrators under s 436A of the Corporations Act 2001 (Cth).

8 On 17 February 2009 HAR, as chargee under various charges, appointed joint and several receivers (Receivers) to all the assets of Compass and CMPL.

9 On 30 April 2009 the creditors of Compass approved Compass entering into a deed of company arrangement. A deed of company arrangement was executed on 21 May 2009 by the Administrators and by Compass.

10 On 21 May 2009 the Receivers of Compass resigned from their appointment as Receivers under one of the charges, meaning they were no longer Receivers of all of the assets of Compass. In particular, the Receivers were no longer appointed as Receivers of funds held in several bank accounts that Compass held with Bankwest. That includes the funds relevant to these proceedings.

11 On 30 April 2009 the creditors of CMPL resolved that CMPL should be wound up. The Administrators became the liquidators of CMPL.

12 In 2007 Compass and HAR entered into three joint ventures. The three projects are:

(a) the oxide joint venture (Oxide JV), a joint venture to explore for, develop, mine and process a multi-metal oxide resource in the Northern Territory;

(b) the sulphide joint venture (Sulphide JV), a joint venture to explore for, develop, mine and process a multi-metal sulphide resource lying underneath the oxide resource the subject of the Oxide JV; and

(c) the regional exploration joint venture (Regional Exploration JV), a joint venture to explore for minerals within a certain area with a view to the development of any resources discovered.

13 HNC guaranteed HAR's obligations under the joint venture agreements.

14 The Oxide JV is conducted at the only operating mine site at Batchelor in the Northern Territory.

15 Prior to its going into administration CMPL was the operator under the Oxide JV and the Sulphide JV. Compass was the operator under the Regional Exploration JV.

16 In relation to each joint venture, there are terms to the following effect:

(a) the operating committee of the joint venture would approve a programme and a budget covering a 12-month operating period;

(b) once a programme and budget had been approved by the operating committee, the operator of the joint venture would be authorised to undertake the operations specified in that programme and budget and to incur, on behalf of the joint venturers, the joint venture expenditure that was estimated in and related to the operations contained in that programme and budget; and

(c) the operator was empowered to make cash calls to fund joint venture operations, to meet the estimated joint venture expenditure for the month following the next succeeding calendar month.

17 The Oxide JV Agreement (Oxide JVA) provides that:

(a) once any mining operations had commenced, the operator of the Oxide JV, when entering into any contract or incurring expenditure relating to the Oxide JV would do so as agent for each Oxide Joint Venturer, severally, in proportion to their participating shares in the Oxide JV; and

(b) the Oxide Joint Venturers granted the oxide operator an indemnity in relation to liabilities incurred by the operator in the performance of its obligations as operator.

18 On 9 November 2008 a memorandum of understanding was signed between Compass and HNC for HNC to provide funding to Compass by paying Compass' next cash calls on the oxide project operating expenses four months in advance. That was expressed to be in addition to the said to be already agreed convertible note facility between HNC and Compass for US$10 million. Attached to the memorandum of understanding is a document entitled 'Confirmation In Addition To The MOU', also signed and dated 9 November 2008.

19 Paragraphs 1, 2 and 4 were in the following terms:

1. This confirmation in addition to the MEMORANDUM OF UNDERSTANDING as attached is in close connection with the abovementioned MOU as well as both [Compass] and HNC's mutual endeavours to ensure the stable running of both [Compass] and the Oxide Project at a time when [Compass] encounters financial difficulty that may result in the process of Voluntary Admin[i]stration in compliance with Australian Corporate Act 2001.

2. Mr Gordon Toll, Chairman of the Board of Directors, Compass Resources Ltd, agrees and confirms that the USD$24 million (Schedule 4 Mr. Neil Guest sent to Ms. Ruby Yingjie Deng on 6 Nov. 2008 shows the amount is USD29.7 Million) convertible notes from Coffee House are to be converted to ordinary [Compass] shares at the same time and the same price with HNC's USD$10 million.

...

4. [Compass] and HNC agree and confirm that the aforementioned MOU is mainly for [Compass] to avoid the process of Voluntary Administration in compliance with the Corporate Act 2001 and other conditions to ensure HNC's interests in connection with the signing and execution of the MOU are to be negotiated and put into writing as soon as possible between [Compass] and HNC.

20 In par 46 of his affidavit, Mr Jones states that as a consequence of his review of Compass' business and accounting records:

(a) he considers it 'apparent' that Compass had not met several cash calls made on it by CMPL under the Oxide JVA in the six months leading up to November 2008; and

(b) he considers that by November 2008 unless Compass obtained alternative funding it would not have been able to meet its ongoing financial obligations with respect to meeting cash calls that might be made on it by CMPL under the Oxide JV.

21 Although no objection was taken to these paragraphs, counsel for the parties opposed to Compass' application submitted that little or no weight could be given to these paragraphs, because the deponent failed to identify with any particularity the source(s) for his asserted conclusions. It is not necessary to determine what weight to give these statements because whether I accept them or not makes no difference to my decision.

22 The parties were represented by law firms in the negotiation and drafting of the Facility Agreement.

23 At the time of entering the Facility Agreement, Compass had two sets of offices. Corporate headquarters were in Sydney and it had an office in Darwin. The office in Darwin was leased from the fourth defendant, Randazzo Investments Pty Ltd (Randazzo).

24 On 19 November 2008 Compass and HNC entered the Facility Agreement.

25 In overview, the substance of the agreement is as follows. Subject to conditions, HNC would lend US$10 million to Compass and Compass would issue convertible notes entitling HNC to convert the debt to shares in Compass.

26 The recitals stated that HNC had agreed to provide Compass with a facility for US$10 million under which Compass may issue 'convertible redeemable unsecured loan notes' to HNC.

27 By cl 2.1, subject to HNC receiving all necessary Chinese Government approvals, HNC agreed to make the loan amount of US$10 million available to Compass by accepting convertible notes issued by Compass to HNC. Once HNC received all necessary Chinese Government approvals, it would notify Compass as soon as practicable thereafter. At any time in the five business days after that notification, Compass was entitled to request to draw down from HNC an amount equal to the loan amount by the giving of an irrevocable notice: cl 2.1(b).

28 By cl 2.1(c), following receipt of a notice complying with cl 2.1(b), HNC was obliged to lend the amount requested by depositing that amount into the bank account specified by Compass in the notice under cl 2.1(b).

29 It can be seen, therefore, that the Facility Agreement permitted Compass to determine the bank account into which the loan funds were to be paid.

30 On the day of receipt of loan funds under the Facility Agreement, Compass was obliged, by cl 2.2, to issue a convertible note with a face value equal to the amount of the loan.

31 Clause 3.1 set out conditions precedent to the conversion of the convertible notes into conversion shares. These included some shareholder approvals.

32 Clause 3.2 provided that the parties had certain obligations in relation to the conditions precedent. By cl 3.3, if any condition precedent was not satisfied on or before the date (the Conditions Date) three months from the date of the agreement (or any other later date nominated in writing by HNC) then any party may terminate all rights and obligations under the agreement by written notice to the other parties. In that event, the agreement would have no further force and effect other than for rights and obligations:

(a) under cl 3 and cl 1, 2, 5, 6, 7.2, 7.3, 9 and 10 to 22; and

(b) that had accrued on or before the date of termination.

33 Clause 4 provides that upon satisfaction of the conditions precedent not later than the Conditions Date, on the fifth business day after the satisfaction of the conditions precedent the loan became due and payable and automatically converted to shares. That conversion was at a stipulated exchange rate and conversion price, so as to discharge the loan and any interest under the agreement.

34 Clause 5 provides for automatic repayment in some circumstances.

35 By cl 5.1, the whole of the loan would become immediately due and payable on the fifth business date following the Conditions Date where:

(a) the conditions precedent were not satisfied on or before the Conditions Date; or

(b) although the conditions precedent were satisfied on or before the Conditions Date, no issue of shares had taken place on the conversion date.

36 Clause 6 is the foundation of the arguments that the funds were received by Compass as trustee. Clause 6 is headed 'Use of the Loan', and is in the following terms.

[Compass] agrees and acknowledges that at least 70% of the amount to be advanced under this agreement must be used to meet [Compass'] obligations under the Oxide Joint Venture and to pay rent and employees of [Compass] in ordinary course of business.

37 By cl 7 Compass gave several undertakings. Clause 7.1 prevented Compass from creating or allowing to exist a security interest over its assets after the date of the Facility Agreement without the prior written consent of HNC, which consent would not be unreasonably withheld.

38 By cl 7.2 until the date on which all amounts outstanding on the loan have been repaid or conversion of the loan into shares had taken place, Compass was obliged not to incur or guarantee any indebtedness or create or issue debt securities or reduce its capital or agree to or take steps to reduce its capital, without the consent of HNC which consent would not be unreasonably withheld.

39 Clause 8 provided that each of the following was an event of default:

(a) Compass fails to make within three business days of due dates, any payments due under the agreement;

(c) any representation or warranties of Compass in the Facility Agreement are false or misleading; or

40 By cl 8, at any time while an event of default was subsisting, HNC was entitled, by notice to Compass, to declare that all sums actually or contingently owing under the agreement would become due and payable on the fifth business day following the date of the notice unless the default was rectified within that time. If the default was not rectified within five business days of the date of the notice, Compass was obliged to immediately pay the outstanding principal and accrued interest.

41 On 25 November 2008 a convertible note certificate was issued by Compass to HNC for the funds the subject of the Facility Agreement, namely the principal amount of US$10 million.

42 On 25 November 2008 the funds the subject of the Facility Agreement were deposited in Compass' existing bank account with Bankwest. At that time prior to the deposit the account contained a credit balance of $738,527.85. Mr Jones says that those funds were being used by Compass as working capital.

43 After the deposit of the US$10 million, various payments were made by Compass from the account. Some payments were made to meet Compass' obligations under the Oxide JV, some to pay rent and employees of Compass, and some to other obligations of Compass which did not relate to the Oxide JV and were not the payment of rent or employees.

44 On 16 December 2008 the sum of $6 million was paid out of this account to a Bankwest term deposit held by Compass. That sum of $6 million plus the interest accrued on it remained upon term deposit when Compass was placed in administration and is still held by the Administrators.

45 On 29 January 2009 the Administrators were appointed.

46 The necessary shareholder approvals under cl 3.1 were not obtained by the Conditions Date - 19 February 2009 (being the date three months after 19 November 2008).

47 HNC lodged an informal proof of debt in the administration of Compass. The proof of debt claimed the sum of US$10 million under the Facility Agreement. The proof of debt stated that the effect of cl 6 of the Facility Agreement was that US$7 million of the loan amount was subject to a Quistclose trust and must be applied in accordance with the terms of that trust and so is not available to meet the claims of ordinary unsecured creditors.

48 By letter of 7 April 2009 solicitors for the Administrators stated that the Administrators considered the Bankwest deposit account funds are not subject to a Quistclose trust but are held by Compass for its own purposes.

49 By letter of 23 April 2009 HNC's solicitors reasserted their position that the deposit account funds were the subject of a Quistclose trust. The letter made it clear that HNC does not make any claim in respect of those funds. Rather, HNC's position was that 70% of the funds were available only for cl 6 purposes and not available for other purposes of Compass.

50 In correspondence in May 2009 Compass' solicitors wrote to solicitors for HAR inquiring whether HAR would act as contradictor in proceedings to resolve the apparent issue respecting a Quistclose trust in relation to cl 6. Solicitors for HAR stated that HAR did not wish to be involved in any proceedings.

51 In order to engage the parties jurisdiction to make a declaration, Compass sought to ensure that there was a suitable contradictor to Compass' claim that there is no trust. CMPL is a party who would stand to benefit from the stated purpose. That is because the obligations of Compass under the Oxide JVA are primarily to pay to CMPL the cash calls issued by CMPL to enable CMPL to conduct the joint venture. However, it was correctly recognised that in circumstances where the deed administrators of Compass are the liquidators of CMPL, it was not appropriate for CMPL through its liquidators to act as a contradictor. The following steps then occurred:

(1) the liquidators of CMPL issued a report to the committee of inspection of CMPL on 17 June 2009;

(2) that report advised the committee of inspection of the Quistclose trust issue and proposed that either a subcommittee or a single member of the committee of inspection act on behalf of all the creditors of CMPL to represent those creditors in proceedings regarding whether a Quistclose trust existed; and

(3) at a meeting of the committee of inspection, a creditor of CMPL, NT Controls and Automation Pty Ltd (NTCA), agreed to act in these proceedings representing all the creditors of CMPL.

52 The first defendants seek a direction that it was appropriate for the liquidators to delegate the responsibility of the conduct of these proceedings on behalf of CMPL to NTCA. There is no opposition to that application. I would grant the application. The approach taken by liquidators for CMPL seems to me to have been an appropriate means of proceeding in the circumstances I have outlined.

53 NTCA (the contradictor) on behalf of the first defendant contends that cl 6 created a trust in favour of HNC, the lender: Compass received the funds as trustee to pay it in accordance with the cl 6 purposes and for no other purpose.

54 Randazzo also contended that cl 6 gave rise to a trust. However, Randazzo contends that cl 6 creates a trust in favour of the classes of person identified in cl 6, not in favour of the lender HNC.

55 HNC and HAR did not play an active role in the proceedings. They entered submitting appearances. They made it clear that they did so on the basis that other parties asserted that cl 6 created a trust, and HNC and HAR were content for the court to determine the controversy between those parties and Compass. If a trust was created then, according to HNC and HAR, the monies must be paid in accordance with cl 6.

57 Generally, in commercial transactions, when A advances money to B, the relationship between A and B is debtor and creditor. However, the circumstances may give rise to obligations of trust or of a fiduciary character. Relationships of trust and debt can co-exist.

58 Whether an obligation of trust is created depends upon the mutual intention of A and B: see, for example, Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) [1978] HCA 45; (1978) 141 CLR 335, 353; Walker v Corboy (1990) 19 NSWLR 382, 395 - 396; Re Australian Elizabethan Theatre Trust [1991] FCA 344; (1991) 30 FCR 491, 502; Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association [1999] FCA 27; (1999) 161 ALR 105 [35] - [39].

59 The parties agreed that the question depends upon intention. However, they did not agree as to what intention was necessary and sufficient to create a trust. Compass submitted what is necessary is an intention that the funds not become the property of the borrower and the borrower be permitted to use the funds only for the specified purpose. The contradictor and Randazzo submitted that the question was whether the parties intended the money to be at the free disposal of the borrower.

60 Insofar as these are different tests, I accept Compass' submission. In my opinion, a trust is created when A pays money to B as a loan only if the mutual intention is that the money paid not become part of the assets of B.

61 In Barclays Bank v Quistclose Investments Lord Wilberforce described the mutual intention of the lender and borrower, and the essence of the bargain, as being that the sum advanced should not become part of the assets of the borrower, but should be used exclusively for payment of a particular class of its creditors (580). See Re Australian Elizabethan Theatre Trust [1991] FCA 344; (1991) 30 FCR 491, 499.

62 In Australasian Conference Association Ltd (353) Gibbs ACJ summarised the ratio of Barclays Bank v Quistclose Investments as follows:

That case is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.

63 That passage has been applied in a number of cases in determining whether a Quistclose trust exists. See, for example, Ausintel Investments Australia Pty Ltd v Lam (1990) 19 NSWLR 637, 647 - 648 (see also 641); Jessup v Queensland Housing Commission [2001] QCA 312; [2002] 2 Qd R 270 [6]; Quince v Varga [2008] QCA 376 [34] - [35]; Salvo v New Tel Ltd [2005] NSWCA 281 [33].

64 The position was put in the same way by the Privy Council (per Lord Mustill) in Re Goldcorp Exchange Ltd [1994] UKPC 3; [1995] 1 AC 74, 100, where it was said that it was necessary to show a mutual intention that the monies should not fall within the general fund of the borrower's assets but should be applied for a special designated purpose.

65 The contradictor and Randazzo relied heavily on the speech of Lord Millett in Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164. In that case, Lord Millett said as follows:

A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cash flow. Commercial life would be impossible if this were not the case.

The question in every case is whether the parties intended the money to be at the free disposal of the recipient (see Re Goldcorp Exchange Ltd (in receivership) [1994] UKPC 3; [1994] 2 All ER 806 at 823[1994] UKPC 3; , [1995] 1 AC 74 at 100 per Lord Mustill). His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose, for as Lord Wilberforce observed in the Quistclose case:

'A necessary consequence from this, by a process simply of interpretation, must be that if, for any reason, [the purpose could not be carried out], the money was to be returned to [the lender]: the word "only" or "exclusively" can have no other meaning or effect.' (See [1968] 3 All ER 651 at 654, [1970] AC 567 at 580.)

In the Quistclose case a public quoted company in financial difficulties had declared a final dividend. Failure to pay the dividend, which had been approved by the shareholders, would cause a loss of confidence and almost certainly drive the company into liquidation. Accordingly the company arranged to borrow a sum of money 'on condition that it is used to pay the forthcoming dividend'. The money was paid into a special account at the company's bank, with which the company had an overdraft. The bank confirmed that the money would only be used for the purpose of paying the dividend due on 24 July 1964. The House held that the circumstances were sufficient to create a trust of which the bank had notice, and that when the company went into liquidation without having paid the dividend the money was repayable to the lender [73] - [74].

66 The contradictor submitted that the test of necessary intention is that stated by Lord Millett: Did the parties intend the money to be at the free disposal of the recipient? Counsel submitted that:

(a) an intention that the money not become part of the borrower's assets is not necessary (ts 100 - 101);

(b) a contractual intention that the borrower use the funds only for a specified purpose is sufficient to establish a trust (ts 101 - 103, 105); and

(c) Lord Millett's test and the test stated in the other cases to which I have referred were to be reconciled in the following way. If the parties agreed that the loan funds were to be used for a stipulated purpose and for no other purpose, then the loan funds were not intended to be at the free disposal of the recipient and, therefore, it should be concluded that the funds were not intended to be part of the assets of the borrower (ts 104 - 105).

67 I do not accept these submissions. In my opinion, the test of the necessary intention is the composite test stated in the cases to which I have referred. Is it intended that the monies not become part of the general assets of the company and be used only for the particular purpose? It is not sufficient, in order to establish a trust, to show that the parties intended that the monies be used only for a particular purpose. Not every contractual obligation to use loan funds for a specified purpose gives rise to a trust of the monies lent.

68 That seems to me to be supported by the authorities to which I have referred. See also Re Global Finance Group Pty Ltd (in liq); Ex parte Read [2002] WASC 63; (2002) 26 WAR 385 [167]. Further, as a matter of principle, an express or inferred trust is founded upon an intention that the beneficial interest not lie in the legal owner of the trust property.

69 In determining the question of intention the court will have regard to the language employed by the parties, including in the particular clause in question, the nature of the transaction, and the circumstances surrounding the relationship: Walker v Corboy (397); Re Australian Elizabethan Theatre Trust (502 - 503); Peter Cox [35] - [39]; Re Global [167]; Jessup [6]; Salvo [33] - [34].

70 Whether there is expressed a requirement that the funds be kept separate from other monies of the borrower is a significant consideration in determining the question of intention: Walker v Corboy (397 - 398) the 'most powerful indicium'; Re Australian Elizabethan Theatre Trust (505 - 506) 'of considerable significance'; Jessup [12]; Salvo [38] 'indicative but not conclusive' [65]; McManus RE Pty Ltd v Ward [2009] NSWSC 440 [25] 'often decisive'.

71 The search is for an intention (or not) that monies paid to the borrower not become part of the borrower's assets. In that light, it seems to me to make sense that an intention (or not) that the funds be kept separate and not mixed with the borrower's general funds is of considerable significance.

72 It is clear that, notwithstanding the references in some of the cases to 'purpose', a Quistclose trust is not a distinct species of trust. It must satisfy the ordinary requirements for any private trust: Re Australian Elizabethan Theatre Trust (502); Re Global [166]; Twinsectra [89]; Salvo [37]; Heydon JD and Leeming MJ, Jacobs' Law of Trusts in Australia (7th ed, 2006) [215].

73 Monies lent under a Quistclose trust may be held on trust for the lender, or on trust for third parties who benefit from the specified purpose for which the loan funds are to be used. That will depend upon the intention revealed, in the light of all the facts: Heydon JD and Leeming MJ, Jacobs' Laws of Trusts in Australia (7th ed, 2006) [215] - [216].

74 In Re Australian Elizabethan Theatre Trust (503) Gummow J stated that if the facts disclosed no contractual obligation by the borrower to the lender to pay the creditors there cannot be an intention to create a trust in favour of the borrower's creditors. Instead, the borrower would hold the monies borrowed as trustee of an express trust for the lender, subject to a mandate for the lender to use the funds to pay the creditors. On that footing, there is one trust created to give the lender security for its rescue operation of the financially unhealthy borrower, but not to render the creditor's beneficiaries under any trust.

75 That passage was applied by the Queensland Court of Appeal in Quince v Varga [39] - [40].

76 In Re Australian Elizabethan Theatre Trust (503) Gummow J also referred with apparent approval to the suggestions by Mr P J Millett QC (as his Lordship then was) in 'The Quistclose Trust: Who Can Enforce It' (1985) 101 Law Quarterly Review 268, 290 - 291, and to the adoption of those suggestions by the New Zealand Court of Appeal in General Communications Ltd v Development Finance Corp of New Zealand Ltd [1990] 3 NZLR 406, 430 - 433.

77 In Twinsectra, Lord Millett analysed the nature of a Quistclose trust, and the location of the beneficial interest, in some detail: [77] - [100]. On Lord Millett's analysis, the beneficial interest remains with the lender, subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions [100].

78 There is no general reluctance to infer an intention to create a trust, including in favour of third parties: Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604, 618; Commonwealth v Booker International Pty Ltd [2002] NSWSC 292 [34] - [45]; Salvo [33]. A court will recognise the existence of a trust whenever it appears from the language of the (relevant) party or parties, construed in its context in the surrounding circumstances, that the parties so intended.

79 Counsel for the contradictor submitted that the background to the Facility Agreement disclosed a shared concern about the liquidity of Compass, if not financial difficulties on Compass' part. I accept that that is so.

80 The contradictor invited close attention to the nature of the purposes referred to in cl 6. The Oxide JV was the single operating mine of the three joint ventures between Compass and HAR. Paying its employees and its rent ensured that it maintained the staff and premises necessary to continue in operation.

81 The contradictor emphasised the mandatory language of cl 6, particularly the word 'must'. I accept that cl 6 is mandatory, in the sense that it imposes a contractual obligation on Compass to use at least 70% of the funds only for the specified purposes and for no other purposes. As I have said, counsel for the contradictor submitted that the governing test of intention was whether the parties intended that the funds were at the free disposal of the borrower. As I have explained, I do not accept that test.

82 Counsel submitted, and I accept, that there are no difficulties arising from the use in cl 6 of the phrase 'at least 70%'. The obligations imposed by cl 6, whether personal or also proprietary, relate to a sum of US$7 million of the US$10 million advanced under the Facility Agreement.

83 The contradictor submitted that the absence of the use of the language of trusts is not determinative. I accept that submission.

84 The contradictor also submitted that the absence of a provision specifying a separate account in which the funds are to be held, and prohibiting the mixing of the funds with other funds of the borrower, is not conclusive of there being no trust. I accept that the absence of such provisions is not conclusive but, as I have said in stating the relevant legal principles, whether such provisions are contained in an agreement between lender and borrower may be an important factor.

85 At one point in his oral submissions, it appeared that counsel for the contradictor submitted that cl 6 created a trust in favour of the parties referred to in cl 6 unless and until the purposes in cl 6 failed, in which case the funds were held on trust for the lender (ts 105 - 106). However, ultimately, counsel's submission was that cl 6 created a trust in favour of the lender HNC, so that the lender at all times retained the beneficial interest in the funds. (See ts 121 - 123.) In this respect, the conclusion invited by the contradictor is consistent with Lord Millett's analysis in Twinsectra [77] - [100], to which I have already referred.

86 By contrast, counsel for Randazzo submitted that cl 6 creates a trust in favour of the classes of persons referred to in cl 6. Counsel's submissions emphasised the use of the word 'must' in cl 6. He also emphasised the statement of the test by Lord Millett in Twinsectra [73] - [74].

87 Counsel for Randazzo devoted some time in written and oral submissions pointing to reasons why it was said to be unlikely that the Facility Agreement created a trust in favour of HNC as lender. In this context, Randazzo emphasised that HNC received a convertible note in return for making the loan to Compass. An argument of this kind assists Randazzo's case only if it is first found that the parties intended the monies not become the property of the borrower. That might lead to an enquiry about who was intended to be the beneficial owner of the money. However, for the reasons that follow I do not find any intention that the monies not become Compass' property.

88 As I have explained, I consider that whether cl 6 creates a trust depends upon whether the mutual intention of HNC and Compass, as revealed by the language of the Facility Agreement and the surrounding circumstances, was that the loan funds not become part of the assets of Compass but be held by Compass only to be used for the purposes stated in cl 6.

89 For the reasons that follow, I am not satisfied that the parties had that intention. I conclude that the parties intended that the loan funds become Compass' property. In summary, I come to that conclusion taking into account the context and surrounding circumstances, the evident commercial purpose of the transaction, the absence of any stipulation that the funds be paid into a particular account and be kept separate from other funds of Compass, and other provisions of the Facility Agreement. Other relevant provisions include the default provisions in cl 8, the provisions for the issue of a convertible note and conversion of the debt to shares, and the recitals.

90 The Facility Agreement does not contain any provision requiring the loan funds to be placed into a new or separate account, or prohibiting the mixing of the loan funds with other funds of Compass. The effect of cl 2.1 of the Facility Agreement was to permit Compass to determine the bank account into which the loan funds were to be paid. There was nothing in the express terms of the Facility Agreement, or arising by necessary implication, to preclude Compass from specifying its general bank account for the receipt of the loan funds and then mixing the loan funds with other funds of Compass. To my mind, that is a factor of considerable significance. It seems to me a strong indication of an intention that the loan funds become the property of Compass.

91 Other provisions of the Facility Agreement seem to me to provide further support for this conclusion. I turn to those other provisions.

92 Clause 8 makes a breach of cl 6 an event of default. While an event of default subsists, cl 8 entitles HNC to give a notice to Compass declaring that all sums owing under the agreement become due and payable on the fifth business day after the notice unless the default was rectified within that time. If the default is not rectified, Compass becomes obliged immediately to pay the outstanding principle and accrued interest. If it were intended that the loan funds not become part of the assets of Compass, then the remaining proceeds of the loan would be available to satisfy, in part at least, Compass' debt to HNC. It might then be expected that cl 8 would make some reference to the remaining proceeds of the loan, but no reference to this appears in cl 8.

93 A similar point arises in relation to cl 5. By cl 5, if the conditions precedent were not satisfied within three months from the date of the agreement, the whole of the loan would become immediately due and payable on the fifth business day after the conditions date. Again, there is no reference to the remaining loan funds being used in partial satisfaction of the debt.

94 The provisions in the Facility Agreement for the issue of a convertible note and the conversion of the debt to shares are also relevant to the question of intention. When Compass received the loan funds it was obliged to issue a convertible note with a face value equal to the loan amount: cl 2.2. By cl 4, when (and if) the conditions precedent are satisfied, the loan becomes due and payable and is automatically converted to shares.

95 Counsel for all parties accepted in the course of argument that, at the time of entering the Facility Agreement, the parties would have contemplated that not all of the loan funds of US$10 million would have been necessarily expended by the time the conditions precedent were satisfied and the loan converted to shares.

96 Compass submitted that it was unlikely that the parties intended the lender, HNC, to have a continuing beneficial interest in the loan funds in circumstances where the loan was discharged and HNC had been issued with shares in satisfaction of the debt. On the face of things, there is considerable force in that submission.

97 However, counsel for the contradictor submitted that the parties should be taken to have contemplated that:

(a) even after the discharge of debt and issue of shares to HNC, HNC had a continuing interest in seeing the loan funds used only for the purposes of cl 6, because the purposes of cl 6 were vital to the continued commercial health of Compass (and HNC would by then have been a shareholder of Compass); and

(b) if the purpose failed, the shares issued to HNC were likely to be worthless and so HNC should be able to access the remaining loan funds.

98 While I accept that the first submission reflects a plausible intention, I am not persuaded it reflects the most likely intention of the parties. I do not accept the second submission because, once the shares are issued, any debt owed to HNC is discharged. Consequently, the parties cannot be taken to have intended that, after the issue of shares to HNC, there is any occasion for HNC to have access to remaining loan funds. Certainly, I do not accept that the second submission reflects the most likely intention of the parties.

99 Finally, although it is not a matter of any great significance, I refer to the description in the recital of Compass as issuing 'unsecured loan' notes. If the intention were that the funds not become part of Compass' property, but remained beneficially owned by HNC, then the description of the loan as unsecured would have been somewhat inapposite.

100 Counsel for the contradictor submitted that consideration of the evident commercial purpose of the transaction supports a finding of an intention to create a trust of the loan funds. I am not persuaded that the evident commercial purpose of the transaction favours a finding of intention of a trust in favour of the lender. To my mind, the evident commercial purpose of the transaction is at least equally consistent with an intention that the transaction created a debt and convertible note without any element of trust. In this regard, I accept the submissions of counsel for Compass. The purposes of cl 6 may be viewed as akin to use of the funds for working capital. Compass was in a joint venture with HNC's subsidiary, HAR. HAR's joint venture obligations were guaranteed by HNC. Compass had liquidity problems or was in financial difficulty. In those prevailing circumstances, the lender HNC had an interest in the continued viability of Compass. The protection of that interest does not require the imposition of a trust over the loan funds. HNC's rights under the Facility Agreement, including its right to demand repayment in certain events, its right to shares in lieu of the debt in certain events, and its right to enforce cl 6, sufficiently advance HNC's evident commercial purpose.

101 For these reasons, I am not persuaded that the parties intended that the loan funds not become the property of Compass but remain beneficially owned by HNC.

102 Nor am I persuaded that the Facility Agreement, construed in its context, reveals an intention that the loan funds not become the property of Compass but be held on trust for the classes of persons referred to in cl 6. The point made in [90] supports that conclusion. The language of cl 6, construed in its context, and the evident commercial purpose of the Facility Agreement do not justify a conclusion that HNC and Compass intended that US$7 million of the loan funds would not be owned beneficially by either of the parties to the Facility Agreement, but would be held on trust for the parties referred to in cl 6. Those parties were referred to in cl 6 in only a quite general way. All of them are unrelated to the lender HNC and some are also unrelated to Compass.

103 Moreover, the various events in which the loan would become repayable also militate strongly against finding an intention that the loan funds be held for the benefit of, in the sense of as beneficial property of, the cl 6 parties. It would not make commercial sense for HNC to intend the loan funds to be held on trust for the cl 6 parties even in circumstances that the loan was repayable.

104 For these reasons, I would grant the declarations and directions sought by Compass. I will hear from the parties as to the precise form of relief and as to costs.