The Madallah debt?
11 It is agreed that the commercial arrangements between Madallah and Euphoric did not provide for Euphoric to extend credit to Madallah. However, although this was the arrangement, it was possible for Madallah to obtain fuel for which it did not pay. The most obvious mechanism by which this could occur would be if a payment made by Madallah, either its own cheque or that of a third party, was dishonoured. The records indicate that this did occur at times. Furthermore, if Euphoric's employees, for whatever reason, did not enforce the commercial terms and authorised fuel without payment, Madallah may obtain fuel for which it had not paid. An explanation of the complexity of the arrangements was provided by Mr Nicholls, Euphoric's Financial Controller who said in evidence:
"Q. What do you mean by shivers down your spine in relation to Madallah?
A. The commercial arrangement we have with someone being capable of picking up from a terminal. To put it in context, it's an extremely large corporation, turning over about half a billion dollars a year. There are enormous amounts of transactions that will occur seven days a week, 24 hours a day, and the ability to actually physically procedurally-wise control those logistics is extremely difficult. It is a weakness that the industry has always suffered.
The commercial arrangement with Madallah initially was for them to actually attempt to pay before we issued shipment numbers. The problem with that, which all sounds in theory good, is that in actual fact shipments that are issued are live and have a licence to make money, because they can - a person can go to a terminal with their appropriate issued truck card and access fuel from those terminals at any point and those shipments can be acted upon in seconds, if they wish to.
This leaves an enormous window of exposure that we suffered with Madallah to the point where we requested security, because, effectively, it only required - if I can explain the exposure, if that's all right? We do not receive the money from the banks by notifications as fast as we transact, so you can get a shipment, take a load of fuel and sell it in the space of minutes, literally. However, the bank only tell us that we've received the money 24 hours later, up to 72 hours on a weekend. So we had an enormous window of exposure that relied on good faith of the customer to pay you.
In the event that they didn't, you ended up with a debt, which is what happened with Madallah. In which case, we were always suffering from a hope and prayer that they bank the money, because we knew the shipments were live, the product was available.
Q. Right.
A. So it made a very dangerous commercial arrangement for us, considering - and I believe throughout history, there was also Madallah trading periods of time where moneys was not received in time or in accordance to what was actually drawn."
12 The sum which Euphoric claims was owed by Madallah when it ceased trading on 30 June 2000 was $290,380.41. This amount was confirmed by a reconciliation of Euphoric's ledger for Madallah which the trial judge found had been conducted with great care by Ms Giblin who has been the Credit Controller for Euphoric and has been its credit manager since October 2000. Although extensively cross-examined, the trial judge found Ms Giblin to be an impressive witness and his Honour accepted her evidence.
13 No flaw has been demonstrated in Ms Gilbin's reconciliation and the conclusion that it reflects the true position is supported by a number of matters. One of the more significant matters is the level of security inherent in the system of ordering and delivery to the customer's fuel tanker driver. Although it is conceivable that the system could be corrupted from within Euphoric, or by the customer's driver, there is no suggestion that this occurred in the present case. Because the driver must use an identifiable swipe card and enter a prearranged number before obtaining fuel, the opportunity for fraud is limited. For that fraud to have been worked many times on the one customer (each order is about $30,000), is inherently unlikely.
14 It is apparent that, at times, the record keeping process of Euphoric was not ideal. In part this is explained by the change in the recording system which occurred at the end of April 2000. As I have related, Euphoric changed from the PETSYS system to SAP, thus requiring a reconciliation of the PETSYS records and a transfer to SAP. The ledger shows eight items apparently raised under PETSYS which were transferred to the SAP records at 8 May 2000 totalling $242,273. At the same time, a payment of $112,552.59 was credited, leaving Madallah owing $129,720.43. Invoices to support the eight ledger entries totalling the $242,273 amount were tendered in evidence. Thereafter, the ledger shows a pattern of trading with most, but not all, orders being paid until three orders, one on 29 June 2000 and two on 30 June 2000 totalling $96,932.17. At 30 June the reconciliation conducted by Ms Giblin showed an outstanding debt from Madallah of $290,380.41.
15 There was no direct evidence of the delivery of fuel and non-payment tendered at the trial. Accordingly, Euphoric's case depended on an analysis of the available business records. It is obvious that Madallah would also have had records which could have assisted an understanding of the position. Indeed at the trial Mr Ayoub admitted that if, as he alleged, there were always deposits in advance, it would have been a very simple exercise to collect all the Madallah invoices and all the deposit books and show how each invoice was paid by the relevant deposit. Mr Nasr gave evidence to the same effect. However, no records were forthcoming. The explanation given was that Madallah had been sold by Mr Nasr to an unrelated person, Mr Aoun, and accordingly, access to its records was not available to Bycoon.
16 The evidence of the sale is not convincing. Mr Nasr said the sale took place at the beginning of 2002 and he was paid $10,000 in cash. However, an ASIC search revealed that Mr Ayoub remained the sole shareholder in 2003. There were no documents to support the sale. Mr Ayoub agreed that the records of Madallah were kept in a manner which would have allowed for simple analysis and, if it was the case, rebuttal of Euphoric's claim. At least for a period of months after these proceedings were commenced on 16 August 2001, the records could have been analysed to prove that Euphoric's claim was unfounded. This was not done and apparently no effort was made to retrieve the records.
17 Of these matters the trial judge said:
"A price of $10,000, paid in cash with no documentary support and the ASIC search to the contrary, for a shelf company which had ceased trading 18 months before but against which there was a claimed debt of $290,000 strongly suggests, in my view, there was no such sale. It was, I consider, mere fantasy and a means to overcome the absence of Madallah's records. I do not believe the evidence of Mr Ayoub and Mr Nasr on this aspect. Of course, any records with Mr Aoun were unavailable because his whereabouts were unknown despite a warrant for his arrest to produce the records in these proceedings."
18 In my opinion, the evidence before his Honour more than justified the conclusion he reached on this aspect of the matter. The failure to produce Madallah's records points strongly to the conclusion that they would not have assisted the appellants' case.
19 The case of both defendants was that Madallah had always paid for any fuel it ordered at the time it was ordered and accordingly, no debt could have arisen. However, the reconciliation of the Euphoric records conducted by Mr Giblin indicates otherwise. As an illustration of the position, three deposits are recorded as being made by Madallah on 31 May 2000. One deposit, for an amount of $33,000 may have been payment for fuel purchased on 26 May for a total of $33,043.19. However, it is not apparent that the other two deposits being for $37,500 and $8,293.66 relate to any particular fuel order.
20 Evidence was given by the General Manager of Euphoric, Mr Peter Rogers, of his attendance on Mr Ayoub in late May or early June to discuss the troubled state of the Madallah account. Although challenged as to whether the meeting took place in May or June (it being suggested to him that it did not take place until October), Mr Rogers' evidence is supported by an entry in his diary which indicates that a meeting occurred on 30 May. It would be consistent with such a meeting having occurred that Madallah would seek to retrieve its situation by increasing its payments which may explain the payments on 31 May 2000. Notwithstanding these payments, as far as Euphoric was concerned, the position of Madallah did not improve and Mr Rogers gave evidence that he arranged a further meeting with Mr Ayoub for 15 June 2000. Mr Rogers, accompanied by Mr Powell, Euphoric's Marketing Manager, attended at the appointed time for that meeting but Mr Ayoub failed to arrive. There was no explanation for his failure to attend.
21 As the trial judge points out, although Mr Ayoub swore two affidavits in the proceedings, he does not deny Mr Rogers' evidence as to the meeting in late May or early June. Mr Ayoub's evidence is that rather than there being a meeting at that time, there was a meeting to discuss the Madallah debt in October of that year, but this is denied by both Mr Rogers and Mr Powell. Senior Counsel for the appellants relied on this evidence of Mr Ayoub, emphasising that if Mr Ayoub's evidence was correct it was not consistent with Madallah having trouble with meeting its payments in June.
22 The trial judge did not accept the evidence of Mr Ayoub in relation to many aspects of the matter. In particular, his Honour did not accept his denial of an indebtedness by Madallah in June or that allegations that monies were owed to Euphoric were only ventilated in October. To my mind, his Honour's conclusion is correct. It is supported by the fact that in his evidence, Mr Ayoub admitted that the "transfer of the disputed Madallah debt" was raised with him at the time Bycoon opened its account with Euphoric, after which arrangements to assign the Madallah debt to Bycoon were put in place.
23 Emphasis was placed by the appellants on the fact that Mr Rogers gave evidence that his recollection was that Madallah had a direct debit arrangement with Euphoric. In this respect, it would appear that Mr Rogers was mistaken, as payments appear to have been made by cheque. Mr Rogers believed that some direct debits had "bounced."
24 Although Mr Rogers' recollection on this aspect of the matter may have been faulty, his Honour did not consider that the credibility of his evidence was affected. Given the size of the Euphoric enterprise and the complexity of its business arrangements, it may be accepted that on these matters Mr Rogers may have an imperfect understanding.
25 It was in late June that Madallah's arrangements with Euphoric came to an end and on 7 July that Bycoon commenced to trade. Euphoric says that the cancellation of Madallah's arrangements was due to it being in arrears with payments. No alternative explanation was offered by the appellants.
26 It is true that Madallah continued to acquire fuel up to and including 30 June 2000, on which day two purchases were made. Senior counsel for Madallah submits that this would be inconsistent with Euphoric having terminated arrangements with Madallah earlier in the month. It is submitted that Madallah would not have been allowed to place further orders if Euphoric was not in funds.
27 The circumstances of these orders are not explained by the evidence. They could be orders which had been approved previously but only filled on that day. Perhaps the credit controller had not reacted as quickly as required or, having regard to the arrangements to be made with Bycoon, had authorised deliveries to the end of June. The evidence is silent. However, I am satisfied that the lack of explanation of this possible anomaly does not displace the conclusion which his Honour reached that the fuel, for which invoices were available, had been purchased by Madallah.