(iv) The references in the irrevocable authority of 14 November 2002 to the moneys being held in trust confirmed that the parties intended that, as between them, "the sum of $750,000 should be treated as subject (so far as possible) to the cl 4.2(b) trust notwithstanding it was paid to Henry Davis York to be held as part of the second deposit" ([88]).
25 Mr D Hammerschlag SC, who appeared for the Respondent/Cross-Appellant, accepted that a trust pursuant to the Subscription Agreement existed up to the point of time when the monies were released from the Acuiti Trust Account. However, once the monies were released to Henry Davis York there was, he submitted, no trust under the Subscription Agreement. Contrary to his Honour's conclusion, he submitted, there was no trust because the mechanism for dealing with the trust funds under the Subscription Agreement could no longer operate. Once the sum was transferred, HDY held it under the terms of cl 5.10 of the Share Purchase Agreement. Clause 4.2(d) made provision for the release of the funds pursuant to "another direction" by the Investors. Such a direction was given, i.e. the direction to pay the monies to the HDY Trust Account. He submitted that once the monies were so released, the trust had done its work. He submitted that the trust had ceased to exist either by mutual discharge or by operation of the "direction" under cl 4.2(d).
26 The Appellants/Cross-Respondents supported his Honour's conclusion that the parties intended to create an express trust with respect to the sum of $750,000. Mr B Coles QC, who appeared for the Appellants/Cross-Respondents, adopted his Honour's reasons. The change in the nature of the trust, with the effect that the Investors were put at risk if the deposit were forfeited, was not, he submitted, inconsistent with the continued existence of a trust.
27 Mr Coles QC submitted that the possibility of forfeiture of the deposit constituted an agreement by the beneficiaries that there would be no breach of trust if the monies were to be lost in that fashion. That, however, was the full extent of the dispensation which the beneficiaries gave to the trustee. There was no intention to extinguish the trust. They were, in effect, consenting to a release of the trust on a condition, which condition did not eventuate. Accordingly, he submitted, New Tel remained a trustee for the Appellants.
28 The submission of Mr Coles QC, that the same trust persisted throughout, was directed in large measure to support the appeal with respect to the sum of $850,000. It was not a necessary basis for the case of the Cross-Respondents with respect to the sum of $750,000. Mr Coles QC put an alternative submission that New Tel held on trust for the Investors the chose in action constituting its entitlement to the relevant part of the funds in the HDY trust account.
29 Mr Hammerschlag SC accepted (see T26 12-16) that his Honour's analysis was to the effect that New Tel held in trust for the Appellants whatever entitlement New Tel had with respect to the deposit of $750,000. That does appear to be the intent of his Honour's analysis, although not expressed in that way. On this basis the trust created under the Amended Subscription Agreement, with Acuiti as trustee and the trust property as the funds in the Acuiti Trust Account, had been substituted by a trust in which New Tel was the trustee of trust property constituted by its entitlement to the deposit, whatever that entitlement might be from time to time. This is not accurately described as a trust under cl 4.2(b) of the Subscription Agreement but it reflects, in my opinion, the thrust of his Honour's analysis.
30 In my opinion the express trust created by the Subscription Agreement, as amended to substitute Acuiti Legal as trustee of the Subscription Price, was terminated upon the transfer of the funds to HDY. The authority to transfer to HDY was "another direction" within cl 4.2(d) and, thereafter, neither New Tel nor Acuiti could satisfy the description in cl 4.2(b) that it would "hold the Subscription Price on trust for the Investors". At no time did New Tel "hold" anything that could answer the description of the "Subscription Price".
31 Upon the transfer of the funds to HDY, there was a risk that the deposit could be lost by New Tel and, therefore, terminate any beneficial interest of the Appellants in the funds. The existence of that risk is not, however, in my opinion, determinative of the issue before the Court. The issue to be determined is whether or not a new express trust was created between New Tel as trustee and the Appellants as beneficiaries, with the relevant trust property being the chose in action constituted by New Tel's entitlement to the return of that part of the deposit constituted by the $750,000 transferred from the Acuiti Trust Account.
32 In my opinion, the present is a case such as that determined to exist in Bahr v Nicolay (No 2) (1988) 164 CLR 604, where Mason CJ and Dawson J said at 618-619:
"If the inference to be draw is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting that interest or of giving effect to the intention, then there is no reason why in a given case an intention to create a trust should not be inferred. The present is such a case. The trust is an express, not a constructive, trust."
33 It is well established that an intention to create an express trust can be inferred from the full range of relevant circumstances, including the nature of the transaction and the construction of the words used. (See Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 120; Walker v Corboy (1990) 19 NSWLR 382 esp at 395-399; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (In Liq) (2000) 202 CLR 588 at [34]; Tito v Waddell (No 2) [1977] Ch 106 at 211. The relevant case law has been summarised by Campbell J in Commonwealth v Booker International Pty Ltd [2002] NSWSC 292 at [34]-[45].) There are cases in which it is pertinent to consider the mutual intention of the parties to a transaction. (See Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at 580B; Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (In liq) (1978) 141 CLR 335 at 353; Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 at 502-503; Re Goldcorp Exchange Ltd; Kensington v Liggett [1995] 1 AC 74 at 100.)
34 As Gummow J put it in Re Australian Elizabethan Theatre Trust supra at 503:
"The relevant intention is to be inferred from the language employed by the parties in question and to that end the court may look also to the nature of the transaction and the relevant circumstances attending the relationship between them: Walker v Corboy (1990) 19 NSWLR 382; Scott, The Law of Trusts , 4th ed, 1987, s25.2. There is no need for particular caution in drawing the inference that a trust was intended: Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 618-19. However, it also is important to appreciate both the flexibility of the institution of the express trust and the range of equitable institutions which fall short of but have some of the characteristics of a trust."
35 In the present case the relevant circumstances include the existence of an express trust; the nature, scope and purpose of the transaction by which funds were received by Acuiti and subsequently released from the Acuiti Trust Account to the HDY Trust Account, and the language of both the Authority to Transfer and the second letter of set-off. In my opinion, the combined effect of the circumstances indicates an intention to create an express trust.
36 In determining the intention of the parties in this case, the existence of the express trust under cl 4.2(b) of the Subscription Agreement is, of course, the starting point. It is most unlikely that the relevant parties, i.e. New Tel and the Appellants, would authorise the disposition of funds so held on any basis other than the retention of a beneficial interest on the part of the Appellants. There is nothing in the evidence to suggest that anyone intended that the Investors' beneficial interest in the funds had been transmogrified into a mere debt.
37 The original purpose to be served by keeping the funds identifiable and separate was to ensure their return if the transaction did not go ahead. The transfer to HDY did add a level of risk, however the original purpose remained. (I do not intend by the use of the word "purpose" to identify a distinct species of express trust. See Jacobs Law of Trusts in Australia 6th ed, Butterworths, Sydney, 1997 [214] at p15; Re Australian Elizabethan Theatre Trust supra at 502, commenting on the use of the word "purpose" in Quistclose.) Equity has often intervened to ensure that funds advanced for a particular purpose are not applied otherwise. (See e.g. Re Rogers; Holland v Hannen (1891) Morr 243 at 248; Edwards v Glyn (1859) 2 El & El 29; 121 ER 12 at 50-51; Re Drucker; Ex parte Basden [1902] 2 KB 55; Re Watson (1912) 107 LT 96 at 183.)
38 It is of significance that the sum of $750,000 was never released to New Tel but was always kept separate, until transferred to HDY in satisfaction of New Tel's obligation to pay a deposit. The balance of the deposit was met, in large measure, from New Tel's own funds. Segregation of funds is indicative, but not conclusive, on the intention to create a trust. (See e.g. Henry v Hammond [1913] 2 KB 515 at 521; Walker v Corby supra at 397-398; Re Australian Elizabethan Theatre Trust supra at 505-506.) In the present case there was no segregation in the HDY Trust Account, but as between New Tel and the Appellants, the funds flowed in separate streams.
39 Subsequent documentation referred to the sum of $1.15 million of which, as noted above, $400,000 has been repaid, leaving the balance of $750,000 in issue. For purposes of clarity, hereafter I substitute "$750,000" for references in the documents to "$1.15 million".
40 In the second letter of set-off, to repeat, the parties stated:
"Background
…
8 … The parties acknowledge that the [$750,000] funds of the Subscription Price shall be held in the Henry Davis York Trust Account subject to and until completion of New Tel's acquisition of the Digiplus group of companies.
Agreement
…
4 The parties acknowledge and agree that [$750,000] represents the total cash component of the Subscription Price payable to and received by New Tel from the investor parties … Further, subject to and upon completion of New Tel's purchase of the Digiplus group of companies, the investor parties shall be issued convertible notes under the Subscription Agreement …"
41 These references clearly relate the sum of $750,000 to the Subscription Agreement and the twice repeated formulation "subject to and until completion of New Tel's acquisition of the Digiplus group of companies" identifies the condition precedent in cl 2.1 of the Agreement. This formulation is not a reference to the acquisition under the Share Purchase Agreement, which is a document entered into between parties to whom the letter of set-off does not refer. The contingency that the deposit may be lost to New Tel is not treated as in any way pertinent to the relationship between the parties to the letter of set-off. That the parties inter se agree that the $750,000 is held by HDY "subject to" completion of the acquisition, when the convertible notes will issue, does support an inference that, as between the parties, there is an intention to create an express trust.
42 A similar analysis applies to the passage in the critical document, the Authority to Transfer Funds of 11 October 2002, which, to repeat, stated:
"The parties acknowledge and agree that the [$750,000] funds of the Subscription Price shall held in the Henry Davis York Trust Account subject to and until completion of the Digiplus acquisition."
43 The Authority contains express references to the Subscription Agreement. The funds are throughout characterised as part of the "Subscription Price", invoking the definition of that term in the Subscription Agreement as an amount invested under, and in accordance with the terms of, that Agreement. The particular reference in the Authority to the words "subject to and until completion of the Digiplus acquisition" is, like the equivalent formulation in the second letter of set-off, a reference to the condition precedent in cl 2.1 of the Subscription Agreement, namely the completion of the purchase by New Tel of the Digiplus group of companies. That there may be circumstances in which the deposit may be forfeited under cl 5.10 does not detract from the proposition that, between New Tel and the Appellants, the parties intended New Tel's entitlements to be subject to a trust.
44 In Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Quistclose lent money to Rolls Razor Limited for the purpose of paying its final dividend. Lord Wilberforce said at 580 that "the arrangements give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the lender". His Lordship added:
"…the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd, but should be used exclusively for payment of a particular class of creditors, namely, those entitled to the dividend. A necessary consequence of this, by process simply of interpretation must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents."
45 In Re EVTR Ltd [1987] BCLC 646 funds were advanced for the sole purpose of purchasing equipment. The money was used to pay a deposit for the equipment, but the company was placed into receivership before the equipment arrived. Most of the deposit was returned to EVTR. The Court held that the receiver could not retain the returned deposit money. The funds had to be returned to the lender. Dillon J said:
"On Quistclose principles, a resulting trust in favour of the provider of the money arises when money is provided for a particular purpose only, and that purpose fails."
46 Furthermore, Bingham LJ (as his Lordship then was) said at 652:
"Until the sums were paid out, the company plainly held them on trust to apply them for the stipulated purpose and no other. Had the purpose failed before payment, the case would have been indistinguishable from Quistclose. But that did not happen. The sums were applied for the stipulated purpose.
…
It would, I think, strike most people as very hard if the appellant were in this situation to be confined to a claim as an unsecured creditor of the company. While it is literally true that the fund which he provided was applied to the stipulated purpose, the object of the payment was not achieved and that was why the balance was repaid to the respondents. My doubt has been whether the law as it stands enables effect to be given to what I can see as the common fairness of the situation. Our attention has not, I think, been drawn to any case closely analogous to the present. But the company certainly held the fund on trust in the first instance. The purpose for which the fund was paid out partially failed. The repayment to the respondents was a direct result of the company's original holding of the fund as trustee. The balance which was recovered may reasonably regarded as not having been paid out at all. I am happy to be persuaded that the sums repaid are to be treated as held on the same trusts as the original £60,000 and, in the present circumstances, on a resulting trust for the appellant."
47 It is not necessary to determine whether the analysis in English cases of a resulting trust applies in Australia. (See also Twinsectra Ltd v Yardley [2002] 2 AC 164 at [100].) The circumstances in which a trust should be classified as presumed, resulting or constructive are not the subject of any authoritative determination. (See the references set out in Rob Evans v European Bank Ltd (2004) 61 NSWLR 75 at [112]-[116].)
48 The reasoning in EVTR, where a deposit was returned by a third party, applies in the present case to support the conclusion that the original supplier of funds retained a beneficial interest in the funds.
49 In this case, as in EVTR, it was the intention of the supplier of funds, relevantly the Appellants, that the money was to be applied and applied only for a specific purpose (i.e. the purchase of the equipment in EVTR or the Digiplus acquisition in the present case). The money was applied towards a deposit in partial fulfilment of the purpose which was not fulfilled (i.e. the failure of the equipment purchase in EVTR or the Digiplus acquisition in the present case). The return of the deposit in each case meant that the beneficial interest in the funds of the supplier became an express trust of the deposit in the hands of the recipient.
50 Gummow J said in Re Australian Elizabethan Theatre Trust supra at 501:
"But the essential reason the insolvency law did not strike at the transaction in question in Quistclose was that the moneys represented by the cheque drawn by Quistclose in favour of Rolls Razor and banked in the special account of Rolls Razor never at any stage became the beneficial property of Rolls Razor. It acquired no more than what Dixon J called a dry legal interest: see Commissioner for Stamp Duties (NSW) v Perpetual Trustee Co Ltd, supra, at 510. On its part, Quistclose had both a contractual right to repayment out of the general assets of Rolls Razor, as a general creditor, and the beneficial interest in a fund, whether by way of resulting trust or as the second limb of an express trust."
51 Here, the beneficial interest was similarly kept from New Tel. In my opinion, at all relevant times, the Investors retained a beneficial interest in the funds - although it was not an exclusive beneficial interest. At no time did the money become the beneficial property of New Tel.
52 The Authority to Transfer Funds itself made it quite clear that the funds were released to the HDY Account only for the purposes of the Digiplus acquisition. In my opinion, New Tel and the vendors could not have agreed between themselves to vary the terms upon which the deposit was held by HDY. Equity would have intervened to prevent the disposition of the funds held in the HDY Trust Account, save in accordance with the terms of the Share Purchase Agreement which existed at the time of the deposit, including the risk of forfeiture of the deposit under cl 5.10.
53 In the present case, there was an express trust of New Tel's chose in action being its bundle of rights to the sum of $750,000 paid as a part of the deposit under the Share Purchase Agreement, in whatever form that chose of action took from time to time. Relevantly, the express trust applied upon repayment of the deposit from the HDY Trust Account to give the Appellants a beneficial entitlement to those funds.