Plaintiff v Defendant

1 In mid-2009, the Mercury Group ('Mercury'), which was in the business of importing and distributing clothing to major retailers, was in financial difficulty. Its principal banker, the defendant ('CBA'), had been progressively reducing finance available to Mercury. Mercury was unable to obtain alternative finance. As a result, Mercury was unable to pay its overseas suppliers for stock it had ordered.

2 In early July 2009, the plaintiff ('Milfoil') agreed to advance approximately $500,000 to Mercury Brands Group Pty Ltd ('MBG')[1] in order for stock to be released from 13 of Mercury's overseas suppliers. To ensure that Milfoil's position was protected in light of Mercury's financial position, it was agreed that:

(1) Milfoil would purchase the stock from the overseas suppliers with the advance: the stock would be invoiced to, and the property of, Milfoil;

(2) Mercury would then arrange for the stock to be kept separate and delivered to its retail customers, with the customers to make payments to Milfoil; and

(3) the proceeds of sale of the stock received by Milfoil would first be applied in repayment of the advance, interest and costs, with the balance of the proceeds and/or the remaining stock then released to Mercury.

3 In accordance with that agreement, on 3 July 2009, Milfoil paid $509,471.16 (including bank charges) (the 'Milfoil advance') to 13 of Mercury's Chinese suppliers.

4 Two issues soon arose after that payment was made which have given rise to disputes from early August 2009 and which have led to this and other proceedings. First, the stock purchased with the Milfoil advance was not invoiced to Milfoil, and was not identified and kept separate by Mercury. Second, Mercury's customers were not directed to make payments to Milfoil. The result was that Mercury received any proceeds of sale of the stock purchased with the Milfoil advance into accounts of Mercury with CBA.

5 As a result of its financial difficulties, the board of MBG appointed a voluntary administrator on 17 September 2009. The next day, the CBA appointed receivers and managers to MBG and MBL. Mercury's business was then sold by the administrator to Australian Horizons Pty Ltd ('AHT') on 1 October 2009.

6 Other than interest payments for July and August 2009,[2] Milfoil only received $92,000 before the appointment of the administrator. It has only received $57,000 since that time. This was obtained after the administrator sought directions from the Federal Court as to whether Milfoil was entitled to some of the moneys received from Mercury's customers (the 'Federal Court proceeding').[3]

7 This proceeding was issued in 2013. The claims made in the proceeding have changed over time. Originally, Milfoil's claim was for the proceeds of sale of the stock purchased and recorded in a Reconciliation Working Paper (the 'RWP') in the sum of $606,896.66. The RWP was prepared and circulated in late September 2009 in an attempt to identify the stock purchased with the Milfoil advance. Its inaccuracies have bedevilled the parties since that time.

8 In 2015, Milfoil amended its claim to include additional stock allegedly purchased with the Milfoil advance with a wholesale value of at least $2,043,250[4] from the Chinese suppliers and with a retail value to Mercury of at least $3,090,538[5] (collectively the '2015 amendments'). The trial was conducted on that basis. However, in final address, Milfoil sought only to recover from the CBA the unpaid portion of the Milfoil advance.

9 The underlying basis of Milfoil's claim has always been that the CBA received the proceeds of sale of the stock purchased with the Milfoil advance with knowledge of Milfoil's interest in that stock. This was on the basis that the proceeds of sale of the stock purchased with the Milfoil advance were deposited into Mercury's accounts with the CBA.

10 Milfoil alleges that the CBA first became aware of its interest in a conversation between Mr Terrence Reynolds (known as 'Terry') of Milfoil and Mr Salvatore Barbagallo (known as 'Sam') of the CBA on 10 August 2009. What was discussed during that conversation was the major factual dispute at the trial.

11 Milfoil also alleges that the CBA became aware of its interest in a series of communications in late September and early October 2009. At that time, the CBA, the administrator and the receivers were involved in negotiations for the sale of Mercury's business to AHT. The sale agreement was executed on 1 October 2009 (the 'Sale Agreement'). By this time, it is not disputed that the CBA was aware of the RWP.

12 Under the Sale Agreement, AHT purchased all of the assets of the business of MBG for an amount which ensured all the money Mercury owed to the CBA would be repaid (approximately $2.2 million). The assets sold included the debts owing by Mercury customers: but the amounts owed to Milfoil by Mercury customers were 'Excluded Assets' and remained the property of Milfoil. Milfoil submitted that, after the Sale Agreement, the CBA paid or 'swept' across the proceeds of sale of the stock purchased with the Milfoil advance to AHT.

13 The CBA relied upon a number of defences in response to the claims made by Milfoil as a result of the 2015 amendments. Many of the those defences have fallen away by reason of the nature of the limited claim pursued by Milfoil in final submissions. These included:

(1) Milfoil has not proved that the stock referred to in Schedule A that was not also in the RWP was the property of Milfoil or that any of the payments in Schedule B were the proceeds of sale of stock purchased with the Milfoil advance;

(2) claiming the stock referred to in Schedule A or the proceeds of sale in Schedule B was an unenforceable penalty; and

(3) claiming that Milfoil is estopped from alleging it is entitled to any stock other than that referred to in the RWP.

14 However, relevantly, the CBA has always maintained:

(1) it was not informed of Milfoil's interest in the proceeds of sale of stock purchased with the Milfoil advance in Mr Reynolds' conversation with Mr Barbagallo on 10 August 2009;

(2) while the CBA was aware of the RWP in late September and early October 2009, it disputes that the RWP gave it sufficient notice of Milfoil's interest in any particular proceeds of sale the CBA received; and

(3) Milfoil has not established that the proceeds of sale of the stock purchased with the Milfoil advance as recorded in the RWP were received by or deposited with CBA, particularly that the CBA received these proceeds after the appointment of the administrator.

15 Further, the CBA contends in recent amendments that:

(1) Milfoil has 'unclean hands' by claiming the stock in Schedule A and the proceeds of sale of the stock in Schedule B (not pursued in final address), which should preclude any equitable relief; and

(2) the CBA should be excused from any liability for breach of trust (if established) pursuant to s 67 of the Trustee Act 1958 (Vic) (the 'Trustee Act').

16 For the reasons that follow, I have concluded that:

(1) the CBA was informed that Milfoil had an interest in stock purchased with the Milfoil advance in Mr Reynolds' conversation with Mr Barbagallo on 10 August 2009 but insufficient information was given to the CBA at that time to identify the proceeds of sale in any meaningful way;

(2) Milfoil has not established that all of the proceeds of the sale of the stock recorded in the RWP were received by, or deposited with, the CBA;

(3) the CBA did not 'receive' the proceeds of sale of stock purchased with the Milfoil advance recorded in the RWP for the purpose of a claim of knowing receipt;

(4) Milfoil has established that some of the proceeds of sale of stock purchased with the Milfoil advance recorded in the RWP in the sum of $31,432.78, were deposited with the CBA and that CBA swept those proceeds to AHT; and

(5) however, based upon the information available to the CBA at the time of that payment to AHT, Milfoil has not established that CBA made that payment 'knowingly', for the purposes of a claim for inconsistent dealing.

17 As a result, it is not necessary for me to determine whether Milfoil should be disentitled to relief based on the 'unclean hands' defence or whether the CBA should be relieved of any liability by reason of s 67 of the Trustee Act. However, for completeness, I have concluded that essential elements of the unclean hands defence have not been made out.

18 I asked the parties to confer about the list of issues or questions to be determined in this proceeding in light of the changes to the plaintiff's case in the final address. The parties submitted two slightly different versions. I considered those two versions and concluded that the following issues are for determination:

In respect of the July agreement between MBG and Milfoil alleged in paragraph 8 of the current statement of claim:

(1) what were the terms found by Finkelstein J in the previous judgments in the Federal Court Proceeding? and

(2) which of the terms alleged in paragraph 9(a) to (e) and (g) of the current statement of claim have been established by the evidence?

Was the CBA aware of Milfoil's interest in the stock purchased and/or released by the Milfoil advance, or the proceeds of sale thereof, on 10 August 2009? If so, was the CBA given sufficient information to identify that stock or the proceeds of sale thereof?

(2) if so, is a constructive trust imposed on the CBA in respect of such proceeds and if so, did the CBA breach that trust by appropriating any and which of those proceeds for its own benefit?

Was CBA made aware of Milfoil's interest in the stock purchased and/or released by the Milfoil advance or the proceeds of sale thereof in late September and/or early October 2009:

(1) by receipt by the CBA of the RWP made available in the negotiations of the Sale Agreement and/or of the letters dated 2 and 6 October 2009?

(2) by receipt by the administrator of the letters dated 23 September, 28 September and 30 September 2009 enclosing the RWP and otherwise by the RWP being made available in the negotiations of the Sale Agreement?

(3) by receipt by the receivers of the letters dated 29 September 2009, and dated 29 September but sent on 30 September 2009 enclosing the RWP and otherwise by the RWP being made available in the negotiations of the Sale Agreement?

If yes to question 4, was the CBA given sufficient information in the RWP to identify that stock or the proceeds of sale thereof?

(1) did the CBA receive proceeds of sale of stock listed in the RWP?

(2) if so, is a constructive trust imposed on the CBA in respect of such proceeds and, if so, did the CBA breach that trust by appropriating any and which of those proceeds for its own benefit?

If yes to any part of questions 3(2) or 6(2), is Milfoil entitled to equitable compensation in the sum of $486,574.34 or any lesser sum plus any and what interest paid by Milfoil to the Westpac bank to fund the Milfoil advance?

Does Milfoil come to Court with 'unclean hands' as alleged in paragraph 47A of the current defence which would disentitle it to the equitable compensation referred to in question 7?

If yes to question 3(2) and/or 6(2), should the CBA be excused for any breach of trust pursuant to s 67 of the Trustee Act 1958 (Vic)?

19 The CBA sought to include an additional issue in relation its awareness referred to in issues 2 and 4. It sought to have addressed whether Milfoil pleaded, and/or was permitted to advance, a case of knowledge based on Baden[6] categories (ii) and (iv). I will deal with these matters as part of issues 2 and 6.

20 Further as I set out in section 22 below, in the course of drafting these reasons, I noted a related basis of liability for knowing receipt, namely, liability of an agent who knowingly deals with trust property inconsistently with the terms of the trust. I sought further submissions from the parties about the basis of this liability and its application if any to the facts of this case. Those submissions were received on 15 May 2019. Although I have not altered the list of issues to be determined set out above, that related basis of liability is addressed in response to issue 6.

21 Before I deal with the chronology and findings of fact, it is important to note, as is evident from the list of issues to be determined, that most of the relevant events took place almost 10 years ago. Indeed the content of conversations, and beliefs held, in the period between July and December 2009 were the subject of detailed cross-examination at trial. It is difficult to recall with any precision what someone said, what someone heard or what someone believed all that time ago. Common experience tells us that the more significant the issue is to a person, the more likely it is that he or she will recall the event, even after a long period of time.

22 However, it is important to acknowledge too that in such circumstances a person's recollection can be coloured by emotion. That seems particularly true in this case. On the one hand, Mr Reynolds and his family are clearly emotionally involved in, and impacted by, the subject matter of these proceedings. On the other hand, the allegations affect the professional reputations of many of the CBA witnesses: indeed some have been interviewed by Victoria Police in relation to these events.

23 As a result, I have relied very much upon the contemporaneous documents in making my findings of fact and in deciding the likely contents of conversations or beliefs of the witnesses during this period.

24 Milfoil is controlled by Mr Reynolds. Milfoil is the trustee of the Reynolds Family Trust. The Reynolds family consists of Mr Reynolds, his wife Eleanor and their three children: Michael, Steven and Helen. Steven was employed by Mercury on about 20 May 2009.

25 Mr Reynolds is the driving force behind this proceeding. He holds a bachelor's degree in Banking and Finance from Monash University. He is a Fellow and Honorary Life Member of the Financial Services Institute of Australasia, formally the Australasian Institute of Bankers.

26 Mr Reynolds commenced working for the Bank of New South Wales in 1961, aged 15. He continued to work with the Bank of New South Wales until 1980. From that time, he was employed by finance companies that were owned by the Bank of New South Wales which became Westpac in 1983. In 1980, he was appointed the State Manager, Trade Finance for AGC Ltd. In 1984, he was appointed the State Credit Manager of the Business Division of AGC Ltd. From 1985 to 1991, he was the Senior Corporate Manager of Bill Acceptance Corporation Ltd. For several years, Mr Reynolds was the first staff elected trustee of Westpac's AGC/BAC staff super fund.

27 From 1991 until his retirement in 2002, he worked as a consultant in banking finance and politics. From about 2002 to about 2006, he worked as a lecturer and tutor in banking (money and capital markets) at Deakin University. In his career Mr Reynolds acquired knowledge of bank and finance facilities. He also became aware of how goods were imported into Australia from overseas.

28 Mr Reynolds gave evidence that he did not invest in the share market. His only investments, including those made through Milfoil, were a couple of houses which he managed.

29 Mr Reynolds was cross-examined over 4 days. His credit was severely attacked. He was shown documents from 2008 until 2016 relating to his involvement in the events which are the subject of this proceeding. It was put him that some of those documents were fabricated and that others contained statements that were knowingly false, all for the purposes of advancing Milfoil's interests. It was put in substance that Mr Reynolds was a deluded man obsessed by the loss of the Milfoil advance who lied in order to succeed in this proceeding.

30 As a result of that cross-examination, I formed the following views about him. Mr Reynolds is an intelligent and proud man who values his knowledge of finance and commerce. He is confident in his own abilities. However, he overemphasizes his knowledge, his abilities and his importance.

31 This is sometimes to an alarming degree. For example, in his email to the Fraud Squad dated 19 January 2012, Mr Reynolds stated:

It was me alone that stopped the wholesale banking collapse in 1991 and gave us 20 great years of economic recovery. It was me who led Wayne Swan through what could have been another banking collapse in 2008 with the GFC.

32 In cross-examination, Mr Reynolds maintains this was true. I have no real evidence about the extent of Mr Reynolds involvement in events in 1991 and 2008. However, if it were true that he 'alone' stopped the wholesale banking collapse in 1991 or that he 'led Wayne Swan' in relation to the GFC, it is something that is likely to be in the public domain. I have very much taken into account the fact that Mr Reynolds overemphasises his knowledge and his abilities, and his importance in forming a view about his evidence.

33 As I said, he is very much the driving force of this proceeding and of investigating the events giving rise to it. This is because he very much feels that he is the victim of an injustice by reason of being unable to recover the funds which Milfoil advanced to Mercury in July 2009. The advance was a significant amount of money to someone in the position of Mr Reynolds. He has only been repaid a small part of it. This is in circumstances where:

(1) Milfoil was unable to pursue Mercury which was placed into administration in September 2009, became subject to a deed of company arrangement in November 2009 and was placed into liquidation in April 2011;

(2) the CBA received all the debts it was owed by Mercury under the Sale Agreement;

(3) in the Federal Court proceeding, Milfoil obtained a judgment for the payment of approximately $295,000 plus costs on an indemnity basis but only received approximately $57,000.

34 In these circumstances, I can understand Mr Reynolds' sense of injustice. However, in my view, his sense of injustice and his general nature led him to writing intemperate correspondence.

35 Further, it led him to making allegations against officers and employees of Mercury, the administrators and the CBA. From 2010, he insisted that the Fraud Squad of the Victoria Police investigate the circumstances giving rise to this proceeding and charge relevant officers of the CBA, in particular, Mr Barbagallo. This resulted in a number of the witnesses in this proceeding having to make statements to Victoria Police in the course of that investigation which lasted until 2016. No charges were ever laid.

36 The making of these complaints was the subject of much criticism of Mr Reynolds in cross-examination. Mr Reynolds wanted Victoria Police to investigate the circumstances giving rise to this proceeding because he believed, and still believes, that the CBA has in effect stolen the stock, or the price paid for that stock by customers, purchased with Milfoil funds. This is because he believes that by paying the $509,000, the Chinese suppliers released stock that had a value of in excess of about $2 million and was sold for about $3.5 million. However, on the evidence before me, there is a basis for Mr Reynolds to believe that the stock purchased with the Milfoil advance was worth more than $509,000: perhaps two or three times that amount. I will deal with that evidence further below.

37 Counsel for the CBA stated that Mr Reynolds made up evidence not only about his own achievements but also about aspects of this claim, both in documents prepared from 2009 and in the witness box. Counsel for the CBA referred to this politely as 'gilding the lily'. I agree that Mr Reynolds has very much overstated his achievements and has exaggerated and overstated his or Milfoil's position in order to obtain repayment of the Milfoil advance.

38 For example, in his letter to the administrator dated 28 September 2009 and the receivers dated 29 September 2009, Mr Reynolds stated 'we hold copies of pro forma invoices for each transaction' i.e. for each of the 13 Chinese suppliers paid with the Milfoil advance. Based on the evidence before me, that statement was not true in respect of most of the transactions. In cross-examination, Mr Reynolds acknowledged that this was the case and that this statement had the potential to mislead the administrator and the receivers. It is noteworthy that on this and other occasions Mr Reynolds was prepared to make admissions which appeared against his interests.

39 Notwithstanding that Mr Reynolds exaggerated and overstated the position at times, I do not consider that Mr Reynolds is a witness who cannot be believed at all. Rather, I think these statements and his evidence as a whole need to be viewed very carefully in light of these matters, which, in my view, resulted in part from his sense of grave injustice and of desperation as time went by in 2009 when he was not repaid the Milfoil advance. None of this should be read as accepting or condoning the exaggerations and overstatements made by Mr Reynolds during this period. However, they are factors to be taken into account in assessing his statements and evidence as a whole.

40 In short, I have been careful to assess and consider Mr Reynolds' evidence in light of contemporaneous information and documents before accepting that evidence.

41 Further, in cross-examination, much was made of the fact that many of the factual matters contained in his witness statement in this proceeding about relevant events were not included in Mr Reynolds' affidavit sworn 23 February 2010 in the Federal Court proceeding (the '23 February 2010 affidavit'). Again, it was suggested that some of the new matters raised were fabricated to support Milfoil's claim in this proceeding, for example, the matters set out in [13]-[17] and [19] of his witness statement. Mr Reynolds disputed this.

42 It is true that the account of Mr Reynolds in his witness statement is more detailed than the account set out his 23 February 2010 affidavit. In oral evidence Mr Reynolds explained this was because his 23 February 2010 affidavit was prepared in haste given the time constraints imposed in the Federal Court proceeding. He said that the Federal Court proceeding was served in late December 2009 and he was unable to see a lawyer in January 2010. Mr Reynolds then fell unwell with the shingles. He said he prepared a 30 page affidavit in about three days which was then cut down by his counsel. I generally accept that explanation. I have also had regard to the different nature of this proceeding and the Federal Court proceeding.

43 In cross-examination, Mr Reynolds was asked whether he blamed everybody but himself for his failure to recover the Milfoil advance. He replied that in hindsight it looked like a foolish decision and that he was embarrassed by it. It was a candid and difficult admission for a proud man like Mr Reynolds.

44 As I said above, the allegations in this proceeding affect the professional reputations of many of the CBA witnesses: indeed some have been interviewed by Victoria Police in relation to these events. The CBA witnesses to the key conversations on 10 August 2009 were Mr Barbagallo and Ms Dunlop. It is appropriate I say something about their evidence at this stage.

45 Mr Barbagallo is and was at the relevant time a senior executive at the CBA. In his evidence, he set out his limited recollection of the relevant events in 2009. However, once again, he disputed many aspects of the version of events of Mr Reynolds. Some occasions when he did so were understandable, others less so.

46 For example, he maintained that he never heard of Milfoil (as opposed to Mr Reynolds) before he received a letter of complaint dated 26 October 2009. This is notwithstanding he received an email about Milfoil and its strategy the day after his 'strange' phone call with Mr Reynolds on 10 August 2009. Further it is notwithstanding that he oversaw the negotiations of the Sale Agreement which expressly provided that the debts owed to Milfoil were excluded from the assets assigned to AHT.

47 Mr Barbagallo was reluctant to make sensible admissions about his role. For example, he reluctantly agreed that, if he was aware of the Milfoil agreement, it would have adversely affected the CBA's ability to recoup what was owing to it. Further, Mr Barbagallo sought in his evidence to convey that he took customers in the CBA Credit Structuring Group (including Mercury) 'at face value' if they said they were seeking refinance, stating 'there was always a possibility it won't happen but one works to towards hoping that it does'. I find his evidence in this respect implausible in the case of Mercury in early August 2009. There had been at that time a history of promises of refinance which had not been met and of the CBA reducing indebtedness.

48 Ms Dunlop gave evidence that she had little recollection of key conversations. That is understandable given the passage of time. However, she went on to dispute that she would have made some statements attributed to her in Mr Reynolds' statements and affidavits. In many cases, I consider that she took an unduly narrow view of the statements attributed to her and did not address that the substance of those statements may well be correct.

49 For example, as I set out below, Mr Reynolds stated that she informed him on a number of occasions that she would contact the Chinese suppliers to ensure that they were informed about Milfoil's position. She denied these statements on the basis that it was not part of her role to contact Chinese suppliers. However she did not address the thrust of the evidence (which ultimately was not disputed) that contact would be made with the Chinese suppliers to ensure they were informed of Milfoil's position. In my view, her approach to giving this evidence did Ms Dunlop no credit.

50 Further, Ms Dunlop was reluctant to make sensible concessions in response to questions. For example, she maintained that she had no view about the solvency of Mercury in mid-2009. I do not believe that, in her position as Financial Controller and as a Certified Public Accountant, she had no view about Mercury's solvency at this time. Further, when questions were asked about particular facts which all indicated that Mercury was close to being insolvent, she was very reluctant to acknowledge this was so.

51 As noted above, Mercury was in the business of designing, importing and distributing clothing. Approximately 90% of the goods imported by Mercury were already pre-sold for each season to major retailers including Myer, David Jones, Kmart, Target and Harris Scarfe. Most of the overseas suppliers were located in China. Most suppliers required a 50% deposit on shipment of goods and the balance within 30 days. Stock was delivered to Mercury's warehouse in Geelong. Most retailers would pay Mercury within 30 days of delivery. As a result, there was often a lag between payments to be made to suppliers and payments received from retailers. Out of season stock had little value and was sold through garment clearing houses.

52 The mark-up that MBG applied to stock purchased from overseas suppliers was about 35-50% of the 'landed cost'. The landed cost for stock was usually 20-30% more than the price paid to the overseas supplier as it included the transport costs and customs duties.

53 The CBA was the primary bank used by Mercury. On 22 January 2003, the CBA registered a fixed and floating charge over the assets and undertakings of MBL, formerly Austin Group Limited (the 'MBL charge'). On or about 17 May 2004, the CBA registered a fixed and floating charge over the assets and undertakings of MBG, formerly Austin Bros Group Pty Ltd (the 'MBG charge').

54 From about late 2007, Mercury had a multi option facility which consisted of trade finance which was regularly used to pay overseas suppliers (the 'CBA facility') and an overdraft facility into which payments from customers were made before being transferred to the CBA facility. It also had business credit cards, a CBFC asset finance account and a foreign exchange hedge facility. There were two principal Mercury accounts:

(1) a business transaction account held by MBL being account number 06318810286557 ('first CBA account');

(2) an overdraft account held by MBL being account number 06350410312939 ('second CBA account').

55 Mercury was transferred to the CBA's Group Credit Structuring Risk Management section in February 2008. This was the section of the CBA that dealt with customers who were experiencing financial difficulty by not meeting undertakings or showing signs of distress with poor financial results. At all relevant times, Mr Barbagallo was in charge of this section. From February 2008, he was aware of Mercury and supervised the management of Mercury's file by Adam Vincent and Tom Brooks. Mr Barbagallo had a good working knowledge of the Mercury file and he was the ultimate decision-maker within the section of how CBA managed it.

56 Mercury was transferred to this section for monitoring because it was experiencing financial difficulty from at least 2007. In September 2007, Mercury's CBA facility was reduced from $9 million to $3 million. This was achieved by MBL raising $6 million through Hawkeswood Investments Pty Ltd. Mr Barbagallo was aware that Hawkeswood Investments was connected with Opus Prime which collapsed in early 2008.

57 Mercury recorded a loss of $7.848 million for the year ended 30 June 2008 . In mid-to-late 2008, Mercury breached the terms of the CBA facility. In August 2008, its credit card limits were reduced from $200,000 to $40,000 and the CBA facility was reduced. There were discussions within the CBA for it to conduct an 'orderly exit' of the facility by the end of 2008. Despite attempts to arrange alternative finance, Mercury was unable to refinance the CBA facility in December 2008.

58 The impact of the global financial crisis in late 2008 and the depreciation of the Australian dollar also had a significant impact on Mercury's business increasing the costs of stock imported. Indeed Mr Barbagallo conceded that from about this time the CBA needed to 'get out of Mercury Brands on the best possible terms'.

59 Mercury unsuccessfully sought to obtain alternative finance throughout 2009 from Affiniti Business Finance Pty Ltd ('Affiniti') and Biron Capital. As a result, the CBA reduced the CBA facility progressively: from $3.5 million in April 2009 to $2.5 million in late June 2009, and then to $1.9 million in August 2009. Mr Barbagallo was aware that these measures had an adverse effect on Mercury's ability to pay suppliers for new stock and was impacting cash flow and turnover. By July 2009, Mr Barbagallo's task was to adopt an exit strategy for the CBA.

60 In fact, Mercury's financial position was very serious. The papers for the Mercury board meeting on 21 May 2009 record that Mercury had sought professional advice from Mr Stan Traianedes as to whether Mercury was insolvent. They also recorded that key staff including Ron Luff, the General Manager Commercial Operations, and Jacki McAvenna had been terminated. The preliminary final report for the year ended 30 June 1990 recorded a loss of $11.369 million.

61 From late June 2009, Mercury was unable to pay suppliers for stock it had ordered. Mr Luff gave evidence that by May 2009:

(2) MBG was having real trouble paying suppliers and he was directed to find alternative suppliers who had no history of MBG's poor payment record; and

(3) Mercury was 'in crisis in terms of being able to supply stock to meet retailers' orders'.

62 It was in that context that Mercury approached Mr Reynolds in early July 2009. That approach came through his son Steven who started working for Mercury in about May 2009 in a sales position. Steven had had extensive experience in sales but not in the clothing industry. He was a good friend of Anthony Blumberg, Mercury's Operations Manager. He was employed by Brendan Santamaria, Mercury's Chief Executive Officer. Steven knew Mr Santamaria socially.

63 Not long after he started work at Mercury, Steven became aware that:

(1) Mercury was having trouble getting stock from overseas suppliers to fulfil orders; and

(2) if these orders could not be fulfilled, then Mercury would be at serious risk of losing its supply agreements with several major Australian retailers such as Kmart, Myer, David Jones and Target referred to as the 'Majors'.

64 On 1 July 2009, Santamaria and Blumberg told Steven that Mercury had received orders from the Majors and that stock was waiting to be shipped to Australia subject to Chinese suppliers being paid. Mr Santamaria said that Mercury needed $500,000 to release the pre-sold stock. Mr Santamaria said that the CBA was restricting its funding and that Mercury needed to find another way to get those goods out of China. In the course of that conversation, Steven told them that his father was a retired banker and may be able to suggest a way of helping.

65 As a result, a meeting was arranged with Mr Reynolds on 2 July 2009. The meeting took place at the Reynolds family home in Hampton. Mr Reynolds, his wife Eleanor, Steven, Mr Santamaria and Mr Blumberg attended the meeting. The only evidence of that meeting in this proceeding was given by Mr Reynolds and Steven. Mr Reynolds and Steven also gave evidence of this meeting in their affidavits filed in the Federal Court proceeding.

66 In his affidavits, witness statement and oral evidence, Mr Reynolds referred to his dealings as being with 'MBL' as he believed that he was dealing with representative of the publicly listed company. The communications and correspondence passing between the parties in July and August 2009 would contribute to that belief. However, Finkelstein J found in the Federal Court proceeding that the agreement was with MBG.[7] That finding binds the parties in this proceeding. As a result, for convenience, I will refer to MBL and MBG as 'Mercury' except where necessary.

67 In summary, Mr Reynolds' account of the meeting, which I accept and which lasted about two hours, is as follows.

68 First, Mr Santamaria set out the nature of the difficulties being experienced by Mercury, in particular, that the CBA (which held a debenture charge) was limiting the finance available to Mercury with the result that Mercury could not pay for the release of new season stock from Chinese suppliers. Mr Santamaria also told him that the stock ordered was to be supplied to major retailers Kmart, Target, Myer and David Jones.

69 Second, Mr Reynolds made enquiries of the financial situation of Mercury. Mr Santamaria informed him that all creditor payments were in order and up-to-date and that Mercury was seeking to refinance with $3.5 million from Affiniti by 31 July 2009. Reference was also made later in the meeting to a potential capital injection by Biron Capital of $2 million.

70 Third, Mr Reynolds told Mr Blumberg and Mr Santamaria that it was unlikely that anyone would lend Mercury money because the CBA may crystallise its debenture. He explained that in order to get a third party to advance funds it was necessary:

(1) for the third party to advance funds to buy the stock from the Chinese suppliers directly invoiced to the third party;

(2) for Mercury to receive and deliver the stock to retailers as agent or trustee for the third-party; and

(3) for Mercury to issue an invoice to retailers in the name of the third party to ensure payment directly to the third party rather than Mercury or the CBA.

71 Mr Reynolds explained that the purpose of this arrangement was to ensure that the third party received payment of the funds advanced plus interest and that the CBA and/or any external administrator of Mercury would have no claim on the proceeds of sale of stock purchased with the third party funds. Mr Reynolds stated that this kind of arrangement could also be used by the CBA itself so that the CBA could assist clients by becoming the owners of the assets until repaid.

72 Fourth, Mr Santamaria stated that the arrangement outlined by Mr Reynolds was not one which Mercury had considered_._ In this context, Mr Blumberg asked whether Mr Reynolds would be interested in injecting $500,000 of share capital as he expected the shares in MBL to start to rise after the refinancing in late July 2009. Mr Reynolds said no: the only way he would be willing to proceed was if Milfoil was the third party in the arrangement he identified. He said that the only reason Milfoil would do so was because of Steven's involvement in Mercury and because MBL was a publicly listed company.

73 Fifth, Mr Santamaria said that he was willing to accept $500,000 on that basis. He said this payment would ensure the release of stock to Milfoil worth well in excess of Milfoil's advance. He said that the stock had a 40% mark up so that the amount invoiced to retailers would be significant and Milfoil would get its money back first within July 2009 and by 31 July 2009 at the latest.

74 Mr Santamaria said that if Milfoil were to purchase the stock in the manner discussed, Mercury could buy back stock from Milfoil on 31 July 2009 (as soon as the refinancing with Affinity was in place) or after the $2 million capital injection from Biron Capital or upon the sale of the business which could occur at any time as there were then on foot merger discussions with AHT.

75 Mr Reynolds replied that as soon as Milfoil was repaid, Mercury could keep the rest of the proceeds of sale of the stock purchased but that if Mercury failed to fulfil its side of the bargain, all stock would remain the property of Milfoil.

76 Sixth, Mr Santamaria advised that he had been authorised to negotiate an arrangement which included the payment of a fee of $70,000 by way of cash or fully paid MBL shares at 2.1 cents (6,250,000 shares). Mr Reynolds accepted this.

77 Seventh, Mr Reynolds told Mr Santamaria that, as Milfoil needed to borrow the $500,000 from an existing Westpac facility, it was necessary for Mercury to pay interest of 9.95% monthly in arrears on any outstanding balance of the Milfoil advance. Mr Santamaria agreed.

78 Eighth, Mr Reynolds questioned Mr Santamaria as to how the stock purchased by Milfoil could be identified. Mr Santamaria replied that the stock was all instantly electronically readable and identifiable. Mr Reynolds reiterated that invoices to retailers would need to be sent out in Milfoil's name and that Steven who was working at Mercury was authorised to sign invoices on behalf of Milfoil.

79 Ninth, in his witness statement, Mr Reynolds stated that Mr Santamaria must explain the Milfoil arrangement to the CBA. This evidence was not contained in his 23 February 2010 affidavit. Indeed, in his witness statement, Mr Reynolds went on to state that as 'a precondition' to Milfoil being involved, it was agreed that Mercury first had to inform the CBA of what was proposed and to discuss if the CBA wanted to do future transactions themselves on the suggested basis. He stated that Mr Santamaria assured him he would personally advise the CBA on 3 July about the arrangement and also arrange for Mr Reynolds to meet and speak with the CBA. Mr Reynolds also referred to this precondition in his statement to Victoria Police.

80 In cross-examination, it was put to Mr Reynolds that evidence about notifying the CBA in this meeting on July 2 or 3 July was a recent invention in an attempt to give notice to the CBA. Mr Reynolds rejected that assertion, maintaining that he wanted the arrangement proposed to be raised with CBA to be used for future transactions.

81 In his oral evidence, Mr Reynolds made clear that he asked Mr Santamaria to go to the CBA bank to explain the strategy he had given to them and which he believed the CBA should have used to protect itself. This evidence is consistent with Mr Reynolds' view of the benefits that would flow from the arrangement he had proposed more generally and his desire for the CBA to be aware of his role in devising it.

82 Whist I generally accept the evidence of Mr Reynolds about this meeting, I am not satisfied on the balance of probabilities that it was 'a precondition' that the CBA be notified. However, I have concluded that it is more likely than not that at the 2 July meeting Mr Reynolds insisted on the need to inform the CBA of the nature of the arrangement which Mr Reynolds proposed (including the arrangement agreed with Milfoil) and to discuss if the CBA wished to do future transactions on that basis. Mr Santamaria agreed to do so.

83 Steven's recollection of this meeting is less clear, but consistent with his father's. In his evidence, Steven stated that:

(1) Mr Santamaria and Mr Blumberg went through the company's problems;

(2) his father suggested a way to fix this by buying the stock direct from Chinese companies via Milfoil so that it could be released to the Australian retailers;

(3) his father said that all proceeds from the Australian retailers were to go into Milfoil's Westpac account;

(4) Mr Santamaria said that the retailers paid on 14 days;

(5) his father said he would take an upfront fee of $70,000 offered by Santamaria and that once Milfoil's advance was recovered, plus interest and costs, the balance of stock and proceeds would go into Mercury's account;

(6) if there was any delay with the payments into Milfoil account, Milfoil would get interest each month until paid; and

(7) Mr Santamaria said that if Milfoil failed to get its money back by the end of the month from refinancing or the possible sale of the business, the worst case would be that Milfoil owned the stock.

84 In his oral evidence, Steven said that his father rejected an offer to take shares in Mercury for his $500,000 investment. He also recalled that interest on the funds advanced was also discussed and recalled a reference to 9% or 9.1% compounding until the money was paid.

85 In order to make the Milfoil advance, Mr Reynolds increased the indebtedness on property owned by Milfoil (in which his son lived) under a facility with Westpac (the 'Westpac facility'). That facility has a limit of $870,000 and, after the Milfoil advance, about $600,000 was drawn down on it.

86 On 3 July 2009, Steven met with Mr Santamaria at Mercury's offices at about 8 am. Mr Santamaria gave Steven a letter addressed to Milfoil for consideration (the '3 July Mercury letter'). Steven delivered the letter to his father that morning.

87 The 3 July Mercury letter was on Mercury's letterhead and was in the following terms:

Assignment of invoicing related to direct stock payments

Firstly, thank you for supplying the short term AUD $500,000 working capital facility to Mercury Brands Limited and I am pleased to confirm the following:

* Milfoil Pty Ltd will make payments to Mercury Brands Chinese suppliers directly up to a value of AUD $500,000 - such payments to be mutually agreed and made by Milfoil Proprietary limited

* Mercury Brands Limited will assign invoicing for $500,000 from the order(s) to Milfoil proprietary limited

* Mercury Brands Limited acknowledges that the invoices are the property of, and for the benefit of Milfoil Pty Limited and has no equitable interest in these invoices. Milfoil Pty Limited's bank details are to be clearly displayed on the invoices as the payee and the beneficial owner. In the event that payment is paid to Mercury Brand [sic] Limited in error, Mercury Brands Limited agreed that the payment is held in trust for Milfoil Pty Limited and will pay the funds across immediately to Milfoil Pty Limited

* Mercury Brands will pay 9.95% per annum on the outstanding balance to be calculated on a month by month basis and invoiced by Milfoil Pty Ltd such invoice to be paid within seven days of issue

* In consideration of the facility; 6,250,000 share [sic] in Mercury Brand [sic] Limited [ASX:MCB] will be issued to Milfoil Pty Ltd with immediate affect [sic].

88 Mr Reynolds made handwritten notes on his copy of this letter. In relation to the working capital facility he wrote 'no, not a facility'. Other annotations were made at the time or during the course of 3 July 2009. Some of those annotations included a tick. Mr Reynolds gave evidence that the tick should not be read as correct but just that it had been noted. He gave evidence that the percentage of 9.95% was approximately 2% more than he was being charged on the Westpac facility. He said this figure was suggested by Mr Santamaria.

89 After reading the letter, Mr Reynolds told Steven he wanted to speak to Mr Santamaria to clarify a few things with him. In that conversation, Mr Reynolds said he told Mr Santamaria that:

(1) Milfoil was buying stock from the overseas suppliers and Milfoil was selling the stock to Mercury's customers: it was not providing any loan or working capital to Mercury;[8]

(2) Mr Reynolds wanted an assurance that all transactions were not on Mercury's balance sheet;

(3) any proceeds of sale that were inadvertently paid to Mercury would be held on trust for Milfoil;

(4) Mr Reynolds would need to see the invoices for the $500,000 to be remitted to Milfoil with each Chinese supplier's name, address and full banking details, including account numbers;

(5) Mr Reynolds would be remitting funds to China as directed by Mercury so Mercury must ensure that Chinese suppliers were aware that Milfoil would be buying new stock available for immediate shipment; and

(6) the amounts which Milfoil was to pay were to be inclusive of insurance and freight costs.

91 In his 23 February 2010 affidavit and in his witness statement, Mr Reynolds referred to a conversation he had with Ms Dunlop after his conversation with Mr Santamaria. The purpose was to ensure Ms Dunlop understood the arrangement with Milfoil. He stated that:

(1) Ms Dunlop told him she was personally overseeing the matter and that she would send documentation and invoices with the details of the amounts to be paid to the Chinese suppliers;

(2) Ms Dunlop would ensure that the Chinese suppliers understood that Milfoil's remittances were for new stock only, that the monies paid by Milfoil included CIF and that the invoices and other shipping documents were to be in the name of Milfoil;

(3) Ms Dunlop would immediately email the Chinese suppliers for confirmation of these arrangements;

(4) Ms Dunlop would ensure that Milfoil stock was clearly identifiable and marked as the property of Milfoil;

(5) Steven would sign the invoices to retailers in due course on behalf of Milfoil; and

(6) Milfoil would pass title to all residual stock to Mercury the moment Milfoil had recovered its outlay and the agreed fee.

92 Ms Dunlop first heard of Mr Reynolds and Milfoil in late June or early July 2009 when she was informed that Mr Reynolds could provide finance to Mercury to assist with purchasing stock from several Chinese suppliers. As I set out below, at that time she was aware that Mercury was in a desperate position to obtain funds to pay for stock to fulfil customer orders. She received a copy of the 3 July Mercury letter from Mr Santamaria at 10:46 am on 3 July 2009.

93 Ms Dunlop does not now recall this conversation with Mr Reynolds. However, she said she would not have made statements to the effect that she would email Chinese suppliers confirming the Milfoil arrangement or that she would ensure that the Milfoil stock was clearly identifiable and marked as the property of Milfoil.

94 Ms Dunlop said she would not have made the statements about the Chinese suppliers because it was not part of her role within MBG to communicate directly with Chinese suppliers. She did not deny that she said words to the effect that the Chinese suppliers would be emailed confirming the Milfoil arrangement which I consider to be the substance of Mr Reynolds' evidence. I find Ms Dunlop's evidence denying one aspect of Mr Reynolds' evidence but not the substance of it an attempt to discredit Mr Reynolds' evidence generally. I have concluded that on the balance of probabilities Ms Dunlop told Mr Reynolds that the Chinese suppliers would be emailed but the identity of the person who would email them may not have been discussed. However, Mr Reynolds' impression and recollection was that Ms Dunlop would do that.

95 Ms Dunlop said she would not have made the statements about identifying Milfoil stock because she said she did not know what stock was purchased by Milfoil at this time. I do not accept that she would not have made these statements. This was in a context where the whole purpose of the Milfoil advance was to release new but pre-ordered stock from Chinese suppliers. The 3 July Mercury letter made plain that the invoices for the stock are the property of, and for the benefit of, Milfoil. As I set out below, later on 3 July, she provided details of the 13 Chinese suppliers and the amounts to be paid (which she had obtained from the merchandisers) to Mr Reynolds. As result, I find it is more likely than not that Ms Dunlop did make such statements.

96 Later in the day around 3pm, Ms Dunlop gave Steven a bundle of papers with handwritten amounts which she said Milfoil had to pay to the Chinese suppliers in order to get the stock released.

97 Ms Dunlop asked whether Steven could deliver the documents to his father. Ms Dunlop told Steven that she had emailed the Chinese suppliers and notified them that Milfoil was buying the stock directly from them. He agreed to do so.

98 The bundle of papers were not the actual invoices for the goods to be released as a result of the Milfoil advance and did not correspond with the amounts to be paid by Milfoil. They consisted of:

(1) an invoice or invoices for each Chinese Supplier; and

(2) if the invoice did not contain the supplier's bank account details, a CBA remittance advice for each such supplier indicating the bank account details.

99 On each invoice Ms Dunlop had written a shorthand or alternative name for each supplier: for example the shorthand name for 'Qingdao Jinlifa Garment Co' was 'Jinlifa'. She also wrote the amount to be paid by Milfoil to each supplier in hand. For the most part, the amounts were round numbers like $20,000 or $70,000 and totalled $500,000, which Mr Reynolds had agreed to provide.

100 Steven delivered the bundle to his father at about 4 pm. Mr Reynolds rang Ms Dunlop on the afternoon of 3 July 2009 to query why the handwritten amounts to be paid did not correspond with the invoice amounts on the documents provided. Mr Reynolds states that Ms Dunlop informed him that:

(1) the amounts she had written on the forms were the sums that the Chinese suppliers had agreed to accept to release the new but overdue stock;

(2) she could not find any recent remittance for all these suppliers to confirm banking payment details so Mercury had to rely upon these invoices which had banking payment details recorded; and

(3) it was okay to proceed as she had emailed each of the suppliers advising them of the arrangement with Milfoil and of Milfoil's invoice requirements.

101 Ms Dunlop does not recall this conversation. Once again she disputed that she would have made statements to the effect that she had emailed Chinese suppliers confirming the Milfoil arrangement and that she would ensure that Milfoil stock was clearly identifiable and marked as the property of Milfoil. For these reasons set out above, I conclude that it is more likely than not that statements to this general effect were made by her.

102 At around 4:15 pm on 3 July, Mr Reynolds and Steven went to the Westpac branch in Hampton to make the 13 transfers as stated on the documents provided by Ms Dunlop. Steven signed each transfer. It took about an hour to process these transfers. Several times over the hour, Steven was in contact with Mr Santamaria and Ms Dunlop to discuss matters that needed clarification. Steven told Mr Santamaria and Ms Dunlop that each remittance would include the express condition 'CIF prepayment by Milfoil Pty Ltd for new stock to be shipped August 2009 and to be invoiced to Milfoil Pty Ltd or to order.'

103 Because of the exchange rate and fees, the amount exceeded the original $500,000 agreed by about $10,000. Steven asked Mr Santamaria if he wanted Milfoil to pay the additional $10,000. Mr Santamaria replied that would be great. The amounts paid to each supplier totalled $509,471.16 and were as follows:

Guandong Textiles Import and Export Knitwears Company Pty Ltd

104 When Mr Reynolds and Steven completed the transfers, they returned to the Reynolds family home. Mr Reynolds then faxed:

(1) a letter to Mercury dated 3 July 2019 (the '3 July Milfoil letter');

(2) the Westpac Overseas Telegraphic Transfer for the payment to each overseas supplier, each of which included the message 'CIF PREPAYMENT BY MILFOIL P/L NEW GOODS TO BE SHIPPED AUG 2009 AND INVOICED TO MILFOIL PTY LTD OR ORDER'; and

(3) the documentation for each supplier provided by Mercury earlier in the day.

105 In oral evidence, Mr Reynolds stated that the purpose of this message was to ensure that Milfoil was not paying for any goods that were shipped prior to 3 July 2009. He understood that the goods he was paying for had already been manufactured.

As requested Milfoil Pty Ltd, has transferred the sum of $509,471.16 including bank charges to the appended Chinese manufacturers bank accounts.

As agreed good [sic] will remain the property of Milfoil Pty Ltd when shipped CIF and will be received and prepared for delivery to the respective purchaser distribution centers [sic] in terms of your Company's firm written orders. All GST issues and other costs are for your account.

We will be charged interest for July on 31 July 2009 and ask that you remit the sum of $3,888.73 on or before that day directly into Milfoil Pty Ltd, Westpac, 360 Collins Street Melbourne account: 033-055 62 0945 under advice to us on the above fax number.

We will calculate the next months [sic] interest on the basis of the outstanding sum and advise before 31 August 2009.

We are advised goods will be shipped during July 2009 for receipt before end of July 2009 and be ready for dispatch and invoicing to the retailers in the first week of August 2009.

The goods are to be kept separate and identifiable from other Company stock, which we understand is the subject to a Debenture charge from the Commonwealth Bank and its successors.

Title to be retained by Milfoil Pty Ltd, over the goods and the debtor payments post invoicing until our aforementioned sum plus interest is paid in full.

Milfoil Pty Ltd, are to be repaid the principal sum on each payment made today from the proceeds of those invoices. You will retain the rest.

107 In oral evidence, Mr Reynolds said that, in his conversation with Mr Santamaria on the morning of 3 July 2009, Mr Reynolds asked for the $70,000 fee in cash and that Mr Santamaria replied that the board had the night before agreed with the proposed Milfoil agreement and had already issued 6,255,000 shares to Milfoil.

108 Mr Reynolds gave consistent evidence that the Milfoil advance was the amount of money that the merchandisers of Mercury had negotiated for the stock to be released and shipped. Based upon what he was told, he understood that the merchandisers had negotiated a discount with Chinese suppliers so that the goods in fact released would be worth more than the Milfoil advance. Indeed, Mr Reynolds understood that stock valued at about $2 million had been released.

109 Ms Dunlop denied that she ever informed Mr Reynolds about the discount negotiated with the Chinese suppliers or that the stock released was valued at $2 million. However, in [57] of his affidavit sworn 14 January 2010 in the Federal Court proceeding (the '14 January 2010 affidavit'), Mr Traianedes states that Ms Dunlop later also informed him that the value of the stock actually released may well have been two or three times the payment amount negotiated by the merchandiser and paid for by Milfoil. This was confirmed in his oral evidence before me.

110 Ms Dunlop does not recall saying this. She went on to say that she did not believe that she would have done so. She acknowledges that she may have said that the suppliers may release stock that had a higher cost price than the amount Mercury paid for them but she said that she did not know what stock was released or the value of that stock which varied according to landed costs and the mark-up applied. Once again, I prefer the evidence of Mr Reynolds and Mr Traianedes to the effect that Ms Dunlop told them that the value of the stock actually released was two or three times the payment amount negotiated by the merchandiser and paid for by Milfoil.

111 I have concluded that on the evidence before me the terms of the Milfoil agreement were:

(1) Milfoil would purchase the stock with the Milfoil advance from the Chinese suppliers which would be invoiced in the name of Milfoil (which accords with the terms alleged in paragraph 9(a) of the third amended statement of claim);

(2) Mercury would sell the stock purchased by Milfoil to Mercury customers with an invoice in the name of Milfoil or directing payment to be made to Milfoil (which generally accords with the terms alleged in paragraph 9(b) and 9(c) of the third amended statement of claim);

(3) once Milfoil had received payments totalling the Milfoil advance, outstanding interest as agreed and the agreed fee of $70,000:

(i) the balance of the payments received would be held on trust for and paid to Mercury; and

(ii) ownership of the balance of the stock would revert to Mercury (which generally accords with the terms alleged in paragraph 9(f) of the third amended statement of claim); and

(4) in the event that Mercury was paid in error for stock purchased with the Milfoil advance, Mercury held any such payments on trust to be paid to Milfoil in order to meet the Milfoil advance, outstanding interest as agreed and the agreed fee of $70,000 (which generally accords with the terms alleged in paragraphs 9(d), (e) and 9(g) of the third amended statement of claim).

112 It was one of the principal obligations under the Milfoil agreement that Mercury would direct customers to pay Milfoil and, if Milfoil received more than it was entitled to, it would hold the balance on trust for Mercury. In breach of that obligation, Mercury did not direct its customers to pay Milfoil. However, as I set out above, Mr Reynolds and Mr Santamaria discussed on 3 July that any proceeds of sale that were inadvertently paid to Mercury would be held on trust for Milfoil. That is also consistent with the last sentence of the fourth paragraph of the 3 July Mercury letter set out above:

In the event that payment is paid to Mercury Brand [sic] Limited in error, Mercury Brands Limited agreed that the payment is held in trust for Milfoil Pty Limited and will pay the funds across immediately to Milfoil Pty Limited.

113 On 6 July 2009, Steven informed Mr Reynolds that he had spoken to Mr Santamaria and Ms Dunlop that morning and that they had confirmed that they had read the 3 July Milfoil letter and checked the remittance advices and that everything was ok. Mr Reynolds asked Steven to obtain the pro forma invoices for Milfoil's records and the final transport documents for the stock. In a file noted dated 10 July he wrote:

Asked Steve is he monitoring our purchase [sic] assets? Don't want anyone committing conversion on us. May be hard to get money back. He understood. Speaks to Sue Dunlop everyday. Everything is in order.

114 Steven stated that on a number of occasions over the next five weeks his father asked him what was happening with the Milfoil stock. Steven said he regularly asked Ms Dunlop what was happening and whether there was any paperwork she needed him to sign. She kept saying everything was under control. In late July, Ms Dunlop told Steven that goods had been delivered and that she was keeping an eye out in case any of Milfoil's money came into Mercury's accounts. Ms Dunlop disputed that she told Steven that goods had been delivered. I conclude it was more likely than not that she did so.

115 In the last week of July 2009, Milfoil sent to Mercury an interest account for that month in the sum of $3,888.73. Mercury paid this interest directly into Milfoil's Westpac account on 30 July 2009.

116 In oral evidence, Mr Reynolds acknowledged that in July 2009 he took no other steps to try to obtain copies of invoices issued in the name of Milfoil in accordance with the agreement. Mr Reynolds said this was because he expected payment by the first week of August 2009.

117 For completeness, I note that in late July 2009, Milfoil advanced to Steve $60,000 to buy shares in Mercury as part of a rights issue. This purchase was made on the assumption that the share price in Mercury would go up when alternative finance was obtained from Affiniti by 31 July 2009. The arrangement was that the purchase price for the shares would be held 'in escrow' until the Affiniti finance was obtained. Notwithstanding that the Affiniti finance was not obtained, the purchase price of the Mercury shares was not repaid.

118 The events of 10 August have loomed large in this proceeding. It was on that day that Mr Reynolds reviewed the books and records of Mercury made available by Ms Dunlop and spoke to her about Mercury and arrangements with Milfoil. It was also later on that day that Mr Reynolds spoke with Mr Barbagallo in the presence of Ms Dunlop and his son Steven.

119 10 August 2009 was almost 10 years ago. As I set out above, it is difficult to recall with precision details of conversations that took place all that time ago. There are some contemporaneous records of Mr Reynolds' discussions with Ms Dunlop and with Mr Barbagallo.

120 Mr Reynolds prepared two file notes of these discussions. The first is entitled 'Milfoil Pty Ltd File Note 10 August 2009' (the 'first file note'). It is a detailed note of four pages. It deals with his discussions with officers of Mercury and information obtained during the course of the day on 10 August. It contains a lot of detail about the information obtained. It also deals with the conversation with Mr Barbagallo on that evening.

121 The second is headed 'Phone Call to Sam Barbargallo [sic] (Commonwealth Bank) in the presence of Sue Dunlop and Steven Reynolds Mercury Brands Limited 10.8.09.' (the 'second file note'). It also deals in a summary way with his discussions with Ms Dunlop and the information he obtained during the course of the day on 10 August 2009. It is signed by Mr Reynolds and Steven.

122 Mr Reynolds gave evidence that these were prepared from handwritten notes he made on 10 August which have been destroyed. Indeed, the second file note records Mr Reynolds took 12 pages of handwritten notes. Mr Reynolds gave evidence that these file notes were prepared on the evening of 10 August or the next day. Steven said that he signed the second file note within 24 hours of the events of 10 August 2009. This was challenged by the CBA in this proceeding which alleged that these file notes were in some way a later reconstruction or invention.

123 The CBA noted that these notes were not produced as evidence in the Federal Court proceeding. I accept the evidence of Mr Reynolds that these file notes were prepared within a short time of 10 August 2009. I also accept that the file notes were prepared based upon extensive handwritten notes of Mr Reynolds. This is confirmed by the content of the first file note which sets out the information Mr Reynolds obtained from Ms Dunlop. I will deal with this shortly.

124 In addition, Mr Reynolds referred to these discussions on 10 August 2009 in subsequent communications with Mercury, the administrator, the receivers and the CBA, particularly in late September and early October 2009. These include the letter to Mr Thomas dated 1 September 2009, a letter to Mr Traianedes dated 30 September 2009, emails to Mr Burrell dated 1 and 2 October 2009 and the letter to Mr Norris, the CEO of the CBA, dated 2 October 2009 (the '2 October letter'). I will deal with the relevant correspondence in this and in other sections of these reasons. However, I have had regard to them in reaching my conclusions in this section.

125 Ms Dunlop made no contemporaneous file notes of her discussions with Mr Reynolds on 10 August. Neither did Mr Barbagallo. Indeed, the first time that Mr Barbagallo was asked to set out in writing his recollection of this conversation was in response to the 2 October letter. Mr Barbagallo's response is contained in an email dated 26 October 2009 (the '26 October email'). I will address the contents of this email in due course.

126 Mr Reynolds was expecting to be repaid in full by 31 July 2009 or early August from the proceeds of sale of the stock purchased with the Milfoil advance or the Affiniti refinance. Payment of the Milfoil advance was not made by that time. As a result, on 8 August 2009, Mr Reynolds was very concerned. He asked Steven to arrange for him to see the directors of Mercury, Mr Santamaria and Ms Dunlop. A meeting was arranged for 10 am on 10 August 2009.

127 Mr Reynolds said he wanted to meet with the CBA. Steven said his father also wanted to speak to the CBA. This was challenged by the CBA. However, I conclude that Mr Reynolds did want to speak to the CBA and requested to do so. This is consistent with Mr Reynolds' statements to Mr Santamaria on 2 July 2019 set out above. This is also consistent with the email dated 10 August 2009 at 9:37 am, in which Mr Santamaria wrote to Mr Thomas enquiring if a meeting had been organised for Mr Reynolds to meet the CBA that day. The email chain appears to record that Mr Thomas replied to this message at 2:29 pm on that day. However, no response was produced.

128 Further, Mr Vincent gave evidence that Mr Reynolds phoned Mr Barbagallo at some stage on the morning of 10 August 2009. He spoke to Mr Vincent and left a message for Mr Barbagallo to call him back.

129 On 10 August 2009, Mr Reynolds met with Mr Santamaria, Mr Blumberg and Ms Dunlop. Mr Santamaria, Mr Blumberg and Steven were present at the meeting for about 20 minutes. Mr Santamaria told Mr Reynolds that the refinancing with Affiniti was still proceeding. Steven agreed with this version of events.

130 After that time, Mr Reynolds spent most of the day inspecting various financial documents provided by Ms Dunlop and talking with her. The first file note contains a great deal of detail of the information Mr Reynolds acquired from Ms Dunlop and his inspection of the files of Mercury made available by her. Its contents are consistent for the most part with the evidence of Mr Reynolds in relation to the information he learnt on reading the documents provided by Ms Dunlop and his discussions with her on 10 August.

(1) the CBA had refused to allow Mercury to take forward exchange contracts from October/November 2008 costing Mercury $1.2 million;

(2) the CBA had charged Mercury penalty fees over the past year of over $200,000 which is more than was paid in interest;

(3) Mercury's bank facility limit had been reduced from $8.5 million in 2007 to $2.3 million, of which $6 million came from Hawkeswood Investments;

(5) 80% of the trade debtors were Kmart, Myer or Target;

(6) sales were down because of the reduction of the credit facility by CBA;

(7) trade creditors totalled $4.7 million with all group tax and super up to date;

(8) the 'main problem' was the blowout from foreign exchange losses due to the lack of forward cover, penalty fees and reduction in the credit facility;

(9) there was a need to 'pump in $2m equity and then it would be a very profitable business'; and

(10) the refinancing options included GE Capital and Affiniti.

132 The file note also records the CBA had reduced the facility by 'just taking funds against the Directors [sic] wishes'. Details of reductions from April to August 2009 are listed by date. The note refers to further reductions that were to take place on 15 August and 31 August 2009.

133 It refers to the CBA and the conversation with Mr Barbagallo. It relevantly provides:

20. Asked about our appointment with the CBA. Dunlop told bank does not want to see me. I said it seems clear to me they are taking Milfoil trust funds to reduce their exposure as your company is insolvent and that she is worthless. I called my son and Bloomberg in and told them that. Bloomberg looked distressed. Asked for names and phone numbers of the CBA manager. Told Sam Barbagallo [sic] in Loan Recovery on [redacted] or Adam Vincent on [redacted].

134 In his 23 February 2010 affidavit Mr Reynolds stated that as a result of what he saw and heard from Ms Dunlop on 10 August he became aware that:

(1) Mercury appeared to be insolvent as far back as mid-2008 and certainly June 2008 when it lost $7.8 million for the year;

(2) Mercury had lost $1.3 million alone when the CBA refused forward exchange cover in late 2008 when the world financial crisis hit;

(3) Mercury lost another $5 million for the half year ended 31 December 2008;

(4) Mercury owed $4.7 million to unsecured creditors that they could not pay and $600,000 to the ATO for unpaid group tax;

(5) MBL suppliers were refusing to supply further stock on credit;

(6) Ms Dunlop provided a list of amounts which she said the CBA had 'simply taken out of their account over the last three months totalling $1m and were about to take another $0.5m by 31 August 2009 to reduce the facility from $3.8m to $2.3m'; and

(7) Mr Reynolds said to Ms Dunlop that Mercury was insolvent and she said yes.

135 In his witness statement, Mr Reynolds refers to his conversation with Ms Dunlop on 10 August including that:

(1) she disclosed information including the fact that Mercury was hopelessly insolvent and had been for a year or two and the CBA was aware of this;

(2) the CBA had recently been taking money as it arrived into the bank account in reduction of its debt against the wishes of the board of Mercury;

(3) the CBA had already taken out $1 million and was proposing to take another $500,000 by 31 August 2009;

(4) Ms Dunlop said there was enough money coming in to cover Milfoil's $509,000, mainly from a company named Ed Harry who paid on 60 days; and

(5) Mr Reynolds said that Mr Santamaria had told him that he would be paid within 14 days of delivery of goods to Kmart, Myer, David Jones and Target and there had been no mention of Ed Harry.

136 As is apparent, the evidence in Mr Reynolds' affidavit and witness statement is not identical to the file notes set out above. But it is consistent with many aspects of the matters recorded in those notes.

137 Mr Reynolds stated that, in light of this knowledge, he was very alarmed and angry. He called Mr Blumberg and Steven into Sue Dunlop's office and informed them in her presence that Mercury was hopelessly insolvent and the shares were worthless. He said Ms Dunlop agreed.

138 Steven agrees with this version of events. Further, during the discussion, Steven says that Ms Dunlop confirmed that the CBA had been taking money out of Mercury's accounts over the previous three months, reducing the facility by $1 million and was about to take out another $500,000 over the next couple of weeks.

139 In the course of these discussions, Mr Reynolds stated that Ms Dunlop told him that Mercury had not handled the transactions regarding the Milfoil stock in accordance with the Milfoil agreement because:

(1) the stock which had been purchased by Milfoil had been invoiced by Mercury directly to its customers;

(2) the invoices to Mercury's customers did not specify that payment was to be made directly to Milfoil; and

(3) Mercury had existing arrangements with some of its major customers for automated invoicing and direct payment of accounts and received payments from some of its customers in respect of Milfoil stock whilst not remitting those funds to Milfoil.

140 As to the last point, Mr Reynolds stated in his witness statement that Ms Dunlop said this process would get Milfoil's money back much quicker. She said Mercury only had to give back to Milfoil $509,000 plus interest and it would come from the last payment of proceeds to come in, mainly from Ed Harry who paid on 60 day terms and who owed $470,000 plus GST to Milfoil alone. Ms Dunlop said that the stock supplied to Ed Harry had formerly been ordered by Kmart who had rejected the stock because Mercury could not get it released. She said this was part of the stock paid for with the Milfoil advance. Mr Reynolds told Ms Dunlop that the deal was that he had to be paid first.

141 Mr Reynolds said he looked at the creditors listing and discussed them with Ms Dunlop. He noted that almost all sales since the Milfoil advance had been to Myer, Kmart, Target and Ed Harry, that there was $700,000 of bad debts (90 days and over) on the detailed listing analysis and that most of Mercury's trade debtors of over $2 million were those four retailers.

142 Mr Reynolds requested evidence of the stock purchased with the Milfoil advance or said he would go to the police. He told Ms Dunlop that it appeared Mercury was committing the fraud and tort of conversion. He said Ms Dunlop replied that she would send him copies of all delivery and invoicing documentation regarding the stock Milfoil had purchased. He also said he wanted the stock to be invoiced as arranged (i.e. in the name of Milfoil with funds directed to be paid to Milfoil). Ms Dunlop replied that Mercury had received a refund of about $6000 from one Chinese vendor, named Hubei, that Milfoil had paid in advance. She said she had just paid that into a Mercury account and kept it.

143 Ms Dunlop has little recollection of the relevant events on 10 August. She recalled Mr Reynolds coming into the Mercury offices. In her witness statement she did not set out her recollection of this meeting. She merely commented upon the evidence of Mr Reynolds in his witness statement.

144 However, in cross-examination she recalled spending a large part of the day with Mr Reynolds going through the books and accounts of Mercury, including the profit and loss statements and balance sheets. She recalled that it was unusual for an 'outsider' to look at the accounts. She said she showed him what loans were coming from the CBA and who the debtors and creditors were. She agreed that these documents would have shown significant losses and negative equity of Mercury.

(1) she made admissions as to the 'woeful state' of Mercury's finances; and

(2) she readily agreed that Mercury was 'hopelessly insolvent and the shares were worthless' in the presence of Mr Blumberg and Steven.

146 In her witness statement, Ms Dunlop said she did not agree that Mercury was insolvent and that it was not part of her role to comment on the value of shares. She said that at the time she understood MBG was solvent and had no reason to believe otherwise. In cross-examination, she seemed reluctant to admit the serious financial position of Mercury in mid-2009.

147 Further, in cross-examination she said that she did not form her own view about the solvency of Mercury but just acted on what she was told by other people, the board and the auditors. However, she acknowledged:

(1) that, by June 2009, there were issues with suppliers not being paid in accordance with their trading terms and that suppliers were becoming reluctant to supply goods on credit as Mercury could not pay them;

(2) she knew that Mercury's debts were not being paid in the ordinary course of events or on time;

(3) the reduction of the CBA facility and inability of Mercury to buy new stock; indeed she agreed that in July 2009 Mercury was in a 'desperate position' to fulfil retail orders;

(4) she recalled the chief executive officer's report from May 2009 which recorded, among other things, that:

(a) gross sales were down by $880,000 due to Mercury's inability to pay suppliers on time and orders of retailers continued to be pushed out;

(b) the full season forecast of $17.6 million was at risk;

(c) the chief executive officer and Sue Dunlop were reviewing forward orders and cash flow to determine what was to be shipped in the context of suppliers being reluctant to deal with Mercury because of payment issues;

(d) Mr Luff and Ms McAvenna had been removed from the business with plans to remove another 20% headcount prior to 30 June 2009, saving $400,000;

(e) there was old stock in the warehouse that was difficult to 'move'; and

(f) she was asked to approach a number of suppliers to negotiate how much money they would require from the company to release pre-ordered stock.

148 In all these circumstances, I do not accept that Ms Dunlop did not have her own view as to the solvency of Mercury. She is a Certified Public Accountant and was Financial Controller at Mercury. In my view, she must have considered these issues and formed views about the financial position and solvency of Mercury. Further, the need for and unusual nature of the arrangement with Milfoil must have raised real concerns in her mind about the ongoing solvency of Mercury. To even a lay person, absent finance then being available, Mercury was in a dire state.

149 In these circumstances, given that Ms Dunlop spent most of the day with Mr Reynolds going through the financials of Mercury, I conclude that it is more likely than not that she made comments to the effect that Mercury was in a very difficult or desperate state financially.

150 Ms Dunlop does not recall telling Mr Reynolds that any of the stock which was formerly the stock ordered by Kmart but subsequently sold to Ed Harry was part of the stock paid for by the Milfoil advance. However, she did not deny other statements to the effect that Mercury had only to pay $509,000 plus interest to Milfoil and that this amount would come from the last payment from Ed Harry who paid on 60 day terms and who owed $470,000 plus GST to Milfoil alone.

151 Further, Ms Dunlop does not recall stating that she would send copies of all delivery and invoicing documentation regarding the Milfoil stock to Mr Reynolds. But it is important to recall that one of the purposes of this meeting was for Mr Reynolds to know the details of the stock purchased with the Milfoil advance so that he could be repaid. Given Mr Reynolds' persistent nature, I consider it more likely than not that Ms Dunlop did make statements to this general effect.

(1) she said that when Milfoil purchased the stock on 3 July 2009, stock levels in the warehouse were very low;

(2) she said that she had lied to investigative accountants undertaking a due diligence for the new lender on 30 July 2009 by telling them the Milfoil advance was a loan and that all stock and debtors were Mercury's; and

(3) she provided a list of the amounts she said the CBA had taken out of Mercury's accounts. She said she provided a list of the repayments that were due.

153 As to the first matter, Ms Dunlop seemed reluctant to acknowledge there was limited stock received in May and June 2009. However, as noted above, she acknowledged that the reduction of the CBA facility had an effect on the ability of Mercury to buy stock and suppliers were in fact reluctant to supply stock during this period. Indeed, she agreed that in July 2009 Mercury was in a 'desperate position' and needed the stock purchased with the Milfoil advance to fulfil retail orders. Further, she ultimately agreed that the stock in the warehouse was only old stock and it became very difficult to sell without significant reductions. As a result, I conclude that she did say to Mr Reynolds words to the effect that new stock was low when the Milfoil advance was made.

154 As to the last matter, there is a dispute as to whether Ms Dunlop told Mr Reynolds that the CBA had been reducing the CBA facility without the approval or consent of Mercury. It is important to note that the first file note provides details of the amounts withdrawn from the Mercury accounts between April and August 2009, totalling $1 million, and the further amounts to be deducted, totalling $500,000, by the end of August. This is confirmed by the evidence of Mr Reynolds and Steven. It is not disputed by Ms Dunlop. Mr Reynolds maintained in his oral evidence that Ms Dunlop told him these amounts had been withdrawn without approval. He said they were the exact words used by Ms Dunlop in August 2009.

155 Further, it is not disputed that Mercury did not want its CBA facility reduced in this way and argued against these reductions. This is because of the impact it was having on its business. This is consistent with the emails between Mercury and the CBA in late July 2009 and in late August 2009. It that sense, Mercury did not consent to or approve of them. But Mercury had knowledge of them and had to accept them. I think this is what Ms Dunlop was trying to convey. In Mr Reynolds' mind, he saw this as the CBA withdrawing money without consent.

156 As a result of all of these matters, I generally prefer the evidence of Mr Reynolds about his dealings with Ms Dunlop during 10 August 2009 leading up the call with Mr Barbagallo. Relevantly, I find that he became aware that Mercury was in serious financial difficulty from the financial information recorded in the first file note. I also find that Ms Dunlop told him words to the effect that:

(1) Mercury was in a desperate financial state: it had large debts and suppliers were refusing to supply further stock on credit;

(2) the CBA had recently been reducing the CBA facility from monies in the Mercury account in reduction of its indebtedness: the CBA had taken out $1 million and was proposing to take another $500,000 by 31 August and Mercury was not happy about this;

(3) Mercury had not handled the transactions regarding the Milfoil stock in accordance with the Milfoil agreement because the stock which had been purchased by Milfoil had been automatically invoiced by Mercury to its customers and those invoices did not specify that payment was to be made directly to Milfoil;

(4) Mercury was receiving payments into its CBA account in respect of the Milfoil stock whilst not remitting those funds to Milfoil as required;

(5) there was enough money coming in to cover the Milfoil advance from a company called Ed Harry who owed $470,000 plus GST and paid on 60 day terms;

(6) Ms Dunlop would provide Mr Reynolds with copies of all delivery and invoicing documentation regarding the stock Milfoil had purchased; and

(7) there was little new stock when Milfoil made the Milfoil advance on 3 July 2009.

157 Mr Reynolds called Mr Barbagallo in the presence of Ms Dunlop and his son Steven a little before 6:00 pm on 10 August. Mr Reynolds spoke to Mr Barbagallo on his mobile phone, on speakerphone. Mr Barbagallo was in his office with Mr Vincent opposite him, but Mr Vincent could only hear what Mr Barbagallo said. As noted above, Mr Vincent gave evidence that Mr Reynolds had phoned Mr Barbagallo at some stage during the morning of 10 August 2009 and left a message for Mr Barbagallo to call him back. Mr Barbagallo did not do so.

158 Each of the first file note and the second file note prepared by Mr Reynolds contains references to the conversation with Mr Barbagallo on the evening of 10 August 2009.

Asked for names and phone numbers of CBA manager. Told Sam Barbagallo in Loan Recovery on and [sic] [redacted] or Adam Vincent on [redacted]

Rang Mr Barbagallo on his mobile [redacted] from Sue Dunlop's office on my mobile [redacted] with speaker on, with Dunlop and my son Steven present. Barbagallo was uncomfortable when he got my call and said he could not speak to me. When I asked why not?, he said because I had invested [$0.5 million] in Mercury Brands in July 2009. Told him that was untrue and that I had bought stock they could not pay for themselves. See separate file note. In any case, I fully explained our secure arrangements with Mercury Brands, i.e., that we bought the outstanding stock ourselves direct from 13 Chinese suppliers and are standing in the shoes of Mercury Brands to see transactions are completed with K mart, Myer, Target and Ed Harry. The stock is on our balance sheet not Mercury Brands and proceeds are Milfoil's and must go into our Westpac account. Any of our proceeds that for whatever reason may wrongly go into Mercury Brands account with the CBA, are protected and secured and held in trust for Milfoil under a 3.7.09 formal written agreement and must be on forwarded instantly within the payments system to Milfoil at Westpac. Under no circumstances are the CBA to touch any Milfoil money or it will be breach of trust and theft. You have taken $1m out of Mercury Brands account already and about to take another $0.5m this month. It better not be Milfoil money which I suspect it is as we have not received any ourselves. He agreed to be careful not to touch any Milfoil money.

Also pointed out to Barbagallo that the Company has been insolvent for a year and your Bank knows it doesn't it.? [sic] He said yes! I also said that the Bank would have written this debt off and he said yes to that as well. I said you have been charging the client massive penalty fees which are unlawful. He said he is determined to get the Bank's money back whatever it takes. I said be extra careful not to touch ours as there will be criminal and financial consequences. Call ended after 3 minutes. Dunlop and Steven witnessed the whole call and what I told Barbagallo.

160 The second file note then records that Ms Dunlop gave Mr Reynolds the mobile number of Mr Barbagallo, that she dialled it on Mr Reynolds' mobile phone and that Mr Barbagallo answered. The file note then records:

I said my name is Terry Reynolds and I am ringing you from Sue Dunlop's office and Mercury Brands. She is sitting beside me if you need confirmation. He said I cannot talk to you. I asked why not. He said because you're from Milfoil and you invested $500,000 into Mercury Brands in July. I asked him who told him that as it was not true. He said Phillip Thomas the managing Director. I said Milfoil invested no money in Mercury Brands. It purchased newly completed but overdue job lot stock itself from Mercury Brands Chinese suppliers with the transactions on our balance sheet, not Mercury's. That Mercury are acting as bailee to deliver the goods direct to the retailers, Myer, K Mart, David Jones, target Ed Harry [sic] etc distribution centres and all payment proceeds had to go direct to Westpac who advanced the funds to Milfoil. Only when Westpac had been repaid in full would we agreed to Mercury Brands retaining the balance beyond that, but at this point nothing had been credited to the Westpac loan account and it should have been cleared week or more ago by say 31.7.09. I said Sue Dunlop said you are just gratuitously taking money out of the Mercury Brands account to reduce the CBA debt and have taken $1m and are about to take another $500k. He said yes! I said well you better be sure that it is not Milfoil proceeds or it will be conversion and theft as our funds if the [sic] come into the CBA Mercury Brands account are held on trust in a formal trust agreement between Mercury Brands and Milfoil. They must be immediately remitted on to Westpac. They are outside the reach of the Bank's debenture and a liquidator. Barbagallo said he understood and would be careful to liaise with Ms Dunlop and not take Milfoil money.

I said I have spent the day going through the accounting records with Sue Dunlop, taking notes and discovered this Company is hopelessly insolvent and has been for at least a year and the Bank knew this. He said yes. I also said the bank would have written this debt off or made provision for a loss a while ago and he said yes again. I reiterated that under no circumstances is he to touch the substantial amount of Milfoil proceeds or I would have him charged. He agreed but then said "he was determined to get the Bank's money back whatever it took". Before ending the call I said just be sure you don't touch Milfoil's.

161 These two file notes of this conversation are generally, but not altogether, consistent. In the first file note, it is stated that Mr Barbagallo 'agreed to be careful not to touch any Milfoil money'.

162 In the second file note, it is stated that Mr Barbagallo:

(1) agreed that the CBA had taken $1,000,000 out of the Mercury Brands account and was about to take a further $500,000 to reduce the CBA debt;

(2) said he understood Milfoil's position and would be careful to liaise with Ms Dunlop and not to take Milfoil money; and

(3) agreed with Mr Reynolds' statement that he is not to touch the substantial amount of Milfoil proceeds.

163 In his witness statement, Mr Reynolds gave evidence that:

(1) when Mr Barbagallo answered the phone, Mr Reynolds said that he was Terry Reynolds ringing from Mercury. Mr Barbagallo stated he could not talk to Mr Reynolds. Mr Reynolds demanded to be told why not. Mr Barbagallo said 'because you're from Milfoil' and he could not talk to Mr Reynolds because he had invested $500,000 in MBL stock in early 2009;

(2) Mr Reynolds asked him who told him he was investing in MBL and Mr Barbagallo replied that Phil Thomas, the Managing Director, told him in early July that Milfoil invested $500,000;

(3) Mr Reynolds explained that he was not an investor: the arrangement was that Milfoil had purchased $510,000 worth of new but overdue stock itself from Mercury's distressed Chinese suppliers and that Mercury was selling the stock for Milfoil with the proceeds going to into Milfoil's Westpac account, but that had not happened. Instead, the money was apparently flowing into Mercury's account with the CBA;

(4) Mr Reynolds said that Ms Dunlop had told him that since April the CBA had taken $1 million out of Mercury's accounts 'without the approval of the MBL board' and that CBA intended to take a further $500,000 by 31 August 2009. Mr Reynolds said that some of the earlier money and the $500,000 the CBA intended to take was most likely Milfoil's money because Mercury did not have any stock of its own to sell. Mr Reynolds said he must liaise with Ms Dunlop to ensure none of the money the CBA was taking was Milfoil's;

(5) Mr Reynolds said that Milfoil's money were trust funds under the arrangement with Mercury. As such, they were outside the reach of the CBA's set-off arrangements and debenture charge and the same with the liquidator. If the CBA took money out of Mercury's account that exceeded what was Mercury's and left Mercury unable to pay Milfoil in full then the CBA would have to refund those funds to Milfoil;

(6) any attempt to touch Milfoil money by Mercury or the CBA would result in civil and police action for conversion and theft;

(7) Mr Barbagallo acknowledged that the CBA had known for a long time that Mercury was trading insolvently and that the bank had written-off the Mercury debt;

(8) Mr Reynolds told Mr Barbagallo that he did not have any right to deal with Milfoil stock and cash proceeds thereof, which Mercury held on its behalf in trust and had to be fully accounted for to Milfoil, to which Mr Barbagallo replied 'okay'. He then agreed to be careful not to touch any Milfoil proceeds or stock and would assist Mercury to remit them on to Westpac as Milfoil proceeds roll in; and

(9) Mr Barbagallo finished by saying he 'is determined to get the bank's money back, whatever it takes'.

164 Mr Reynolds' witness statement was, for the most part, consistent with the contents of these file notes. However, in his witness statement, he said that:

(1) Mr Barbagallo might have said the CBA had written-off the Mercury Brands debt 'or maybe [he] meant [the CBA] made provision for a bad debt'; and

(2) he did not say that during the 10 August conversation Ms Dunlop said that the CBA was gratuitously taking money out of the Mercury Brands account.

165 Further, in his oral evidence, Mr Reynolds said he told Mr Barbagallo that the Milfoil advance had bought stock valued in excess of the amount of the Milfoil advance.

166 The most fulsome account of this conversation is contained in a letter written by Mr Reynolds at about this time: the 2 October letter. The heading of the 2 October letter referred to an 'ALLEGED CRIMINAL CONSPIRACY TO DEFRAUD INVOLVING COMMONWEALTH BANK (AND MERCURY BRANDS LIMITED GROUP) ...'.

167 In that letter, Mr Reynolds sets out his banking knowledge, skills and achievements, including that he twice 'guided the Federal Government to avoid a banking collapse in Australia' in 1991 and 2008. He then set out the details of the 'apparent fraud' involving Mercury and the CBA. He set out the critical facts in relation to the July agreement and the Milfoil advance, namely, that Milfoil advanced $510,000 to purchase goods to be delivered to suppliers, with suppliers being directed to pay directly into Milfoil's Westpac account. He stated:

The agreement was Mercury would clear and deliver the goods to K Mart and Myer and David Jones as our agent but at all times showing Milfoil Pty Ltd, as owner, with express instructions that the major portion of the invoice, the landed cost price of the goods, would be remitted from the retailers direct into Milfoil's Westpac account. We agreed to allow Mercury Brands Limited to retain the normal profits of the transactions, which was said to be a 40% mark-up, as long as it all proceeded as agreed.

On 10 August 2009 ... I attended the Company and met with Mercury's Financial Controller, Sue Dunlop, where she advised the Bank had just gratuitously taken $200,000 from Mercury's bank account and were about to take another $300,000 without any authority.

I asked her to immediately ring the Commonwealth Bank for me and I spoke to the executive responsible for the Account, Mr. Sam Barbarello [sic]. An extraordinary conversation took place where Mr. Barabarello [sic] stated to me "that he could not speak to me because I was an investor in Mercury Brands Limited, having in early July invested $500,000 cash in to the Company". I asked him "where did you get that information from?" He responded "that the Managing Director of Mercury Brands Limited, Mr. Phil Thomas had told him". I informed him "that this was not the case and the circumstances and legalities of our $510,000 one-off assistance was ex Mercury Brands Limited's balance sheet". "We had agreed to one off assistance for a month just to enable fulfilment of Mercury's June/July contractual supply commitments to K Mart, David Jones and Myers with clothing stock from China while refinancing". Moreover, "we undertook the transactions, in our name and on our balance sheet, so as to not place at risk our money to a Mercury liquidator or a Receiver appointed under a debenture charge held by the Commonwealth Bank".

I also mentioned to him "that according to advices by the Mercury accounting staff, his office has a history of just helping yourselves - about $7 million so far from Mercury and its investors, including $6 million of 'Opes Prime' money, on the erroneous basis that you could do it because you hold a debenture charge." According to the Mercury, Financial Controller, the funds had been deducted, each time by the Bank from the Company account, without hers or the Board's approval.

Accordingly, I advised Mr. Barbarello [sic] "that our remittances were made by Milfoil Pty Ltd, in our name, the stock was purchased by us and in our name, and the proceeds of our transactions were to go direct into Milfoil's Westpac account from the retailers. If part or all of the funds, by chance, ended up in Mercury Brands Limited account, by processing error or otherwise, which seemed the case, they would be held 'in trust', and remain our property. Therefore the Bank had no lawful right to our $510,000 funds".

Mr. Barberello [sic] acknowledged the Commonwealth Bank had already written the Mercury Brands Limited debt off in full,[9] but he said "he was personally determined to get all the money back for the Bank."

I conveyed to Mr. Barberello [sic] "that by just gratuitously snatching Company positive bank balances at will, was not the way to do it. The Bank has no authority to do so unless the debenture charge is "crystallised" and a Receiver appointed to do it. The banks actions was causing a nightmare to Mercury Financial staff in trying to manage their lawful normal course of business payment commitments and could result in legal action by this public Company's shareholders."

Mr. Barbarello [sic] then said "the bank would not now take the $200,000 second part of the $500,000 they proposed to take in the next few days" But the Bank did anyway.

Clearly the statement that "we invested $510,000 into the Company itself" by Mr Thomas, was the catalyst to Bank staff unlawfully using the misinformation to jumping in first, and taking $500,000 of our funds held in trust, to permanently reduce your Bank's written off, Mercury group debt. In international banking circles, it is referred to as "aggravated breach of trust." And has sent a lot of bankers to prison recently.

169 This version of events is generally consistent with Mr Reynolds' file notes. However, it contains reference for the first time to:

(1) 'Opes Prime' money being invested and the CBA erroneously withdrawing funds in the belief it could do so under its debenture charge;

(2) the CBA's actions of 'gratuitously snatching' credit balances, causing a nightmare to Mercury's financial staff in trying to manage their lawful normal course of business payment commitments and could result in legal action; and

(3) Mr Barbagallo stating 'the bank would not now take the $200,000 second part of the $500,000 they proposed to take in the next few days', but the Bank did anyway.

170 Mr Reynolds wrote again to Mr Norris on 6 October 2009. In relation to the 10 August conversation, he wrote:

The Bank, [sic] was made aware in mid August by the writer of our 3 July 2009 direct prepayment and unencumbered ownership of the relevant stock, and the possibility that our $500,000 plus proceeds may be inadvertently deposited into Mercury Group's operating account. But the bank still took the $500,000 in August 2009 in two tranches, one of $300,000 and the second of $200,000 at that very time revenue from our stock was due.

...

The Commonwealth Bank had known for at least a year that Mercury Group was "insolvent"... Yet the Bank, without appointing a receiver until two weeks ago, progressively took out large tranches of funds to the detriment of other creditors perhaps unwittingly dealing with Mercury in the normal course of business.

According to your account Manager the Bank had already written its indebtedness off. So why collar [sic] our trust money when we were assisting you and the Company?

We reiterate advices in our previous letter that when discussing this Company with the account manager, he stated of being aware that our Company had placed $500,000 in new equity into the Company in July 2009, which we advised was not the case and he had been wrongly informed - we were not an investor injecting equity. We asked him not to take the $500,000 as it was not Mercury Brands Limited funds, but likely our funds held in trust.

171 Mr Reynolds was cross-examined at great length about the inconsistencies between the versions of the conversation with Mr Barbagallo on 10 August. It was put to Mr Reynolds that his version of events was not true, in particular, that Mr Barbagallo agreed that:

(2) the CBA had written-off or made provision to write-off the Mercury debt;

(3) the CBA would be careful not to touch Milfoil's money; and/or

(4) the CBA agreed not to proceed to take $500,000 or part thereof in reduction of Mercury's indebtedness to the CBA.

172 When it was suggested to Mr Reynolds that making these statements was inconsistent with banker/customer confidentiality, he replied that, from his experience, confidential customer information was regularly disclosed by banks: in any event, he said Ms Dunlop, the Financial Controller, was present for the telephone conversation. When it was suggested that a senior person in the position of Mr Barbagallo would not have agreed with matters about the client which were against the CBA's interests, Mr Reynolds maintained that statements to this effect were made by Mr Barbagallo.

173 When it was put to Mr Reynolds that these statements were a complete fabrication, Mr Reynolds maintained that they were true.

174 It was put to Mr Reynolds that the statement relating to Opes Prime and the CBA helping itself to $7 million (which was contained in direct quotes in the 2 October letter) was not in his file notes. He agreed. Mr Reynolds then conceded that he did not in fact refer to $7 million but that he had put it in more general terms. Mr Reynolds said he did not know if he said anything to him about the debenture charge.

175 When he was taken to a statement to the effect that the Mr Barbagallo agreed not take out $200,000 from the Mercury account to reduce indebtedness in late August 2009,[10] Mr Reynolds agreed it was not in his file notes. However, he maintained that was what was said.

176 When he was taken to the passage in the 2 October letter about the CBA 'gratuitously snatching' Mercury's money and causing a nightmare to staff, Mr Reynolds agreed that was not in his file notes. Mr Reynolds said the file notes did not record everything. He maintained he said that the CBA was gratuitously taking Mercury's money to reduce its indebtedness.

177 Mr Reynolds was asked in cross-examination how, on the basis of what he told Mr Barbagallo on 10 August, Mr Barbagallo or anyone from the CBA could determine whether any money coming into the CBA accounts was the money of Mercury or Milfoil. Mr Reynolds acknowledged that it was his obligation, and not that of the CBA, to work out which stock had been purchased with the Milfoil advance, whether it had been sold and whether any proceeds had been received. He acknowledged that this had not been done by him by 10 August 2009. Indeed, Mr Reynolds acknowledged that he did not know of all the Milfoil stock on 1 and 4 September, notwithstanding the documents provided to him on 4 September. He acknowledged it was his obligation to notify Mr Barbagallo of what trust money of Milfoil's was going into the Mercury accounts.

178 However, Mr Reynolds said his case was that once the CBA had been put 'on notice', it should have got together with Mercury and anybody else that was involved to sit down and work out who was entitled to what.

179 Steven's recollection of this conversation is now not clear but generally consistent with his father's version. In both his affidavit in the Federal Court proceeding and his witness statement, Steven recalled that:

(1) his father demanded to speak to the CBA manager;

(2) he listened on loudspeaker as his father spoke to Mr Barbagallo; and

(3) he heard his father say that Milfoil had not invested any money in Mercury and purchased stock worth $509,000 from Mercury suppliers and that the CBA had no right to deal with that stock or its proceeds.

180 In his witness statement, Steven stated that, when Mr Barbagallo answered, his father said it was Terry Reynolds and that they were meant to meet him at Sue Dunlop's office. Mr Barbagallo said he could not speak to his father because he was an investor in Mercury. He said that his father said he was not an investor and when his father said that the CBA should not touch the stock or any proceeds, Mr Barbagallo said okay. He said his father asked him to confirm he was not going to take the money which was held in trust.

181 This recollection of events was generally confirmed in Steven's oral evidence. He said the conversation with Mr Barbagallo was a professional, firm and factual conversation between the two of them. He remembered his father telling Mr Barbagallo not to take out money because it was held on trust. He did not remember what Mr Barbagallo said in response, only that he agreed. It was put to him that the matters referred to in his file note were not in his affidavit or his witness statement. He agreed. In my view, Steven made sensible concessions about this file note and his recollection of the conversation.

182 Ms Dunlop has little recollection of this conversation. Ms Dunlop recalls Mr Reynolds telephoning Mr Barbagallo from Mercury's offices. She recalls that it was a short conversation. She also recalls Mr Reynolds telling Mr Barbagallo about how good he was at banking and how much of an expert he was. Her recollection was that:

(1) Mr Reynolds did not explain the arrangement between Milfoil and Mercury;

(2) Mr Barbagallo told Mr Reynolds he could not talk to him as he was not an authorised representative of Mercury;

(3) Mr Barbagallo ended the telephone call before Mr Reynolds could say anything other than how good he was at banking and how much of an expert he was.

183 She reviewed the file notes of Mr Reynolds. She disputed that she said that the CBA was gratuitously taking money out of Mercury's account to reduce the CBA debt and that the CBA had taken $1 million and were about to take another $500,000. She said that, if Mr Reynolds had attributed this comment to her in front of a representative of the CBA, she would have been offended and would have corrected him. I agree with this aspect of Ms Dunlop's evidence. I think that this aspect of Mr Reynolds' file note is not correct and is an example of him overstating his position.

184 Mr Barbagallo recalled the telephone call, which came 'out of the blue' from Mr Reynolds. It was in the afternoon and the call was received when he was at his office desk at 385 Bourke Street, Melbourne. At that time, Mr Barbagallo was working in an open plan environment and, at the time of the call, Mr Vincent happened to be at his workspace. However, Mr Vincent could not hear the call as Mr Barbagallo did not have his phone on speakerphone. Mr Barbagallo said the call lasted for three to four minutes. Mr Barbagallo's version of the call is as follows.

185 First, Mr Reynolds introduced himself and said words to the effect that he was calling about Mercury, that he got Mr Barbagallo's contact details from Mr Thomas and that he was calling from Mercury's premises. Mr Barbagallo said he could not confirm or deny that Mercury was a customer. In oral evidence, Mr Barbagallo said this was the first thing he said to Mr Reynold: it was the CBA's standard response to someone who wanted to talk about a customer, notwithstanding Ms Reynolds was at the customer's offices.

186 Second, Mr Reynolds said he was a former Westpac executive with involvement in distressed companies and that he knew Greg Manning because he used to work with him at Westpac. At the time of the call, Mr Barbagallo reported to Mr Manning. Mr Barbagallo responded that it did not matter if Mr Reynolds knew Mr Manning, he could not talk to him about a customer.

187 Third, Mr Barbagallo said words to the effect that if Mr Reynolds was an investor or potential investor in Mercury, he could not speak to him and he was unwilling to discuss with him any matter relating to a customer of the CBA. Mr Reynolds replied that he was not an investor and that he was very experienced in these sort of matters and that he knew how to look after himself. Mr Barbagallo said he considered the conversation to be strange. Mr Barbagallo said that Mr Reynolds did not say he was a lender.

188 However, Mr Barbagallo gave evidence that he assumed Mr Reynolds might be a lender if he was not an investor, but that Mr Reynolds did not tell him he was a lender and Mr Barbagallo did not ask. Later, Mr Barbagallo said that he thought Mr Reynolds might be an investor in Mercury because Mr Thomas had told him that Mr Thomas had been in discussions with investors in June and July 2009.

189 Fourth, Mr Reynolds said words to the effect that he gave advice to Bob Hawke and Paul Keating while they were prime ministers and that his advice helped save the Australian economy in the early 1990's and again in 2008. He said Mr Reynolds 'rambled on' about how good he was and how clever he was.

190 Fifth, Mr Reynolds said his son worked in a warehouse operated by Mercury. As a result, Mr Barbagallo thought Mr Reynolds might be worried about the security of his son's job. Mr Barbagallo said Mr Reynolds mentioned Mr Thomas but cannot recall what was said other than he got Mr Barbagallo's contact details from him.

(1) money belonging to him finding its way into Mercury's accounts; or

(2) him or anyone else paying invoices on behalf of Mercury.

Mr Barbagallo said that if he had said either of those two things, Mr Barbagallo would have immediately spoken with Grant Dewar, the internal legal counsel at the CBA, about what that might mean for the CBA. Mr Barbagallo said it was his duty and invariable practice to immediately take advice from legal counsel if an issue with potential legal ramifications for the CBA arose.

192 Mr Barbagallo thought it was strange that Mr Reynolds telephoned him out of the blue and then not clearly explain his involvement with Mercury. He said that most of what Mr Reynolds said related to working with Mr Manning, Mr Hawke and Mr Keating. He formed the view that Mr Reynolds was quite odd. He said the only reason he was prepared to listen to Mr Reynolds for a minute or two was because he said he knew Mr Manning.

193 As to Mr Reynolds' version of events and the matters recorded in his file notes, Mr Barbagallo:

(1) denied Mr Reynolds said he was ringing from Sue Dunlop's office or that she was sitting beside him;

(3) denied that Mr Reynolds told him he was an investor or had invested $500,000, or that Mr Barbagallo said Mr Thomas told him in early July that Milfoil invested $500,000 into Mercury;

(4) denied that Mr Reynolds fully explained or even mentioned the arrangement with Mercury including denying that Mr Reynolds said he purchased $510,000 worth of stock from Mercury's Chinese suppliers and that Mercury was selling that stock for Milfoil;

(5) denied that Mr Reynolds said Ms Dunlop told him that the CBA had taken $1 million out of Mercury's accounts from 1 April 2009 without board approval and that the CBA intended to take a further $500,000 by 31 August 2009;

(6) denied that Mr Reynolds said the $500,000 the CBA intended to take by the end of August was most likely Milfoil's money because Mercury did not have any stock of its own;

(7) denied that Mr Reynolds told him that he did not have any right to deal with Milfoil stock and proceeds which Mercury held on its behalf in trust and that he replied 'okay';

(8) denied that he admitted that the CBA had taken out money gratuitously or that Mr Reynolds said not to take out Milfoil proceeds or if he did it would be conversion and theft;

(9) denied that Mr Reynolds pointed out that Mercury had been insolvent for a year and that Mr Barbagallo acknowledged the CBA knew it was insolvent and had written-off the debt; and

(10) denied that he said 'I'm determined to get the bank's money back whatever it takes'.

194 In his oral evidence, Mr Barbagallo agreed that he thought the conversation was weird. On his version, there was no information given except that Mr Reynolds knew Mr Manning, Bob Hawke and Paul Keating and saved the Australian economy. Mr Barbagallo agreed that no one else had ever claimed to him to have had saved Australia from financial crises in the past.

195 I note at this stage that Mr Reynolds denied that:

(1) he mentioned Mr Manning during this conversation. Mr Reynolds said he had never heard of or spoken to Mr Manning;

(2) he said he gave advice to Bob Hawke and Paul Keating while they were prime ministers. He said he had never spoken to Bob Hawke or Paul Keating in his life; and

(3) he said he helped save the Australian economy in the early 1990's and again in 2008. He said Mr Barbagallo 'pulled that out' of the 2 October letter.

196 There was a discussion between Mr Barbagallo and Mr Vincent immediately after Mr Barbagallo's conversation with Mr Reynolds. Mr Barbagallo asked Mr Vincent, who was sitting opposite him at the time the conversation took place, to undertake a company search of Mercury. The purpose was to discover the true nature of Mr Reynolds' interest in Mercury and whether Mr Reynolds had registered a charge to protect it.

197 However, there is no evidence that Mr Barbagallo told Mr Vincent that he had just had a strange or weird conversation with a man who had claimed to have saved the Australian economy. Mr Barbagallo was asked why he did not say anything like that to Mr Vincent when the conversation was over. He said he could not recall, although he may have said so. This was not referred to in his witness statement. It was not referred to in Mr Vincent's witness statement either.

198 Mr Vincent gave evidence that he was sitting at Mr Barbagallo's desk at the time of the conversation but could not recall the details. He said he heard Mr Barbagallo say words to the effect that 'I will not talk to you because it would be inappropriate to talk to an investor' and 'unless you are accompanied by Phil Thomas and appointed by the company in some form, it would be inappropriate to speak to you'. He also recalls him saying words to the effect 'whether you are known to Greg Manning makes no difference to me'.

199 Mr Vincent said that after the call was finished, Mr Barbagallo told him it was Mr Reynolds. He said the only time he had spoken to Mr Reynolds was earlier that day when he took the phone message from Mr Reynolds requesting that Mr Barbagallo contact him. Apart from that, Mr Vincent could not recall whether Mr Barbagallo discussed the call with him after it had ended.

200 In cross-examination, Mr Vincent said that the call did not seem unusual to him. He did not recall Mr Barbagallo saying that he had spoken to someone who had claimed to have saved the Australian economy and had dealings with Mr Hawke and Mr Keating, or saying the conversation was strange or weird. I note that Mr Vincent gave evidence that Mr Barbagallo usually discussed with him issues which arose on matters they were working on. Indeed, after this call, Mr Barbagallo asked Mr Vincent to undertake a company search of Mercury to see whether Mr Reynolds had any registered security interest over it.

201 Mr Barbagallo said the next time he spoke to Mr Thomas was shortly after 10 August 2009 when Mr Thomas telephoned him to provide an update on the work he was doing at Mercury. Mr Barbagallo said that his contact details should not have been provided to Mr Reynolds and asked Mr Thomas not to give them to strangers. I will refer to this conversation further below.

202 Mr Vincent gave evidence that, at about this time, he was closely monitoring Mercury and was primarily responsible for reporting about Mercury to Mr Barbagallo. Mr Vincent said that the CBA was concerned about the viability of Mercury but was not in a position to determine whether Mercury was insolvent or not.

203 The conversation between Mr Reynolds and Mr Barbagallo was the subject of an email from Mr Thomas to Mr Barbagallo and Mr Vincent dated 11 August 2009 at 10:16 am (the '11 August email'). The email was addressed 'Dear Sam' and was expressed to be '[f]urther to our conversation yesterday'. The 11 August email was not referred to in the witness statement of either Mr Barbagallo or Mr Vincent.

204 The 11 August email records that Mercury was successful in advancing its arrangements with Biron Capital. A summary of the transaction is provided. It records that the CBA facility would be reduced by $300,000 to $2 million on 17 August 2009 and that an extension fee would allow the facility to be further extended until 30 August 2009. The email concludes:

At this stage we are not pursuing the strategy put forward by Mr Reynolds of Milfoil Pty Ltd and if in the future there is a need for discussion with the Bank he will be accompanied by a Mercury Brands officer (and in any telephone call).

205 I note that Mr Vincent replied to this email, copied to Mr Barbagallo, at 4:04 pm that day, confirming that the CBA was prepared to extend Mercury's debt facility until 31 August 2009 on the basis that:

(1) the limit be reduced by $300,000 to $2 million on 17 August 2009;

(3) a line fee of not more than $20,000 applicable to the period 1 July 2009 to 31 August 2009 also be charged.

206 The 11 August email, if read by Mr Barbagallo, clearly informed him about Mr Reynolds, Milfoil and the 'strategy' put forward by them. That is quite apart from the substance of the conversation between Mr Thomas and Mr Barbagallo on the evening of 10 August (after Mr Reynolds' call), as a result of which the 11 August email was sent.

207 Mr Barbagallo's evidence about this was unclear. At first, he said he did not read the 11 August email at the time. Then he said he did not notice that the name was Milfoil and it just confirmed the CBA's position that it was not prepared to talk to Milfoil. This suggests that Mr Barbagallo must have read the email at the time. He later appeared to acknowledge that he had received it. He also said that the email merely confirmed that he was not going to talk to Mr Reynolds. He then said the reference to Mr Reynolds of Milfoil did not mean anything to him.

208 Mr Barbagallo denied that Mr Thomas explained the strategy put forward by Mr Reynolds before 10 August 2009. As noted above, he also denied that Mr Reynolds had told him about the strategy in the conversation on 10 August. However, he acknowledged that, after receiving this email, he did not ask Mr Vincent or anyone else about what the nature of the strategy was.

209 Mr Vincent gave evidence that he did not recall this email or any strategy put forward by Mr Reynolds of Milfoil. He conceded that, at this time, he was concerned about the viability of Mercury. He acknowledged that there was a strategy of getting outside investors to put money into Mercury, but could not recall the reference to the strategy in the 11 August email. He acknowledged he was copied and responded to the 11 August email after discussing it with Mr Barbagallo.

210 On balance, I have concluded that Mr Barbagallo did read the 11 August email at the time and/or was aware of its contents. This is based upon his own evidence, and the clear link between his conversation with Mr Reynolds, his subsequent call about it with Mr Thomas and the time at which the 11 August email was sent. Further, Mr Vincent said he discussed the email with Mr Barbagallo.

211 As I set out above, Mr Barbagallo first recorded his version of this conversation in the 26 October email when responding to the 2 October letter. It is appropriate that I deal with the 26 October email now.

212 Mr Barbagallo had been asked to comment upon the 2 October letter in order for the CBA to make a formal response to it. His comments are contained in the 26 October email to Mr Manning. Mr Barbagallo said that this was one of probably three or four times over his career that he has had to respond to a letter to the CEO: he said that it was fairly rare in his experience and he would usually give it priority.

(1) Mr Reynolds rang, claiming he got his number from the managing director of Mercury, Mr Thomas. The call lasted about five minutes. The entire conversation was in the presence of Mr Vincent;

(2) Mr Barbagallo spent the first few minutes telling Mr Reynolds that he refused to confirm or deny that Mercury Brands was a customer of the CBA and, if it were, he could not talk to Mr Reynolds as it was inappropriate to talk to any potential investor;

(3) Mr Reynolds 'claimed he was not an investor and completely understood my stance'. He said he was a retired Westpac executive that now specialised in dealing with distressed companies. He suggested he was well known to Greg Manning and that Mr Barbagallo should check out his credentials with Greg;

(4) Mr Barbagallo stated that whether Mr Reynolds was well known to Mr Manning would not make any difference and it was still inappropriate for him to talk to Mr Reynolds irrespective of whether Mr Reynolds was an 'investor or lender', unless he was accompanied by Mr Thomas and appointed by the company as some form of consultant;

(5) Mr Reynolds 'rambled on for some minutes about what he was told by Phil Thomas. Some of it was true, some of it was exaggerated and some of it was clearly not true'. Mr Barbagallo refused to confirm or deny, claiming that Mr Reynolds would need to rely upon his own enquiries and discussions with Mercury;

(6) Mr Reynolds concluded the conversation saying that he understood the position and 'boasting about how smart he was by securing his loan to the company' (emphasis added). Mr Barbagallo recorded '[w]e did not talk about any amount and I did not encourage any further conversation'; and

(7) Mr Barbagallo later spoke to Mr Thomas and reprimanded him for giving Mr Reynolds his phone number and said that he would not tolerate further phone calls from existing or potential future investors or financiers.

214 There are number of points to be made about this version of the 10 August conversation. First, it refers to Mr Reynolds not being an investor and then 'boasting about how smart he was by securing his loan to the company'. In my view, this means something was said about the nature of the interest acquired by Milfoil or Mr Reynolds by reason of the Milfoil advance during the 10 August conversation, including reference to security. However, in oral evidence Mr Barbagallo said that Mr Reynolds did not tell him that: he just thought by October 2009 that Mr Reynolds must have provided a loan.

215 Second, in this version, Mr Reynolds did not ramble on about his experience, Bob Hawke or Paul Keating, but rather about what he was told by Mr Thomas, 'some of [which] was true, some of [which] was exaggerated and some of [which] was clearly not true'. The rambling on about information obtained by Mr Thomas, no doubt about Mercury, is generally consistent with the file notes of Mr Reynolds, his letters and his evidence.

216 In cross-examination, it was suggested to Mr Barbagallo that this meant Mr Reynolds did not in fact mention Bob Hawke or Paul Keating. Mr Barbagallo rejected this, stating that it is hard to forget when someone tells you about saving Australia. When asked why he did not include this in his email, Mr Barbagallo initially said he did not think it was relevant to respond to the complaint lodged.

217 Third, in this version, there is no reference to Mr Reynolds' son working in the Mercury warehouse. It was put to him that this was because it was not said during the 10 August conversation: Mr Barbagallo disagreed.

218 In the 26 October email, Mr Barbagallo referred to a letter Mr Thomas wrote to Mr Reynolds on 4 September 2009 in which he categorically stated that the CBA was not involved in any administrative oversight which resulted in Mr Reynolds' loss of investment.

219 In that email, Mr Barbagallo asked Mr Vincent to confirm that Mr Barbagallo's account of the conversations with Mr Reynolds and Mr Thomas was also his understanding of them. That request was, to say the least, unusual, given that Mr Barbagallo was not talking to Mr Reynolds on speakerphone, with the result that Mr Vincent could not hear what Mr Reynolds was saying. Further, Mr Barbagallo said he has no recollection of talking to Mr Vincent about this 'strange' conversation after the call.

220 It does Mr Barbagallo no credit that he requested this confirmation from Mr Vincent. So too, it does Mr Vincent no credit that he replied 'noted and agreed', without stating his inability to hear Mr Reynolds.

221 I note that Mr Barbagallo also suggested a draft response for Mr Manning or Mr Norris to send to Mr Reynolds.

8.3.7 Conclusions on the 10 August conversation

222 After careful consideration, I generally prefer the evidence of Mr Reynolds to the evidence of Ms Dunlop or Mr Barbagallo in relation to the matters raised by Mr Reynolds in the 10 August conversation.

223 I have concluded that it is more likely than not that:

(1) Mr Barbagallo was aware prior to the 10 August conversation that Mr Reynolds and/or Milfoil had advanced $500,000 in July 2009;

(2) Mr Reynolds explained that Milfoil and/or he had not invested money in Mercury but had purchased pre-ordered stock for Kmart, Target, Myer and Ed Harry from Mercury's Chinese suppliers;

(3) Mr Reynolds explained that that stock was on Milfoil's balance sheet, it was secured and held on trust for Milfoil, that all proceeds of sale of the stock were to be paid into Milfoil's Westpac account but that Mercury had not ensured this had happened. As a result, some of Milfoil's money might be or had been paid into a Mercury CBA account;

(4) Mr Reynolds had been informed that the CBA had already taken $1 million from Mercury's account and was due to take a further $500,000 in August. Mr Reynolds said that the CBA had better be careful not to touch or take Milfoil's money;

(5) there was a discussion about Mercury's poor financial position which Mr Reynolds had learnt about that day. Mr Reynolds said that Mercury was hopelessly insolvent; and

(6) Mr Barbagallo said words to the effect that 'he is determined to get the bank's money back, whatever it takes'.

224 First, Mr Reynolds' version of events is more consistent with the file notes and the contemporaneous documents in evidence, including the 11 August email and the 26 October email.

225 Second, it seems that, in light of the undisputed information Mr Reynolds had obtained during the course of 10 August at Mercury, the only purpose for Mr Reynolds to contact the CBA that evening was to inform the CBA of Milfoil's interest in stock purchased with the Milfoil advance and the proceeds of sale thereof. This is particularly so given it is not disputed that Ms Dunlop informed him earlier on 10 August that Mercury had failed to comply with the Milfoil arrangement as set out above. The consequence of that failure was that the proceeds of sale of the stock purchased with the Milfoil advance would not be paid to Milfoil but, rather, would be paid into the CBA accounts of Mercury.

226 Third, the effect of Mr Barbagallo's evidence is that he prevented Mr Reynolds from speaking about Milfoil's arrangement with Mercury during the conversation by repeating that he was not in a position to confirm or deny that Mercury was a customer or discuss the bank's customers' affairs. I find it extremely unlikely that Mr Reynolds was prevented from speaking about the arrangement. As I set out above, Mr Reynolds was and is a very persistent man. From my observations of him in the witness box, particularly during cross-examination, Mr Reynolds cannot be dissuaded from expressing what he wants to say. Further, as noted in the 26 October email, Mr Barbagallo acknowledged that Mr Reynolds 'rambled on' for some minutes about what he was told by Mr Thomas about Mercury. This is consistent with the general content of Mr Reynolds' file notes, his correspondence and his evidence.

227 Fourth, as to Mr Barbagallo's evidence that he was not informed, and there was no discussion, of any interest of Milfoil in the stock purchased with the Milfoil advance or the proceeds of sale thereof, I do not accept that evidence. In my view, Mr Barbagallo's denial that he was unaware, at least generally, about the 'Milfoil strategy' after the 10 August conversation is inconsistent with the fact that Mr Barbagallo requested a company search of Mercury immediately after the conversation to see whether Mr Reynolds had registered any security interest over Mercury. He made that request of Mr Vincent who was sitting with him at the time the conversation took place. The request for a company search is consistent with some sort of interest being raised or discussed during his conversation with Mr Reynolds.

228 Mr Barbagallo refuted Mr Reynolds' version of events, on the basis that he did not hear of Milfoil until October 2009. I do not accept that evidence. I consider that it is more likely than not that Mr Thomas informed Mr Barbagallo of the substance of the Milfoil advance in July or early August 2009. This is in circumstances where Mercury was keen to satisfy the bank that it was able to obtain or extend the terms of its finance and where it was of great importance to Mercury that the stock purchased with the Milfoil advance was released. This is consistent with Mr Reynolds' evidence at the start of the 10 August conversation about wanting to contact the CBA.

229 Further, I conclude that Mr Barbagallo learned and knew of Milfoil before 26 October 2009 given that it is referred to in the 11 August email, the day after Mr Reynolds called. It was also the subject of discussion with Mr Barbagallo on 30 September and/or 1 October 2009 when it was decided to exclude the debts owed to Milfoil from the assets transferred to AHT as part of the Sale Agreement. In my view, Mr Barbagallo's willingness to exclude these amounts is consistent with some knowledge of Milfoil's interest in that stock or the proceeds of sale thereof before that time. I will deal with this further below.

230 Finally, having heard Mr Reynolds' oral evidence, I consider it very unlikely that Mr Reynolds would have had a conversation with Mr Barbagallo in the circumstances without mentioning Milfoil.

231 As to the statement that Mr Barbagallo would do whatever it took to get the CBA's money back, I also conclude that Mr Barbagallo made this statement. In cross-examination, Mr Barbagallo agreed that his job includes recovering for the bank everything he possibly can and that he is determined in any particular case to get whatever he can to repay the bank. That was his job. So too, it was his job in August 2009 in relation to the Mercury debt and the CBA facility, given Mercury's financial position.

232 While I generally prefer the evidence of Mr Reynolds about the matters he raised during the 10 August conversation, I have found it more difficult to make findings consistent with his evidence that Mr Barbagallo agreed that:

(2) the CBA had written-off or made provision to write-off the Mercury debt;

(3) the CBA would be careful not to touch Milfoil's money; and/or

(4) the CBA agreed not to proceed to take $500,000 or part thereof in reduction of Mercury's indebtedness to the CBA.

233 I accept that these issues were raised by Mr Reynolds. The issue here is whether Mr Barbagallo positively agreed with them, in particular, agreeing not to touch the proceeds of sale of the stock purchased with the Milfoil advance (which could not then be identified) and not to withdraw $500,000 to reduce the CBA's indebtedness.

234 I am unable to conclude on the balance of probabilities that Mr Barbagallo agreed to these statements. These statements were very much against the interests of the CBA. Having observed and listened to Mr Barbagallo, I very much doubt that he, as a senior and experienced credit risk officer, would have made such positive statements to a man he spoke to over the phone for the first time.

235 It may be that Mr Barbagallo may have acknowledged, in some way, statements to the effect that that Mercury was insolvent or that is was likely that the CBA had written-off the debt by now, if only to get Mr Reynolds off the phone. This might have accounted for Mr Reynolds referring the fact that Mr Barbagallo said 'yes' to these statements in his files notes and some of his correspondence. Mr Reynolds has a tendency to see things from his perspective. However, I am unable to concluded on the balance of probabilities that Mr Barbagallo positively agreed to these statements.

236 Further, I am unable to conclude, on the balance of probabilities, that Mr Barbagallo agreed with or assented to statements to the effect that the CBA would be careful not to touch Milfoil's money and/or that the CBA would not proceed to take $500,000 or part thereof in reduction of Mercury's indebtedness in the second half of August 2009. However, again, I accept that Mr Reynolds made statements to this effect to Mr Barbagallo during the 10 August conversation.

237 First, it is inconsistent with Mr Barbagallo's role to protect the CBA's interests, as set out above. Second, agreeing to the statements is inconsistent with the statement of Mr Barbagallo to the effect that he was determined to get the bank's money back whatever it takes (which I have concluded, on Mr Reynolds' evidence, he made). Third, it is inherently improbable that a senior and experienced banking officer would agree not to withdraw funds to reduce the indebtedness of a customer in the position of Mercury, on the basis of the 'say so' of a man he spoke to over the phone for the first time.

238 Finally, there remains other unresolved issues relating to the contents of the 10 August conversation, namely, whether Mr Reynolds referred to Mr Manning, or to Mr Hawke and Mr Keating. In my view, any findings in relation to these matters are not determinative of whether the statements material to the claims in this proceeding were made.

239 But for completeness, based on the evidence before me, I am unable to conclude that Mr Reynolds referred to Mr Manning. I am also unable to conclude that Mr Reynolds referred to Mr Hawke and Mr Keating. However, I conclude that it is more likely than not that Mr Reynolds referred to the fact that he had saved the Australian economy from banking collapse. This is because it something that it is very likely Mr Reynolds would say. Further, in his 17 August 2009 email to Ms Dunlop referred to in the next section, Mr Reynolds said that, on 10 August 2009, he brought into Mercury his file on strategies to (federal treasurer) Wayne Swan 'to show your executives and the Bank'.

9 EVENTS IN AUGUST AFTER THE 10 AUGUST CONVERSATION

240 There was a meeting of the Mercury board at 5:30 pm on 10 August 2009. The minutes noted that any facility by Affiniti was contingent upon Mercury receiving final sign off from Biron Capital for the proposed $2.1 million investment. They also noted that Biron Capital was seeking an assurance that the CBA facility would not be withdrawn before the Biron Capital finance and/or alternative debt finance were in place.

241 On 11 August 2009, Mr Reynolds spoke to Mr Santamaria. Mr Reynolds said that the shares that Mercury had ostensibly transferred to Milfoil in advance, which had not yet been received, were worthless, as Mercury was hopelessly insolvent. He said he wanted the $70,000 in shares changed to cash. Mr Santamaria agreed. He said he also explained and warned Mr Santamaria about conversion of Milfoil's assets and the implications of doing so.

242 Mr Reynolds sent an email to Ms Dunlop on 17 August 2009 at 4:34 pm in which he referred to a telephone discussion with Mr Santamaria 'last Monday' (i.e. 10 August 2009). In that email, Mr Reynolds stated that:

(1) Mr Santamaria agreed to amend the remittance instructions to include the $70,000 fee to be included in payments to Milfoil's Westpac account;

(2) he was happy to assist Mercury fulfil its arrangements to supply stock to its prime customers while Mercury found alternative trade finance facilities but the proceeds of each transaction must first be fully repatriated back into the Milfoil account before Milfoil could do further transactions;

(3) Mercury needed to do something about the CBA just taking lump sums of debt repayments to the disadvantage of other creditors: he considered the CBA had 'collected something in the order of $8 million';

243 The 17 August email also contained the following:

Just because someone holds a debenture charge over a company it does not give them the right to knowingly, secretly and progressively over time milk other creditors of money. This can be seen as "aggravated breach of trust". Bankers have gone to gaol overseas for "aggravated breach of trust".

Whenever there is a company in trouble, I always welcome an invitation to assist with my knowledge and skills. Yours is the first ever that I have gone as far as to use our Company's funds. I have pulled so many companies out of the corporate crematoria, I cannot even remember half of them. That includes the ANZ and Westpac in 1991. Even the Head of the Federal Treasury Department was saying on TV yesterday, "no one can comprehend how Australia got out of the international financial crisis so easily". I brought in my file on strategies to Treasurer Wayne Swan from 8.1.08 to date, to show your executives and the Bank last Monday. Everything (almost anyway!) it seems Treasury (and RBA on Monetary Policy) did to save Australia's economy and banking and payment system, came from me.'

244 Mr Reynolds was taken to the 17 August email during cross-examination. Mr Reynolds said that he contacted Mr Santamaria later on 10 August or early on 11 August. The email records Mr Santamaria agreed to amend payment remittance instructions from the respected trade debtor payments into Milfoil's Westpac account. Mr Reynolds said that he told Ms Dunlop that in the course of his meeting with her on 10 August and later confirmed it with her boss, Mr Santamaria.

245 Mr Reynolds was taken to the paragraph that said he was happy to continue to assist Mercury as set out at [242] above. It was suggested during cross-examination that this email was in very polite terms and was inconsistent with his mood. Mr Reynolds said this was for the purposes of trying to get repaid. He said there was no point 'sinking the boot in' as he was in for half of $1 million. Mr Reynolds said Mr Thomas assured him everything was okay and he tried to keep things on a friendly basis.

246 Ms Dunlop did not reply to this email. She sought direction from Mr Thomas. Mr Reynolds said that Mr Thomas came to see him at the Reynolds' family home on 19 August 2009 to assure him that Milfoil's position was safe and that Mercury would provide documentary evidence to Milfoil.

247 Mr Thomas sent an email to Mr Reynolds on 19 August 2009 referring to a conversation with him that morning and confirming Mercury would pay the $70,000 fee 'from capital raising or debtors collected under your arrangement whichever occurs first'. Mr Reynolds replied at 5:52 pm in the following terms:

Phil

Thank you very much.

I really enjoyed our discussion. It is unusual for me to come across someone so knowledgeable in the field. It was very refreshing.

Though we have 12.5 million hard-working Aussies, Australia really relies on a handful of modest, unsung and unknown financial heroes to keep us on the straight and narrow. That is why we (Melbourne) are the most prosperous and advanced society on earth.

...

It will be fun for you to turn Mercury Brands Ltd., around. It will take some unusual but safe measures to make it happen quickly. Any assistance you require from me is available. Just call me.

Best wishes!

248 Counsel for the CBA submitted that the tone of this email was entirely inconsistent with Mr Reynolds' view on 10 August 2009 that he had been defrauded by Mercury. However, I accept that the tone was consistent with Mr Reynolds trying to keep things on a friendly basis in the hope of obtaining repayment of the Milfoil advance.

249 Throughout the second half of August 2009, the financial position of Mercury was becoming more serious. Mercury was attempting to conclude a deal with Biron Capital and Affiniti but with no success. The Mercury working account became overdrawn and was unable to be repaid. Payments from the account were dishonoured.

250 On 24 August 2009, Mr Vincent wrote to Mr Thomas on Mr Barbagallo's instructions. The letter stated that should Mercury fail to clear the overdrawn account by 24 August 2009, or fail to fully refinance by 31 August 2009, the CBA would cancel the debt facility on 31 August 2009 and appoint PPB Advisory chartered accountants ('PPB') to review the operating performance of Mercury. If Mercury refused to cooperate with the review, the CBA would enforce securities. Mr Barbagallo sent an email to Mr Thomas in similar terms on that day noting that the CBA was becoming increasingly concerned about the solvency of Mercury.

251 On 28 August, Mr Vincent wrote again to Mr Thomas on Mr Barbagallo's instructions. The letter recorded that the CBA was appointing Ian Carson of PPB as an investigative accountant at the cost of Mercury. It also advised that Mercury's facility would be cancelled on 31 August 2009. The effect of this cancellation was so that no fresh advances would be made by the CBA. However, the maturing trade loans were rolled over until the completion of the PPB investigation.

252 In the meantime, on 27 August 2009, Milfoil sent an invoice to MBL for the August 2009 interest in the sum of $4,929.38. That was paid on the same day into Milfoil's Westpac bank account.

253 Mr Reynolds organised an urgent meeting with Mr Thomas on 1 September 2009. Steven and a major shareholder in Mercury, Anthony Ward, also attended. Mr Thomas told Mr Reynolds that:

(1) the stock purchased with the Milfoil advance had to be processed by Electronic Data Input (EDI);

(2) there were no paper invoices issued to retailers; and

(3) the stock was read at the retailers distribution centre with the proceeds of sale being automatically sent to the CBA on the date due for payment.

254 Mr Thomas gave Mr Reynolds a list of invoices relating to the goods that he said belonged to Milfoil (the 'Ed Harry list'). It listed 26 invoices issued by Mercury to its customers between 2 July 2009 and 28 August 2009, together with the value of the invoices. The handwriting on the Ed Harry list, except the top right-hand corner, is that of Mr Reynolds. The handwriting in the top right-hand corner is that of Mr Thomas. It reads 'Ed Harry allocated to Milfoil'. The rest of the handwriting on the Ed Harry list records that it was provided to Mr Reynolds by Mr Thomas on 1 September 2009 and that it was a 'list of Milfoil paid for stock invoiced to Ed Harry & payable on 60 day terms'.

255 The Ed Harry list was not referred to in Mr Reynolds' 23 February 2010 affidavit. In oral evidence, Mr Reynolds said he made a connection between Ms Dunlop's comments about Ed Harry on 10 August and this document, namely, that Ms Dunlop told him that stock purchased with the Milfoil advance had been rejected by Kmart and, as a consequence, subsequently sold to Ed Harry and that $470,000 plus GST was due in 60 days.

256 Mr Thomas handed Mr Reynolds a pile of documents which he said showed that the stock purchased with Milfoil advance had been invoiced. They were a bundle of invoices issued by Mercury to Ed Harry. They correspond with the list referred to above. In his 23 February 2010 affidavit, Mr Reynolds deposed that a cursory review of these documents indicated that some of the invoices and shipment dates pre-dated Milfoil's involvement on 3 July 2009. In his witness statement, he said that the documents he saw were electronically issued transactions without a Milfoil or even a Mercury header. He saw nothing indicating that the proceeds were to be remitted to Milfoil's Westpac account. Mr Reynolds asked Mr Thomas to verify Milfoil's ownership of all of these goods, which Mr Thomas did.

257 In his 23 February 2010 affidavit, Mr Reynolds deposed that the documents handed to Mr Reynolds at the time were exhibit TWR-9. In oral evidence, he accepted that he did not take any documents away from the 1 September meeting and that these documents were provided to him on 4 September 2009. I am not in a position to conclude that this is so. It may be that Mr Reynolds was confused about this. What is clear is that the documents shown to and/or provided by Mr Thomas on 1 September 2009 related only to Ed Harry, in the context of statements by Mr Thomas on that day that the stock supplied to Ed Harry was purchased with the Milfoil advance and/or belonged to Milfoil.

258 Mr Reynolds said that Mr Thomas also provided him with an indicative letter of offer for a facility for Mercury. Mr Reynolds considered that the offer was no more than a marketing letter.

259 Mr Reynolds prepared a typed version of the Ed Harry list which omits the first invoice but is otherwise the same as the information in the Ed Harry list provided by Mr Thomas. It is headed 'MERCURY BRANDS STOCK INVOICED TO ED HARRY TO 28 AUGUST 2009 SAID BY MANAGING DIRECTOR ... ON 1.9.09 TO BE ALL MILFOIL'S'. It records that the total amount of the invoices to Ed Harry was $468,971.32. It also has a handwritten note which appears to be of Mr Reynolds which states 'Stock sold to Ed Harry as too late for original buyer Kmart/Target has been sitting on wharf unprocessed since 3 July 2009'.

260 That evening, Mr Reynolds wrote a letter to Mr Thomas. He worked late into the night preparing it. It was hand-delivered by Steven early on the morning of 2 September 2009. The 1 September letter relevantly provided:

The arrangement was that at all times the transactions would be in Milfoil Pty Ltd's name, as instructed on our bank's remittance advice and your procedures would ensure Milfoil would be shown on the invoices to Australian retailers as the owner of the said goods. We would allow Mercury Brands Ltd, to retain the balance of profit from the transactions once our direct purchase outlay of $510,000, the $70,000 fee and our bank's interest cost at 9.75% pa had been paid and funds credited direct in to Milfoil's Westpac account.

Goods were said to be made up and ready to be shipped in July [2009] with invoicing on or about 1 August 2009 and payment proceeds from K Mart, Myers etc., would be credited to our account during August 2009. Subsequently we have been told some were for Ed Harry with longer payment terms.

We were to be given copies of the invoices to the Australian retailers as soon as issued bearing evidence that the title remained with Milfoil Pty Ltd.

This was clearly set out in our letter of 3 July 2009 to Company Chief Executive, Brendan Santamaria and he later rang that day and confirmed he understood that the stock and debtor payments remained the property of Milfoil Pty Ltd and our instructions would be strictly followed.

I also discussed this with Senior Financial Controller, Sue Dunlop that day over the phone and she understood the required paperwork and mechanism to ensure it was abundantly clear we were not injecting any money into Mercury Brands Ltd, but assisting the Company with one off assistance to fulfil contractual supply obligations of stock to major retailers K Mart, Myers etc., and that title always remained with Milfoil Pty Ltd, on the funds, stock and in turn debtors until we were paid in full. She said we should she would ensure it was fulfilled. The funds were then remitted to China late that day.

...

I visited the Company on 11 August 2009 ostensibly I understood to go to the Commonwealth Bank to assist Mercury Brands Ltd, negotiate an arrangement that would allow the Company to continue to trade without having to seek third party assistance. The Bank executive in charge of the account said to me over the phone that you advised him that I had invested $500,000 into the Company. I made it abundantly clear to him that was not the case and that I had paid $510,000 direct to Chinese suppliers and purchased stock in Milfoil Pty Ltd's name to assist the Company simply to meet commitments to its major customers K Mart, Myers etc., pending committed refinancing and that the stock and in turn the trade debtors would at all times remain the property of Milfoil Pty Ltd. We would not be injecting money into the Company, which was subject to a Commonwealth Bank debenture charge. I made that abundantly clear to him. Also, I made it clear that Milfoil Pty Ltd, had no plans to invest money in Mercury Brands Ltd.

...

On 17 August 2009 I rang Chief Executive, Brendan Santamaria stating that our fee had to be paid in cash a.s.a.p., as offered to us at the outset and not in Company fully paid shares which were worthless, and were not genuine valuable consideration. He agreed to this.

On 19 August 2009 you came to see me and confirmed everything was in order and the transactions were in Milfoil's name and that the $70,000 fee would be paid in cash with the proceeds of the Milfoil Pty Ltd, stock sales or sooner as you were expecting fresh funds to become available.

Phil, today, I saw you at the Company's board-room and you provided me with approximately $470,000 in Mercury Brands Ltd, debtor invoices to EDH Pty Ltd, trading as Ed Harry, dated from 2 July 2009 to 18 August 2009. Some of the larger invoices preceded the date we effected our remittances to the Chinese suppliers? All were in the name of Mercury Brands Ltd, and none mentioned anything about Milfoil Pty Ltd. At this point we should have been given Milfoil Pty Ltd, invoices totalling approximately $704,000 if a 40% margin as originally advised, was added to the $510,000 cost price.

If Mercury had been placed into receivership by the hostile bank in the interim all proceeds of our transactions must be in our hands to deal with them. You mentioned that Ed Harry would be paying Milfoil Pty Ltd direct and that it was not possible with K Mart payments which would need to go through Mercury Brands Ltd. This is not acceptable because the Commonwealth Bank may refuse to remit the funds on, which seems to be its usual practice to help itself, and we do not want a dispute with them or a Receiver over title. That is why the transactions were done the way they were set up. It is incumbent on Mercury Brands Ltd, to ensure all payments for Milfoil Pty Ltd, stock go direct from the trade debtor into the Milfoil Pty Ltd, account. I regret it if K Mart or other trade debtor are inconvenienced. But we came promptly to your Company's assistance to buy and carry the stock ourselves, to assist in fulfilling Mercury's obligations to major customers at short notice, when asked by the Chief Executive with the not insubstantial sum of $510,000.

I note that since we undertook the $510,000 purchase on 3 July 2009 that your banker, the Commonwealth Bank of Australia continues to unilaterally take large amounts of Company funds from the Company trading account ($500,000 in the last month or so) apparently without your Boards [sic] approval.

I also note the [sic] Mercury Brands Ltd, is taking on credit terms from suppliers while the Commonwealth Bank apparently affects a secret/confidential/undisclosed or whatever workout of its former $9 million debt with the Company which I understand is in a default status with the Bank. The Bank debt is now down to $1.6 million but these confiscations of funds, which in my view are of dubious legality, impacts heavily on Mercury Brands Ltd, ability to trade and pay other unpaid creditors.

...

Phil, I have to mention these matters because I am concerned in [sic] the manner in which our stock and in turn trade debtors appear to be being treated. If our stock and debtors have been wrongly transferred/recorded into Mercury Brand Ltd's name without our expressed [sic] written approval, which has not been given, the Company and the officers concerned may be subject to criminal investigation and ultimately serious sanctions for the fraud of "conversion". I work closely with the police in my role, and am familiar with such matters.

...

I am sure the Milfoil procedure I have demonstrated to you and your Company for funding transactions via third parties is the safest and most productive to ensure your Company again prospers. It offers limitless funding at cheaper costs if you bring it on board.

261 This letter is set out in detail because, in my view, it is a contemporaneous record of the events leading up to 1 September 2009 which accords, for the most part, with Mr Reynolds' evidence in this proceeding. It is generally consistent with his version of events in early July 2009, on 10 August 2009 (notwithstanding the date stated in the letter is 11 August), on 17 August 2009, on 19 August 2009 and on 1 September 2009.

262 Mr Thomas sent an email to Mr Reynolds on 2 September 2009 at 10:35 am. He referred to the meeting the day before. He wrote that he was 'working on a full pack of documentation to ensure the arrangement Anthony Blumberg/Brendan Santamaria/you agree on is provided and effected, also taking up your suggestion of putting a documentation pack for other possible investors'.

263 Mr Reynolds also sent an email to Ms Dunlop on 2 September 2009 at 10:19 am. In it he recorded that the Milfoil agreement was a 'pretty simple set of transactions' pursuant to which:

(1) stock purchased with the Milfoil advance was to be invoiced in Milfoil's name for delivery via MBL; and

(2) delivery orders to retail customers would show Milfoil as the owner of the stock and provide details of payment to Milfoil's Westpac account.

(1) the value of the stock after allowing for a 40% profit margin meant that the stock should have been invoiced to retailers for approximately $700,000; and

(2) Mr Reynolds was to be given evidence immediately when stock was delivered that the invoices showed Milfoil's name as owner of the stock and the beneficiary of their proceeds.

265 The email referred to his meeting with Mr Thomas on 1 September 2009 in which he was provided with a bundle of invoices for Ed Harry 'dated from 2 July, a date before [Milfoil's] funds were remitted to China, totalling $470,000 which ostensibly was suggested to mean it was the Milfoil owned stock'. Mr Reynolds stated '[t]hat does not seem right to me. Also there was no mention of Milfoil on the invoices?'. He noted that payments should now be flowing into Milfoil's Westpac account. He said he needed to have evidence that 'all is in order and that our money and assets are being properly protected given the parlous situation of Mercury Brands Limited'.

266 Ms Dunlop forwarded this email to the chairman of Mercury, Mr Abela, setting out her understanding of the Milfoil agreement and stating that she was not sure how to respond to Mr Reynolds. Mr Abela replied that he had spoken to Mr Thomas and Mr Ward and that Mr Thomas was committed to working with Mr Ward and Ms Dunlop to be able to go back to Mr Reynolds with a coordinated response 'to ensure what ever we promise is deliverable'.

267 Mr Reynolds emailed Ms Dunlop again on 4 September 2009 at 7:33 am. In it, he stated that he was alarmed that two months had elapsed and 'not one skerrick of evidence' had been provided to identify the stock purchased with the Milfoil advance. He said he was originally told the stock would be airfreighted and payments settled by Kmart and Myers in 14 days. He required clear evidence of where the proceeds of sale of stock purchased with the Milfoil advance were and when they would be paid to Milfoil, or repayment of Milfoil's advance would occur.

268 Mr Thomas sent a letter by facsimile to Mr Reynolds on 4 September 2009 at 11:54 am. It is significant. In it, Mr Thomas said he wrote with 'much personal embarrassment'. He took full responsibility for the failure of Mercury to comply with the terms of the Milfoil agreement which he called an 'oversight'. He made it clear that no other director or employee was complicit or involved in the oversight. Further, he stated that the CBA had no interest 'in any way, shape or form in this oversight'. Mr Thomas apologised on behalf of the board. He stated that all monies owing to Milfoil would be repaid 'by the due dates' and that the board would take all necessary steps to ensure that Milfoil did not suffer any financial loss or harm as a result of the oversight by Mr Thomas.

269 At 4:00 pm on 4 February 2009, Mr Reynolds received a bundle of documents delivered by Mr Bloomberg which included a bank confirmation payment of $92,896.82 to Milfoil, a schedule providing full transaction details and a full set of documents in respect of the referable Milfoil stock.

270 The documents also included a summary of supplier invoices paid by Milfoil and invoices rendered to customers of Mercury in respect of that stock. Ms Dunlop prepared this bundle of documents. She stated that her purpose was to identify sufficient invoices from the stock that Milfoil had paid for in order to repay Milfoil. Ms Dunlop recalls looking at shipping documents to try to determine that Milfoil had paid for the stock that were the subject of the invoices in the bundle.

271 One of the documents was a list of each of the Chinese suppliers, detailing the amount paid by Milfoil to each of them, and the amount invoiced to Mercury customers in respect of the stock, totalling $606,896.70 (the '4 September list'). It was the first version of the RWP. It was prepared by Ms Dunlop. The figures in the 4 September list were obtained from the bundle of invoices which Ms Dunlop had identified and collated.

272 The 4 September list also recorded payments received from Mercury customers in respect of each of the invoices, totalling $92,896.82. On that day, Mercury paid $92,896.82 into Milfoil's Westpac account. Aside from payments for interest, this was the only money Milfoil received from Mercury until 21 October 2010 when Milfoil received $57,000 from the administrator pursuant to the Federal Court proceeding.

273 It is important to note that the 4 September list and the documents provided to Mr Reynolds in support of it do not relate in any way to the Ed Harry list and the Ed Harry invoices produced by Mr Thomas to Mr Reynolds on 1 September 2009. The reason for this was not made plain in the evidence. It may be that the 4 September list was prepared in response to the letter of complaint of Mr Reynolds dated 2 September and the chairman and Mr Thomas' response thereto.

274 The 4 September list and supporting documents were good news for Mr Reynolds. At last, he had a document which appeared, for the most part, to accord with the suppliers that Milfoil had paid on 3 July and the retail customers which he had been told that stock would be supplied to. The first repayment for part of the Milfoil advance had been paid.

275 As Ms Dunlop maintained in her evidence, the 4 September list was not an actual or accurate record of the stock which had in fact been purchased with the Milfoil advance. It was an attempt to identify that stock based on the supplier and shipping records. As was made plain in the Federal Court proceeding, the RWP, which was based on the information contained in the 4 September list, was far from accurate. The failure of Mercury to provide an actual or accurate list of the stock which had in fact been purchased with the Milfoil advance resulted in the disputes the subjects of the Federal Court proceeding and this proceeding.

276 However, as I set out below, the RWP, like the 4 September list on which it was based, was accepted by Mr Reynolds in the sense that, at last, he had a document which to him appeared for the most part to accord with the suppliers that Milfoil had paid on 3 July 2009 and the customers which he had been told that stock would be supplied to.

277 On 11 September 2009, Ms Dunlop sent an email to Mr Reynolds. It advised that Mercury was expecting a payment from Kmart 'this Monday or the next' for invoices totalling $75,141,08. It is difficult to determine if the invoices and figures provided related to the 4 September list. Ms Dunlop requested that Mr Reynolds inform her if any payment(s) were made into Milfoil's account. She stated that if they were made into Mercury's account she would let Mr Reynolds know.

278 As a result of its financial difficulties, the board of MBG appointed Mr Stan Traianedes as voluntary administrator of MBG on 17 September 2009. The next day, the CBA appointed Mr Ian Carson and Mr Craig Crosbie of PPB as the receivers and managers of MBG and MBL. Mr Nicholas Martin of PPB, assisted by Ms Leah Campbell, conducted the receivership on a day-to-day basis. On 23 September, the receivers opened an account with the CBA, being an interest-bearing cheque account in the name of MBG with account number 06300011824018 (the 'third CBA account').

279 Mr Reynolds learned of the appointment of the administrator on the evening of 17 September 2009. He did not learn about the appointment of the receivers until 28 or 29 September 2009.

280 On 18 September 2009, Mr Reynolds met with Steven and Chris Burrell, a director of Mercury who was also its lawyer. Mr Burrell told Mr Reynolds not to be concerned as Mr Traianedes had been appointed the administrator of the subsidiary MBG, not MBL. This was when Mr Reynolds first became aware of the existence of MBG; he had believed that MBL had been placed into administration.

281 Mr Burrell said that Milfoil should not be concerned as its stock had been identified and was separate. He also said that:

(1) he had personally vetted the Milfoil transactions with the administrator;

(2) the administrator had confirmed that the stock identified belonged to Milfoil and that the administrator would put this in writing in a couple of days; and

(3) the administrator was negotiating the sale of the MBG business, and Milfoil's assets were to be specifically excluded from the sale.

282 Mr Reynolds made handwritten notes of the meeting. They are consistent with his recollection in oral evidence. They included the following note: 'Milfoil will be paid out in full as soon as investors [sic] money comes in or from debtors over the next six weeks'. Mr Reynolds understood the reference to 'investors' to be the potential purchasers of the Mercury business. It was put to Mr Reynolds that his version of this meeting and file note of it were a fabrication, on the basis, among other things, that the administrator could not have formed these views within 24 hours of his appointment. Mr Reynolds disputed this and maintained his version of events. I accept his evidence.

283 Mr Reynolds did not receive a letter from the administrator as discussed with Mr Burrell. As a result, he sent a letter to Mr Traianedes by facsimile on 23 September 2009 at 4:12 pm. The letter relevantly provided:

I [sic] discussions with Mercury Brands, Director, Chris Burrell of Prosperity Legal on Friday in relation to $560,000 approximately in transactions we undertook with our funds and in our Company's name direct to the Chinese suppliers, to assist Mercury meet [sic] its contractual obligations on 3 July 2009, we understand that approximately $170,000 has been received back in our Company's Westpac, Melbourne Advance account with the balance due over the next few weeks from our debtors. Mercury staff is managing these. We have advised Mercury we do not want any of our funds going into Mercury Group accounts. They are to be sent direct from the various retailers to Milfoil's Westpac Account.

According to Mr Burrell you are aware of the situation of the identifiable Milfoil Pty Ltd transactions and have agreed that proceeds will be going direct into our account. He said you would be confirming that in writing to us by yesterday.

For abundant cautions sake would you please confirm the position by return fax.[11]

284 Mr Traianedes did not reply to this letter. As a result, Mr Reynolds sent a further letter on 28 September 2009 at 9:49 am. The terms of that letter were more emphatic, consistent with Mr Reynolds' feelings of frustration and disappointment that assurances he had been given were not being met.

285 In that letter, Mr Reynolds requested that Mr Traianedes not mix Milfoil's assets or funds with those of Mercury. He threatened taking action via Victoria Police for 'the fraud of "conversion"' and for '[a]ggravated [b]reach of [t]rust'. In oral evidence, he stated that he was familiar with these terms from his banking experience and that they are used particularly in Japan and the United States.

286 Mr Reynolds then listed in this letter each Chinese supplier who received funds from Milfoil and the amount paid by Milfoil. The letter continued:

We hold copies of the pro-forma invoices for each transaction all of which were paid for direct by us through our Westpac bankers with remittance advice carrying the following message: "C.I.F. Prepayment by Milfoil P/L new goods to be shipped Aug 2009 and invoiced to Milfoil Pty Ltd., or order".

We have been assured by the Mercury group that all shipments were effected by the suppliers in our name and that goods have been received in Melbourne and dispatched to the various retail clients on our behalf with instructions to make payment direct into Milfoil Pty Ltd's Advanced Account ... All funds should be back in our account over the next fortnight or so.

Milfoil Pty Ltd's agreement to do the transactions was specifically upon the basis that Milfoil Pty Ltd would be doing them in its own right and at no time could either the original remittances or ensuing stock; [sic] debtors and payments go to Mercury Group. At all times "legal and beneficial property and title" remains exclusively with Milfoil Pty Ltd, including the sales margin, until Milfoil Pty Ltd has been fully paid the capital sum remittances, the interest on our own facility, and the $ 70,000 fee. Mercury group only gets any surplus at our grace and expressed behest and after we have been fully repaid.

Hence, we wrote to you as Administrator of the operating Company on 23 September 2009 warning you of our unencumbered title to the goods and resultant traded debtors and payments that must go direct into our aforementioned account. We were advised by the Company director/solicitor, you verbally acknowledge this and would confirm it I [sic] writing by Tuesday last week. We have had no communication from you.

Mr Trainedes [sic], you have been abundantly warned, as have the Directors and personnel of Mercury Group who acknowledge Milfoil's position and state will be fully protected. We are at the front of our own sole queue! Is that clear?

We have not been advised as to how much precisely has been remitted to our Westpac Account and will establish that with the Bank today. Mercury group has told us that it is in excess of $170,000 at this stage. Therefore with a debt outstanding of $490,000 approximately at the agreed rate of 9.95% pa, we require at least $4,000 to be deposited into our operating account at Westpac .... by tomorrow 29/9/09 to cover perceived September 2009 interest costs in terms of the arrangement.[12]

287 On 29 September 2009 at 5:09 pm, Mr Reynolds sent a letter by facsimile in similar but not identical terms to Mr Martin of PBB on behalf of the receivers. However, there were some relevant changes to the letter. The letter to Mr Martin provided:

We hold copies of the pro-forma invoices for each transaction. Westpac's remittance advices all carry the following message: "C.I.F. Prepayment by Milfoil P/L new goods to be shipped Aug 2009 and invoiced to Milfoil Pty Ltd, or order".

We have been assured by the Mercury group that they contacted suppliers to ensure all shipments must be effected by the suppliers in our name, and in fact were, and that goods have been received in Melbourne and dispatched by Mercury (essentially as our agents) their subject clients on our behalf with instructions to make payment direct into Milfoil Pty Ltd's Advanced Account ... We have received back $92,896.82 with the balance, we are told, will be back in our account over the next fortnight or so. We have been assured by the Directors that at all times the subject assets have not been included in Mercury group's books of account, but for abundant caution sake [sic] we are notifying you to be careful here.

We reiterate that Milfoil Pty Ltd's agreement to do the transactions was strictly on the basis that Milfoil Pty Ltd would be undertaking them in its own right and at no time could either the original remittances, ensuing stock shipment, related debtor accounts or payments go to Mercury Group. At all times "legal and beneficial property and title" remains exclusively with Milfoil Pty Ltd, including the sales margin, until Milfoil Pty Ltd has been fully repaid:

(1) The capital sum remittance of $509,471.16;

(2) The interest at 9.75% on our borrowings from our Westpac facility;

(3) A $70,000 fee offered by the company and accepted.

The arrangements were agreed with Mercury verbally and by exchange of letters on 2 and 3 July 2009. Mercury group, on the good faith assumption the transactions would be completed without breach, would receive any sales margin surplus (said to be 40% of the landed price) at our grace and expressed behest and after we had been fully repaid including the $70,000 fee and our interest cost reimbursed.

...

We have had no communication from [the administrator] until a phone call late yesterday, in which he also advised us of your appointment and acknowledges our situation. He states that the transactions are not included in the Companies [sic] books. The Company staff again confirmed this morning that they are being separately monitored as agreed with further funds arriving today.

Mercury Director (and solicitor) Chris Burrell, again assured at the Administrator's first meeting this morning that our assets and debtors have been kept separate from the Companies [sic]. We are distant from the Company and rely on it to fulfil our agreement by managing the transactions for us properly.

The Directors and accounting personnel of Mercury Group involved have at all times since 3 July 2009 repeatedly acknowledge Milfoil's position and state it will be fully protected. We are at the front of our own sole queue!

We trust that is now abundantly clear?

...

We can see you at your office at short notice to provide our confirming documentation. You can obtain the documents also from Talea at Mercury Group who holds all confirming copies.[13]

288 Counsel for the CBA submitted that many statements in these letters were known by Mr Reynolds to be untrue at the time they were written. First, it was submitted that the statement that Milfoil 'hold[s] copies of the pro-forma invoices for each transaction' (i.e. for each of the 13 Chinese suppliers paid with the Milfoil advance) was known to be untrue. Based on the evidence before me, that statement was not true in respect of most of the transactions by Milfoil. In cross-examination, Mr Reynolds acknowledge that:

(1) this statement was not true for most of the transactions; and

289 Second, it was put to Mr Reynolds that the statement that Milfoil had been assured by the Mercury Group that all shipments were effected by the suppliers in Milfoil's name and that goods had been received in Melbourne and dispatched to respective retail clients on Milfoil's behalf with instructions to make payment directly into Milfoil's Westpac account was also not true. On the evidence before me, the shipments were not effected in Milfoil's name and the stock was not dispatched to customers with instructions to make payment into Milfoil's Westpac account.

290 However, this statement by Mr Reynolds is to the effect that he had been assured of these matters by Mercury. In oral evidence, Mr Reynolds said that he had been assured of these matters by this time. This is supported by the statements made by Ms Dunlop on 10 August, Mr Thomas on 19 August, the emails from Mr Thomas dated 1, 2 and 4 September and the email from Ms Dunlop dated 11 September 2009. However, he conceded he had not seen any documents which evidenced that this had been effected and was uncertain at the time these letters were sent whether this had in fact been done.

291 I consider that, objectively read, these statements were intended to convey to the administrator and the receivers that the shipments had been made in Milfoil's name and retail customers had been invoiced in Milfoil's name, notwithstanding Mr Reynolds was uncertain if that had in fact occurred. Indeed, it is what the Milfoil agreement provided for. In my view, this is a clear example of Mr Reynold's 'gilding the lily' to bolster the chances of Milfoil's claim being acknowledged and protected. However, it does Mr Reynolds no credit that he did so.

292 There was a first meeting of creditors of MBG on 29 September 2009. Mr Reynolds was at that first meeting of creditors. Mr Traianedes already knew that Milfoil claimed to have some form of retention of title claim because Mr Burrell had told him so. Mr Traianedes said he told Mr Reynolds that, notwithstanding any comments made by the directors of MBG about this matter, he would need to make his own assessment of Milfoil's claim and it may be appropriate to arrange a meeting with him to discuss the issues privately rather than at the creditors' meeting. Mr Reynolds disputed this, stating that Mr Traianedes gave 'no indication that there was an issue with Milfoil's position different to the assurance that Mr Burrell had advised on 18 September 2009'. Mr Reynolds was then appointed to the committee of creditors at this meeting.

293 Talea Brown was an accountant at Mercury. She sent an email to Mr Reynolds and Steven on 29 September 2009 at 6:09 pm. The email noted that she had spent some time going through the arrangements with Milfoil and attached a spreadsheet which she had prepared. At trial, counsel for both parties appeared to accept that this version of the spreadsheet was not in evidence. However, it appears that this version was part of exhibit TWR-18 to Mr Reynolds' 23 February 2010 affidavit. A further version of the spreadsheet was circulated on 30 September - the RWP. I will deal with the RWP in due course. In summary, it is a document which attempts to reconcile the stock purchased with the Milfoil advance with stock sold to Mercury's retail customers. It was based on the work of Ms Dunlop in early September 2009 (i.e. the 4 September list).

294 Ms Brown's email of 29 September stated that the total funds to be remitted to Milfoil from the proceeds of sale received by Mercury of stock relating to the Milfoil advance was $82,505.02. The email concluded that Ms Brown would be 'providing Stan [Traianedes] with evidence to support the payment to Milfoil of $82,505.02 tomorrow'.

295 Ms Brown sent a further email to Mr Reynolds on 30 September 2009 at 10:38 am. The email enclosed the revised version of the spreadsheet sent the day before (i.e. the RWP). The RWP is entitled 'Milfoil Pty Ltd Reconciliation Working Paper' and is dated 30 September 2009. It contains a number of columns, namely:

(1) 'Supplier Name' - detailing the name of the Chinese supplier that Milfoil paid;

(2) 'Invoice No' - detailing the number of the invoice issued by Mercury to its retail customer (where available);

(3) 'Style No.' - detailing the style number of clothing to which the invoice related;

(4) 'Invoice Amount (Incl GST)' - detailing the amount invoiced or to be invoiced to Mercury's retail customer (including GST);

(5) 'Invoice date sent' - detailing the date any invoice issued was sent by Mercury to its retail customer;

(6) 'Trading Name' - detailing the trading name of the retail customer, namely Kmart, Ed Harry, Myer, David Jones or Shanton Retail;

(7) 'Trading Terms' - detailing the trading terms of the order, being the number of days within which payment was due by the retail customer;

(8) 'Milfoil payment status' - detailing whether Milfoil had been paid, or whether Mercury had received payment, in respect of each invoice;

(9) 'Amount Paid' - detailing any amount paid by the retail customer in respect of each invoice;

(10) 'Anticipated Date of Payment' - detailing the anticipated date of payment by the retail customer for any invoiced issued; and

(11) 'Milfoil Loan Outstanding' - detailing the amount remaining to be paid to Milfoil by Mercury by reference to each customer and invoice.

296 As noted above, there were only five retail customers listed in the RWP: Kmart, Ed Harry, Myer, David Jones and Shanton Retail. The RWP recorded that the total amount to be invoiced by Mercury to retail customers was $606,896.66.

297 There is much detail in the RWP. As noted above, it listed the Chinese supplier which supplied the goods for each Mercury customer and the style number for the goods supplied. Where an invoice had been issued by Mercury to its retail customer, the RWP listed the invoice number, the anticipated date for payment and whether any, and if so what, amount had been paid.

298 As to the amount paid for goods invoiced, the RWP contained a 'Milfoil payment status' column which records one of 'Paid', which means paid to Milfoil, 'Not Paid', which means not paid to Mercury or Milfoil, or 'Pymt Rec' (i.e. payment received), which means received by Mercury but paid not Milfoil.

299 In the next column, the 'Amount Paid' column, any amount received by Mercury but not paid to Milfoil is shaded and any amount received by Mercury and paid to Milfoil is not shaded. At the bottom of the 'Amount Paid' column, there is a 'Total Payments Received' amount of $175,510.94. That is the total of all payments in that column. That total is then broken down into amounts paid to Milfoil, and amounts received by Mercury and still due to Milfoil, consistent with the shading in the column above, as follows:

(2) 'Payment due to Milfoil $82,614.12' (which is shaded).

300 The RWP includes a breakdown in the bottom left hand corner as follows:

301 Ed Harry was one of the five retail customers listed in the RWP. In the case of Ed Harry, the RWP recorded that all stock supplied to Ed Harry had been invoiced. There were five invoices in total: 628320 for $32,238.74, 828257 for $21,40.96, 828256 for $21,40.96, 628499 for $64,237.37 and 628500 for $64,237.37. The anticipated date of payment for invoice 628320 in the sum of $32,238.74 was 30 September 2009. The anticipated date of payment of all other Ed Harry invoices was late October 2009.

302 Further, the 'Milfoil payment status' column records 'Pymt Rec' for invoice 628320, which means received by Mercury. It does not record that the invoice amount was 'Paid' to Milfoil. Further the 'Amount Paid' column shaded the amount of $32,238.74 for that invoice. Indeed, everything in the RWP which is shaded is still owed to Milfoil.

303 Mr Reynolds was pleased and relieved to receive the RWP. He replied by email on 30 September 2009 at 1:22 pm. He thanked Ms Brown very much for her work. He set out his understanding of the Milfoil agreement. Mr Reynolds sought interest on the outstanding Milfoil advance of $486,574.34 for the month of September, totalling $3,998.55.

304 Mr Reynolds then sent the RWP to the receivers and to the administrator. It was put to Mr Reynolds that he sent it because it set out accurately all of the stock purchased with the Milfoil advance. Mr Reynolds did not accept this, maintaining that it recorded what Mercury was saying the Milfoil stock was, and that he did not accept its accuracy as that there may be more stock belonging to Milfoil. However, it is clear that it was the best evidence available at that time to identify stock purchased with the Milfoil advance and Mr Reynolds was keen to circulate it as soon as possible to bolster his claim for repayment of the Milfoil advance.

305 Mr Reynolds sent the RWP to the receivers by facsimile at 2:06 pm on 30 September 2009 under cover of a letter dated 29 September 2009. In that letter he stated that:

(1) the spreadsheet was of 'stock and debtors owned by Milfoil Pty Ltd., but managed by Mercury group in our attempt to assist Mercury group survive';

(2) the RWP had been prepared from 'the factual records' by Mercury group's financial and accounting staff; and

(3) stock purchased by Milfoil was said to be in respect of 'firm contractual re-supply obligations' and he could not understand why there was still undelivered stock.

306 Mr Reynolds sent the RWP to the administrator by facsimile at 6:23 pm the same day under cover of a letter dated 30 September 2009. In that letter, Mr Reynolds stated that the spreadsheet was 'of Milfoil Pty Ltd.'s asset position in relation to Mercury group provided to us by the Company' (i.e. Mercury). He also enclosed the 3 July Mercury letter, the 3 July Milfoil letter and an example of the overseas telegraphic transfers to one of the overseas suppliers on 3 July 2009. In the letter, Mr Reynolds said he could not see that there was any issue about Milfoil's retention of title.

307 The RWP was also received by the CBA on 30 September 2009. Mr Brooks gave evidence that he received it on that date. It is unclear whether the version he received was exactly the same as the version that Mr Reynolds received on 30 September 2009 and which he circulated to the administrator and the receivers.

308 In his witness statement, Mr Brooks referred to the version of the RWP which is exhibit ST-7 to Mr Traianedes' 14 January 2010 affidavit. That version is not identical to the RWP set out above. Relevantly, it contains an additional column 'Discount allowed', and different amounts in the 'Amount Paid' column and in the 'Milfoil Loan Outstanding' column reflecting the discount allowed.

309 It appears that the 'Discount allowed' column and the different amounts in the 'Amount Paid' column were due to the fact that the amounts paid by the retail customers did not correspond exactly with the invoice amounts (as detailed in the RWP). For example, in the case of Ed Harry, invoice 628320 was for $32,238.74. However the RWP at exhibit ST-7 records that there was a discount of $805.96 and that the amount paid was only $31,432.78.

310 Further, the RWP at exhibit ST-7 does not contain a breakdown of the total of the 'Amount paid' column set out in [299] or the breakdown of the kind set out in [300] above. However, in the RWP at exhibit ST-7, everything in the RWP shaded in grey is still owed to Milfoil.

311 The RWP formed the basis of discussions relating to the debts owed to Milfoil as part of the Sale Agreement. I will now turn to the negotiation of that agreement.

312 In the last weeks of September 2009, Mr Traianedes, the receivers and the CBA negotiated the sale of the business and related assets of MBG to AHT for in excess of $2 million. In fact, AHT expressed interest in purchasing the business of the Mercury group from 18 September 2009. A draft term sheet for the sale of the business was provided on 22 September 2009.

313 The Sale Agreement was the subject of detailed negotiations late into the night on 30 September and 1 October 2009 at the offices of the solicitors for AHT, Baker & McKenzie. Those involved in the negotiations were:

(1) Mr Martin and Ms Campbell on behalf of the receivers, and their solicitors, Piper Alderman;

(3) Jeff Moss and other persons from AHT and its solicitors;

314 Under the Sale Agreement, AHT purchased the 'Business' and 'Assets' of MBG. In summary, the purchase price ensured the CBA's debt and related costs were repaid. Indeed, cl 5.3 provided that nearly all of the Purchase Price must be paid directly to the CBA including:

(1) the Secured Creditor Discharge (defined as the sum of $1,924,000);

(2) the Purchase Pre-payment amount of $200,000; and

(3) Instalment 1 and 2, the Final Instalment and the Employee Buffer Instalment.

315 Clause 5.3 concludes that amounts paid to the CBA 'under this clause are to be applied towards satisfaction of the indebtedness of the Seller to the Commonwealth Bank.'

316 The Assets were relevantly defined to include 'the Trade Debtors ... other than the Excluded Assets'. 'Excluded Assets' was defined to include:

any trade debts owed by third parties to Milfoil Pty Ltd (ACN 006 763 524) or its Related Entities (Milfoil) which are collected by the Seller [i.e. MBG] on behalf of Milfoil.

317 It note in passing that this definition does not refer to Trade Debts claimed to be owed to Milfoil: it refers to trade debts owed to Milfoil in light of the RWP. This is confirmed by the definition of 'Trade Debtors' in the Sale Agreement as follows:

all trade debts owed to the Seller in respect of the Business on the Completion Date and any notes and securities for them held by the Seller, other than amounts owed by third parties to Milfoil which are collected by the Seller on behalf of Milfoil.

318 These clauses came to be included in the Sale Agreement because of Milfoil's correspondence to Mr Traianedes and Mr Martin including the letters which enclosed the RWP. It is clear that the parties to these negotiations had the RWP (or versions of it) and had discussions about whether the debts in it were to form part of the assets and debts transferred to AHT or were to be excluded and remain the property of Milfoil.

319 Ms Campbell gave evidence that Mr Martin showed her a two page facsimile from Milfoil enclosing the RWP. She was also provided with another version of the RWP by Ms Dunlop but does not recall when this was provided to her. She is now unable to identify that version of the RWP. She stated that she and Mr Martin relied upon the version of the RWP which came from Ms Dunlop.

320 Mr Traianedes also had a copy of the RWP. He received a copy in the facsimile from Mr Reynolds on 30 September 2009 referred to above. He received a copy from Ms Dunlop and/or Ms Brown. He also received a copy from the directors of MBG during the negotiation of the sale. This was exhibit ST-7 to his 14 January 2010 affidavit.

321 Mr Brooks and Mr Vincent attended the negotiations on behalf of the CBA. However, they kept Mr Barbagallo informed of developments. Mr Barbagallo stated in his witness statement that he was not directly involved in the sale of MBG's business and that he did not take part in any of the negotiations or the settlement meeting apart from having telephone discussions with Mr Martin, Mr Brooks and Mr Vincent, the details of which he does not now recall.

322 However, the evidence of Mr Brooks was that he liaised regularly with Mr Barbagallo as to the terms of the Sale Agreement and that Mr Barbagallo was 'across the detail' as he had ultimate authority of the CBA to approve the deal. I accept the evidence of Mr Brooks that he liaised regularly with Mr Barbagallo over these two days.

323 Mr Vincent, while remembering the exclusion of the Milfoil debts, did not recall the RWP. By contrast, Mr Brooks recalled receiving a copy of the RWP on 30 September 2009. Mr Brooks said that either Ms Martin or Ms Campbell provided him with a copy of the RWP. He believed that they would have provided him with some context for the RWP but does not now recall the specifics. He does recall that the RWP led to the Milfoil debts being excluded from those transferred to AHT.

324 I note in passing that Mr Brooks said that his attending these negotiations was significant: it was the first time he had had such responsibility - Mr Vincent had a personal matter so could not attend on this first day. He said that, as a result, he was careful to make sure that Mr Barbagallo knew what was going on in these negotiations. Mr Brooks said that he was quite certain that he would have covered off all parts of the Sale Agreement with Mr Barbagallo including the exclusion of the debts owed to Milfoil: that was because the final authority for the Sale Agreement was with Mr Barbagallo. He said he did not recall Mr Barbagallo expressing any reservations about the carve-out for Milfoil. He recalls amounts being discussed with reference to the RWP. Once again, I accept the evidence of Mr Brooks about the degree of Mr Barbagallo's involvement in the carve-out for Milfoil.

325 There is some dispute as to whether the parties accepted that the RWP listed the stock owned and debts owed to Milfoil, or the stock claimed to be owned and debts claimed to be owed to Milfoil. The CBA witnesses, for the most part, gave evidence to the effect that the RWP only identified the claims by Milfoil over the stock and debts listed in it.

326 Mr Vincent does not refer in his witness statement to the RWP but in [17] therein refers to when he first heard of a 'claim by Milfoil against MBG for certain trade debts'. In [16] of her witness statement, Ms Campbell states that, although she was not aware of the nature and extent of the arrangement between Milfoil and MBG, given the limited time available to investigate the arrangement prior to the Sale Agreement, she and Mr Martin accepted that the RWP constituted a complete account of all the goods that Milfoil was 'claiming'. She also stated that the substance of the discussion was about ensuring any money owing to Milfoil as per the RWP goes to Milfoil 'provided that Milfoil's claim was established'.

327 In [23] of his witness statement, Mr Brooks refers to a copy of the RWP as a document setting out the invoices for trade debts 'which were claimed by Milfoil'. By contrast, Mr Brooks gave oral evidence that he thought the RWP represented the debtors that were, upon receipt, going to be paid to Milfoil.

328 In my view, the parties to the Sale Agreement accepted that the RWP identified the stock owned and debts owing to Milfoil at the time.

329 First, it is consistent with the terms of the Sale Agreement set out above and, in particular, the use of the word 'owed' in the definition of 'Assets' and 'Trade Debts' e.g. 'other than amounts owed by third parties to Milfoil which are collected by the Seller on behalf of Milfoil'.

330 Second, it is consistent with the fact that the RWP was prepared not by Milfoil but by Mercury. Mercury was putting forward the debts and stock which it considered Milfoil owed it - not what Milfoil claimed.

331 Third, it is consistent with the evidence of Mr Brooks in cross-examination.

332 Fourth, it is consistent with the evidence of and position adopted by Mr Traianedes. Mr Traianedes deposed in his 14 January 2010 affidavit that, during the negotiation of the sale, the directors of MBG told the administrators that Milfoil had paid suppliers for stock on behalf of MBG, that stock had been sold by MBG, and that MBG was collecting the proceeds of those invoices on behalf of Milfoil.

333 The directors gave him a list of invoices to which the agreement with Milfoil related, namely, the RWP. The directors told him that the RWP identified the suppliers of stock, the styles of garments supplied by those suppliers, the relevant MBG invoices and customers to whom the garments had been shipped. According to the RWP, Milfoil had paid $509,471.21 to the Chinese suppliers.

334 In negotiating the Sale Agreement, Mr Traianedes deposed that he placed reliance on the RWP. He said the parties accepted that it accurately identified the invoices the subject of the Milfoil arrangement. In particular, in negotiating the purchase price, Mr Traianedes said that reliance was placed on the fact that the sum of $660,896.66 in the RWP represented the wholesale value of the stock invoiced to Mercury's customers, after the stock was released by suppliers, following payment of the Milfoil advance. It covered the fee of $70,000 due to Milfoil for entering into the arrangement and an allowance for interest.

335 It was on this basis that Mr Traianedes agreed that the amount owed by the customers set out in the RWP would not be included in the total debtors that AHT was purchasing and should be deducted from such total debtors in order to calculate the consideration under the Sale Agreement. I note that the receivers resigned just before the execution of the agreement, apparently because of concerns they may be breaching s 420A of the Corporations Act 2001 (Cth) (the 'Corporations Act'). As a result, the Sale Agreement was executed by Mr Traianedes.

336 As noted above, under the Sale Agreement, AHT purchased the assets of MBG. Clause 1.3 provided that, effective close of business on 30 September 2009, MBG unconditionally and irrevocably assigned to AHT all its right, title and interest in the Trade Debtors. It also provided that to the extent any trade debtors are paid to MBG or Mr Traianedes, MBG and Mr Traianedes would hold that amount on trust for AHT and immediately account for and pay that amount to AHT.

337 However it appears that some Trade Debtors had made payments shortly before close of business on 30 September 2009. It appears that this was also the subject of discussion and agreement as part of the Sale Agreement. This is because, on 1 October 2009, a Deed of Acknowledgement was executed by AHT, Mr Traianedes as administrator on behalf MBG and by Mr Vincent on behalf of the CBA (the 'Acknowledgement Deed'). Mr Vincent's signature was witnessed by Mr Brooks.

338 Under the Acknowledgement Deed, in consideration for AHT agreeing to waive the condition in cl 2.1(d) of the Sale Agreement (that the Trade Debtors at Completion would be at least $3.4 million), MBG and Mr Traianedes agreed that debts which had been owing to MBG and 'presented prior to Completion' were to be remitted to AHT. The amounts paid, the relevant customer and relevant account (most of which were CBA accounts) were listed on the Acknowledgment Deed. The amounts totalled $746,606.53. Relevantly, these amounts included the sum of $245,749.23 received from 'Ed Harry' into the 'Receiver CBA Account' (i.e. the third CBA account). Ed Harry's name was also in the RWP.

(1) MBG and Mr Traianedes agreed that the amounts referred to were the property of AHT and form part of the Assets under the terms of the Sale Agreement; and

(2) the Company and the administrator directed the receivers and the CBA to pay and transfer those funds to AHT.

340 A Deed of Direction was executed by Mr Traianedes on or about 1 October 2009 (the 'Direction Deed'). Among other things, under the Direction Deed, Mr Traianedes authorised the CBA to pay to AHT the amounts in the Acknowledgement Deed held in the CBA accounts. Relevantly, these amounts included the $245,749.23 received from 'Ed Harry' into the 'Receiver CBA Account'.

341 Further, on 1 October 2009, Mr Vincent sent a letter to Mr Traianedes confirming on behalf of the CBA that he would immediately direct the former receivers and managers to make the payments set out in the Direction Deed.

342 Mr Vincent gave evidence that, if he had known that any of the amounts contained in the Acknowledgement Deed or the Direction Deed belonged to, or were claimed by, Milfoil, he would not have signed those Deeds. This is because he would have been obliging the CBA to pay amounts to AHT when those amounts actually belong to Milfoil or were claimed by Milfoil.

343 Mr Brooks' evidence was more confined. He said that, if he was aware that Milfoil was claiming the amounts listed in Schedule B to the third amended statement of claim (which included the amount of $245,749.43 from Ed Harry), these amounts would not have been included in the Deeds and he would not have paid these amounts to AHT.

12.3 Milfoil correspondence after the Sale Agreement

344 Mr Reynolds remained in contact with Mr Mark Burrell during this period. On 1 October 2009 at 6:37 am, Mr Burrell informed Mr Reynolds that an express clause was included in the Sale Agreement that acknowledged that the stock purchased with the Milfoil advance was not part of the assets sold to AHT. He suggested a meeting to confirm a way to move forward.

345 Mr Reynolds replied at 7:45 am that morning in the following terms:

When I spoke to the Commonwealth Bank on 10 August 2009 which was around the date that I should have been paid out from the debtor collections, I was advised by the Bank that Phil had told them I had invested $500,000 into the Company in July and the Bank had just taken out $200,000 and were about to take another $300,000 as a result to reduce their Mercury exposure. Then Phil as Managing Director, gives me phony invoices, some dated before I remitted Milfoil funds on 3 July, pretending to be my stock.

So here I am on 1 October 2009 with $92,000 back in my bank and stock of $199,000 still in your storage and un-invoiced according to Talea Brown's telling schedule, which I faxed you, the bank receiver and your Administrator, yesterday. That stock may be of far less or no value now?

Anyway you look at it Chris, it smacks of "gaining money by deception", "conversion", "fraud", "theft", "conspiracy to defraud" and "aggravated breach of trust" and the Commonwealth Bank appears complicit. You can take your pick. As the Police keep reminding me, "people lie, facts don't lie".

346 As to the phoney invoices, Mr Reynolds gave evidence that he was referring to the fact that some of the invoices predated 3 July 2009 when the Milfoil advance was made. I accept this evidence. I also accept his evidence that, by this time, he was feeling desperate about his inability to get the Milfoil advance repaid.

347 Mr Burrell replied by email at 8:52 am acknowledging Mr Reynolds' frustration but did not accept that there had been any fraud or theft. Mr Reynolds replied by email dated 2 October 2009 at 8:10 am demanding payment in full by 4:30 pm that day, failing which the matter would be placed in the hands of the Major Fraud Squad and ASIC. He also stated:

Given that the Commonwealth Bank is implicit [sic] in this, they can contribute the $500,000 they knowingly took in August 2009 representing what they allege they were told by Phil Thomas was a 3 July 2009 equity investment by Milfoil Pty Ltd., into Mercury and they snatched according to Mercury staff without authority as a permanent reduction to Mercury's debt. I have that from the Bank Executives [sic] mouth.

348 Mr Burrell replied at 8:42 am on 2 October 2009, denying any fraud or other illegal activity. He again suggested that Mr Reynolds contact him in order to move forward. Mr Reynolds replied by a further email at 2 pm on 2 October 2009 in the following terms:

On or about 20 August 2009 [sic], in just an hour or so at Mercury, I discovered that the Company was hopelessly insolvent and had been for a long time. Moreover, Mercury Group Limited shares were absolutely worthless.

It was also said to us while at Mercury that day by the Commonwealth Bank that though the Bank had fully written the Mercury debt off, the executive concerned was determined to get the Bank's money back. He claimed he had been told by Phil Thomas, that Milfoil had invested $500,000 in the Company in early July 2009 and effectively the Bank were taking the $500,000 out in permanent reduction of the Mercury debt, which they did. It seems to me that no one stepped up to stop the misbehaviour of the Bank, and as a result, enabled it to happen.

The Commonwealth Bank took two tranches of funds at the time, one of $300,000 on 15 August 2009, which Sue Dunlop said was without authority, and shortly after they took another $200,000. Exactly the same amount the bank executive stated we had invested and was in Mercury's accounts. This was despite me explaining to the Commonwealth Bank that our $510,000 was not invested into Mercury but done by purchasing stock in our name and if any of our funds from retailers inadvertently went into the Mercury bank account, they were held in trust, on our behalf and could not be misused in permanent reduction of the Bank's debt. The Bank executive said he would not proceed with taking the next $200,000 but did anyway, apparently getting in first as it were, so we did not get it.

...

Now we are told the Company has tracked down stock which is ours, that three months down the track has not been invoiced for. I am receiving different stories with every communication about the situation with "our" stock, debtors and cash. We were told in August $70,000 had been banked into our account, but had not.

We were also told by Brendan at the start the stock would be airfreighted or urgently shipped and all would be in store within 14 days with immediate billing and delivery. Payment would come 14 days after. That means we would get all our money back by early to mid August, 2009. About the same time as the Commonwealth Bank wrenched out what they believed was $500,000 of our funds, which seemed to be appeasement money by Mercury.

349 Mr Burrell replied at 2:05pm, requesting Mr Reynolds work with him in order to get the Milfoil advance back.

350 Between the execution of the Sale Agreement and the conclusion of AHT's payments to the CBA in December 2009, Mr Brooks was responsible for monitoring Mercury's accounts to identify payments received from trade debtors which were to be transferred or 'swept' to AHT.

351 There were four principal Mercury bank accounts with the CBA from about 2009:

(1) the first CBA account referred to in section 6 above, being a business transaction account which was closed on 23 September 2009;

(2) the second CBA account referred to in section 6 above, being an overdraft account which was closed on 22 December 2009; and

(3) the third CBA account, referred to in sections 11.1 and 12.2 above, being the account opened by the receivers which was closed on 27 October 2009.

352 In addition, an interest-bearing cheque account was opened by Martin and Crosbie as agents for the CBA in respect of the former receivership of MBG, being account number 06301210433479, which operated from 10 December 2009 until 2 February 2011 (the 'fourth CBA account').

353 Mr Brooks gave evidence that the CBA agreed to keep open the first and second CBA accounts (which were trading accounts of Mercury) because AHT indicated that receipts from Mercury debtors would be deposited into these accounts.

354 Mr Brooks gave evidence that from the time of the execution of the Sale Agreement to the conclusion of AHT's payments to the CBA in December 2009, he monitored the first and second CBA accounts to ensure that any payments from trade debts belonging to AHT pursuant to the Sale Agreement were swept to AHT. He said that when such amounts had been identified, he sent a list to Mr Traianedes or Mr Moss of AHT seeking confirmation that they would be swept to AHT. Once confirmation was received, Mr Brooks arranged for the amounts to be swept to AHT.

355 Mr Brooks also gave evidence that during this period he monitored all four CBA accounts to ensure that any trade debts belonging to Milfoil were identified and not swept to AHT. He said it was his practice to review these accounts weekly to determine if there had been any receipts from Mercury customers and, if so, whether they corresponded to a payment from a customer in a sum which matched an invoice amount in the RWP.

356 However, the nature of his review was very limited. Mr Brooks said that if a payment from one of the five Mercury customers listed in the RWP did not precisely match an invoice in the RWP, he did not undertake any further inquiries: rather, he assumed that payment did not relate to an invoice listed in the RWP. As a result, the payment by a customer of a lump sum comprising two or more invoices listed in the RWP would not be identified or set aside by Mr Brooks for Milfoil. This is notwithstanding that he acknowledged in oral evidence that many of the sums received from customers were six-figure sums and that there were no invoices with a six-figure sum recorded in the RWP.

357 Further, Mr Brooks said that, in respect of customers referred to in the RWP where there was no invoice number and who made payments after 1 October 2009, he did not know whether such payments related to an invoice or an amount in the RWP. There is no evidence that he made any enquiries in these circumstances. In my view, the process adopted by the CBA via Mr Brooks was far from adequate.

358 On 5 October 2009, the CBA paid the sum of $114,514.99 from the second CBA account to AHT. This was done in accordance with the Acknowledgement Deed and the Direction Deed. Before doing so, Mr Brooks wrote to Mr Vincent, copied to Mr Barbagallo, for approval. The sum paid across did not include payments received from Mercury customers listed in the RWP.

359 Further, on 7 October 2009 at about 10:23 am, the CBA paid the following amounts to AHT in accordance with those Deeds:

360 As noted above, Ed Harry was one of the five Mercury customers listed in the RWP.

361 The payment occurred in the following circumstances. Mr Moss of AHT sent an email to Mr Brooks, copied to Mr Vincent, Mr Traianedes and Mr Martin, at 9:09 am on 7 October 2009 requesting the balance of funds 'as per the direction', which balance included the sum $245,749.23 from Ed Harry. Sometime before 10:23 am on 7 October 2009, Mr Vincent sent an email to Mr Brooks, copied to Mr Barbagallo, requesting that Mr Brooks liaise with PPB to:

notify them that unless they have any objection we will transfer the debtor receipts, deposited into the Receivership account on 30 September 2009 (being assets subject to the sale agreement) and referred to in the VA's deed of direction ("DOD"), to the purchasers nominated account per the DOD.[14]

362 As noted above, PPB had resigned as receivers on 1 October 2009.

363 There is no evidence before me that Mr Brooks made any checks or inquiries (including with PPB) as to whether the sum of $245,749.23 from Ed Harry included any amount to which Milfoil was entitled or claimed to be entitled. I note in passing that Ms Campbell of PPB said that said she took no steps to see whether the payments made by Ed Harry on 30 September 2009 related to the amounts claimed in the RWP: indeed, she said that, to her knowledge, nothing was done to ensure amounts paid to AHT included any amount to which Milfoil was or might be entitled.

364 At 10:23 am on 9 October 2009, Mr Vincent sent an email to Mr Moss attaching a letter dated 7 October 2009 confirming that the payments totalling $511,454.01, including the $245,749.23 from 'EDH', had been 'transferred today'.

365 At 10:52 am on 7 October 2009, Mr Traianedes replied to Mr Moss' email of 9:09 am that morning. In that email, he stated that he had asked about the payment and that 'Thomas Brooks advises that the amounts in the deed of direction have been sent'. Mr Moss replied by email at 11:02 am thanking Mr Traianedes for his follow-up and confirming the CBA had now sent all the agreed amounts.

366 However, at 11:16 am on 7 October 2009, Mr Traianedes then sent a further email to Mr Moss of AHT. It attached a letter also dated 7 October 2009 which:

(1) advised that the remittance from Ed Harry in the sum of $245,749.23 swept to AHT by the CBA included the sum of $31,423.78 which was claimed by Milfoil;

(2) referred to 'a spreadsheet of the amounts claimed by Milfoil ... previously provided' i.e. the RWP (which I assume was exhibit ST-7, given the amount referred to); and

(3) requested the sum of $31,423.78 be remitted to Mr Traianedes.

367 The evidence before me does not disclose how Mr Traianedes formed this view or the circumstances which caused the letter to be sent. However the evidence before me confirms that Mr Traianedes was correct. Invoice 628320 was paid as part of the $245,749.23 received from Ed Harry into the third account on 30 September 2009. Ed Harry issued a remittance advice dated 30 September 2009 in respect of the payment of $245,749.23 which recorded that the sum included payment of one of the invoices in the RWP. Invoice 628320 in the RWP to Ed Harry was for $32,238.74. Invoices 628320 and 628320A in the 30 September remittance advice from Ed Harry totall $32,238.74. As a result, it seems clear that these two invoices in the 30 September remittance advice relate to invoice 628320 in the RWP.

368 Further, I note that the 30 September remittance advice records that, after discount, Ed Harry paid $31,423.78 in respect of these invoices. As noted above, this is recorded in the version of the RWP referred to by Mr Brooks in his witness statement which is exhibit ST-7.

369 On 26 October 2009, Mr Brooks of the CBA wrote to AHT, Mr Traianedes and PPB, advising that the CBA had transferred $178,059.91 into AHT's account. That sum had been paid by Trade Secrets, a customer not listed in the RWP, into the third CBA account on 26 October 2009.

370 On 11 November 2009, Mr Brooks wrote to AHT, Mr Traianedes and PPB, advising that the CBA had transferred $113,886.73 into AHT's account. That payment did not include any amounts received from any Mercury customer in the RWP (for example, $112,646.79 was paid by Harris Scarfe).

371 On an unknown date, Mr Brooks wrote a to AHT, Mr Traianedes and PPB, advising that the CBA had transferred $38,738.85 into AHT's account, which appears not to include any amounts received form Mercury customers listed in the RWP.

372 There is evidence as to other amounts received from Ed Harry that were referable to amounts in the RWP. For example, on 30 October 2009, the sum of $236,301.47 was paid directly into AHT's account by Ed Harry. It is recorded in a remittance from Ed Harry addressed to Mercury dated 30 October 2009. The account number on that remittance accords with the account number for AHT in the Sale Agreement. There is no evidence which indicates to me why this payment was made directly to AHT by Ed Harry.

373 There are four other Ed Harry invoices in the RWP:

(1) invoices 628526 and 628526, each for $21,640.96; and

(2) invoices 628499 and 626500, each for $64,736.52.

374 In the 30 October Ed Harry remittance, reference is made to:

(1) invoices 628526 and 628526, each for $21,640.96 and that, after discount, $21,099.94 was paid for each invoice;

(2) invoices 628499, 626449A and 628500, each for $64,736.32 and that, after discount, $63,117.91 was paid for each invoice.

375 Based upon the invoice numbers and amounts paid by Ed Harry for each invoice recorded in the 30 October Ed Harry remittance, these amounts included payment of all outstanding Ed Harry invoices recorded in the RWP.

376 As noted above, Mr Reynolds sent the 2 October letter to Mr Norris. I have set out the substance of the 2 October letter above. The letter also demanded immediate re-payment of 'the $500,000 taken by the Bank in August ... Otherwise the matter is going straight into the [hands] of the Police and ASIC'.

377 It was put to Mr Reynolds in cross-examination that he had no basis in the letter to demand immediate repayment of $500,000 'taken by the Bank in August' in light of the information in the RWP which showed that not all the Milfoil stock had been invoiced or paid for. Mr Reynolds conceded that this paragraph was 'unfortunate'. But he denied it was a dishonest demand at the time. He said it was based on what Sue Dunlop had told him. He said he had a different view today based on the CBA's discovery.

378 Mr Reynolds also wrote to Mr Norris on 6 October 2009 as set out in section 8.3.1 above. The letters which Mr Reynolds sent to Mr Norris resulted in the opening of a complaint file within the CBA.

379 Mr Barbagallo sent the 26 October email to Greg Manning of the CBA in respect of Mr Reynolds' letters. The email was copied to Mr Vincent. Mr Barbagallo also drafted a proposed response to Mr Reynolds from Mr Perry which concluded that the CBA was not in any way responsible for the loss of his investment in Mercury.

380 On 2 November 2009, Mr Perry of the CBA wrote to Mr Reynolds consistent with the draft response suggested by Mr Barbagallo. Mr Reynolds responded by letter dated 6 November 2009, suggesting that there had been a massive fraud. Mr Reynolds spoke to Mr Perry on 11 November 2009. The conversation is referred to in a letter from Mr Reynolds to Mr Perry of that date. In that letter, Mr Reynolds stated that during the conversation on 10 August he told Mr Barbagallo 'not to touch any of my $606,000 (wholesale value) stock proceeds held in trust and are being wrongly converted into the Company's name and bank account' and that Mr Barbagallo replied he 'would not touch it'.

381 Steven was retrenched from Mercury in early October.

382 On 5 October 2009, Mr Reynolds wrote to his son Michael. Michael was assisting his father at this time. In that email, Mr Reynolds wrote that he was going to email all Chinese suppliers and get them to fax back copies of the invoices of the stock purchased with the Milfoil advance. In oral evidence he said he did email the Chinese suppliers but got back little from them.

383 The letter also stated that the CBA and Mercury were 'all part of a scheme to get us to put $500,000 in and so they could snatch it in permanent reduction of their debt'. In oral evidence, Mr Reynolds confirmed this was his view at the time and it was the reason why he went to the major fraud squad and ASIC. The email continues:

The early signs of something untoward around 10 August caused me to go and investigate the Company to find it was hopelessly insolvent. While there, I spoke to the Bank who admitted being told that we put in $500,00 [sic] in July and they were taking $500,00 [sic] out. Then two weeks later I made a formal complaint to the Company after the MD sent me phony invoices-they instantly sacked their MD because of his apparent complicity with the Commonwealth Bank in attempting to dud us but I feel it was just an attempt to stop or delay me going to the Police.

384 Mr Reynolds wrote to the Chairman of Mercury on 6 October 2009, demanding repayment.

385 On 6 October 2009, the former receivers prepared a report which recorded, among other things, that:

(1) the Business and Assets of MBG were sold for the value of debts owing to CBA;

(2) during the course of discussions on 1 October 2009, Mr Vincent of the CBA had advised Mr Martin that, having regard to the obligations imposed on receivers by s 420A of the Corporations Act, he had formed the view that the receivers ought retire and allow the administrator to accept the offer;

(3) at settlement, Mr Brooks collected cheques for $2,124,000 to be applied against the CBA debts; and

(4) the further amount of $737,000 was payable by AHT under the Sale Agreement, of which $700,000 related to employee entitlements.

386 There was an email exchange between Mr Reynolds and Mr Abela, the chairman of Mercury, on 7 October 2009, which included comments to the effect that Mr Reynolds had been constantly mislead by Mercury executives.

387 That email chain was sent to Mr Reynolds' sons, Michael and Steven. In that email, Mr Reynolds referred to a conversation with Mr Traianedes for about one hour. The email records that Mr Reynolds ran through the sequence of events leading to the Milfoil advance. The email states that during the conversation Mr Traianedes asked for Mr Reynolds' documents relating to the Milfoil advance but Mr Reynolds said he would not provide them as Mr Traianedes was 'too close to Mr Abela'. Mr Reynolds said all his documents were going to the police. In oral evidence, Mr Reynolds indicated that he did not trust Mr Traianedes at this time.

388 The email repeated Mr Reynolds' belief that the Commonwealth Bank had taken 'our $500,000' and that Mr Traianedes agreed they never had any authority to take the company's money. It also records that Mr Traianedes asked for an extension of his appointment and Mr Reynolds agreed as a member of the inspection committee.

389 On 8 October 2009, Mr Reynolds wrote an email to his son Michael. In it, he wrote, among other things:

Working with the Administrator we can get the Commonwealth Bank and get back about $3.5 m. Keep that to yourself Mike. Might put 2 [cents] of real value back into 160 m shares.

390 Mr Reynolds said that this was a reference to the anticipated total of the proceeds of sale of the stock purchased with the Milfoil advance. Mr Reynolds said it was part of the Milfoil agreement that if the Milfoil advance was not paid, Milfoil was entitled to the proceeds of sale of the stock purchased with the Milfoil advance. As noted above, this was the subject of the 2015 amendments which are no longer pursued.

391 On 7 October 2009, Mr Reynolds sent another letter to Mr Traianedes. It referred to their telephone conversation 'last evening' and responded to Mr Traianedes' request for a summary of the events surrounding the purchase of stock with the Milfoil advance. The account provided generally accorded with Mr Reynolds' version of events.

392 On 8 October 2009 at 12:50 pm, Mr Reynolds sent by facsimile a letter dated 7 October 2009 to Mr Traianedes setting out his position and demanding repayment of $494,000, being the outstanding part of the Milfoil advance. He referred to his conversation with Mr Barbagallo and to the phony invoices provided in early September 2009.

393 As noted above, on 7 October 2009, Mr Traianedes wrote to AHT requesting that the sum of $31,432.78 from Ed Harry (which formed part of the sum of $245,749.23 transferred that day) be remitted to him as it was part of the amounts set out in the RWP claimed by Milfoil.

394 The next day, Mr Reynolds wrote to Mr Traianedes disputing that he was an unsecured creditor, setting out extracts of the 3 July Mercury letter which was inconsistent with that conclusion.

395 On 19 October 2009, Mr Traianedes sent a letter to AHT advising that the stock purchased by Milfoil 'does not form part of the assets acquired subject to the sale agreement'. It noted that AHT had collected stock from Mercury's warehouse which comprised stock purchased with the Milfoil money. It attached a schedule with details of the stock as identified by style number. That schedule was not in evidence. It requested an urgent reconciliation in respect of that stock, or that AHT hold any funds received in respect of that stock in a separate account. This letter seems inconsistent with Mr Traianedes' position in his letter dated 15 October 2009 that Milfoil was just an unsecured creditor and had no interest in any stock. This apparent change in position was not explained in the evidence before me.

396 On 19 October 2009, Mr Traianedes also wrote to Mr Reynolds. He noted that while the 3 July letters referred to MBL not MBG, that stock purchase with the Milfoil advance was not kept separate from other stock and the proceeds of sale of stock purchased with the Milfoil advance were paid into the company's bank account. He concluded:

I am therefore faced with a situation where the company was not party to any written agreement with you, it has not acted in accordance with the terms of any agreement you had with [MBL] and in particular it has not identified relevant invoices by clearly displaying Milfoil's bank details on those invoices as the payee or beneficial owner.

In summary, although I am satisfied that you provided assistance to the company I am not satisfied that you did so on a basis which gives you an entitlement to claim either stock or assets from the Company but rather I can only allow your claim is an unsecured creditor for the amounts owing.

397 Once again, this letter seems inconsistent with Mr Traianedes' letter to AHT dated 19 October 2009 referred to above.

398 Mr Reynolds replied on 21 October 2009. The tone of that correspondence reflects his frustration. He requested the immediate payment of the balance of the $606,000 referred to in the RWP.

399 On 26 October 2009, Mr Reynolds and Steven attended a meeting with the administrator. Talea Brown was also present. In his 23 February 2010 affidavit, Mr Reynolds deposed, in substance, that:

(1) Mr Traianedes fully traced 13 payments made pursuant to the Milfoil advance;

(2) all stock that was delivered from China following the Milfoil advance was sold and invoiced by MBG, and Mr Traianedes was not aware of any stock having been invoiced by any other subsidiary of MBL;

(3) Chinese suppliers had credited the Milfoil payment against old debts and not to forward stock as agreed: when Mr Reynolds asked Mr Traianedes how many supplies he had contacted to confirm this he said none; and

(4) Mr Traianedes said he was not retaining any Milfoil stock that had not been sold to AHT.

400 In his witness statement, Mr Traianedes stated that Mr Reynolds articulated his claim and in doing so was very critical of Mercury and its management. He said that Mr Reynolds did not provide any evidence of the stock over which Milfoil claimed title. Mr Traianedes said he had undertaken some investigation regarding the payments made by Milfoil to certain Chinese suppliers. As a result, he said to Mr Reynolds that some of Milfoil's funds had been applied to old debts owing to Chinese suppliers but not for the supply of new stock. Mr Traianedes stated that Mr Reynolds did not inform him that Milfoil had an interest in all stock supplied to Mercury since 3 July 2009 or in a substantial amount of that stock valued in the millions of dollars.

401 On 27 October 2009, Mr Reynolds sent a letter by facsimile to Mr Traianedes confirming the matters discussed at the meeting and outlining concerns regarding Mr Traianedes' own conduct in carrying out the administration. The letter records that the meeting was heated and that Mr Reynolds challenged Mr Traianedes' knowledge and understanding of the Milfoil transaction.

402 On 27 October 2009, AHT wrote to Milfoil advising it was holding $31,432.78 as part of the remittance received 'from Ed Harry pertaining to the Milfoil invoice'. It advised that it considered this payment had been made to AHT in error and that Mr Traianedes had claimed that Mercury was entitled to the money. AHT asked whether Milfoil would agree to these funds being sent to Mr Traianedes and, if not, it requested contact be made with Mr Traianedes with a view to reaching agreement on where the amount was to be deposited.

403 Mrs Reynolds replied that day stating that Mr Traianedes had no rightful claim to the stock purchased with the Milfoil advance or the proceeds of sale thereof and requested the money be sent to Milfoil's account. Mr Reynolds also wrote to Mr Traianedes in relation to this letter. The tone of the letter was terse as Mr Reynolds saw the letter from AHT as confirming that 'Mercury Brands were sending out invoices with Milfoil Pty Ltd on them, where there was no electronic payment system, as Sue Dunlop honestly maintained all along'. He sought the payment of all money owing to

404 On 23 November 2009, the creditors of MBG resolved that MBG should execute a deed of company arrangement as a result of the Sale Agreement. Mr Traianedes became the Deed Administrator. He expected MBG creditors to be paid in full. Two days later, on 25 November 2009, the CBA appointed Mr Martin and Mr Crosbie as the agents for the CBA to finalise any outstanding matters in relation to its securities.

405 On 10 December 2009, PPB 'as agents for the CBA' wrote to Mr Traianedes advising that the bank was then in possession of $35,499.43 which were provided during the receivership relating to debtors in which Milfoil claimed an interest. PPB wished to send this sum to Mr Traianedes pending determination of Milfoil's entitlement. The solicitors for Mr Traianedes responded that, while the CBA accepted that this sum was subject to a claim by Milfoil, Mr Traianedes was not satisfied that Milfoil was entitled to a beneficial interest in it. The sum was transferred to Mr Traianedes pending determination of Milfoils entitlement in it: it was ultimately the subject of the Federal Court proceeding.

406 On 14 December 2009, the solicitors for AHT wrote to the solicitors for Mr Traianedes informing them that AHT had received funds totalling $237,029.33. The letter records that Milfoil had made a claim against AHT in respect of those funds and that Mr Traianedes had advised that he considered they were the property of Mercury. I am unsure how this was the case given that the proceeds of the trade debts were either owed to Milfoil or had been transferred to AHT. This sum was ultimately also the subject of the Federal Court proceeding.

407 On 17 December, Mr Brooks wrote to AHT, Mr Traianedes and PPB advising that the CBA held $37,584.19 in debtor receipts and understood that they had consented to this amount being off-set against the sum of $70,000 demanded by PPB, being the employee entitlement claim buffer payable by AHT.

408 In January 2010, Mr Traianedes as the deed administrator issued an application for directions in the Federal Court in relation to amounts received for various invoices identified in the RWP. The amounts were as follows:

(1) $35,499.43 received by the receivers, referred to in [405] above;

(2) $237,029.33 received by AHT, referred to in [406] above; and

409 The CBA, AHT and Milfoil were put on notice of the Federal Court proceeding. The CBA appeared at the first directions hearing but took no further role. AHT took no role in the proceeding. Milfoil was joined as the second defendant and, as noted above, Mr Reynolds and Steven swore affidavits to establish Milfoil's entitlement to these amounts. Mr Traianedes swore four affidavits: dated 14 January 2010, 25 March 2010, 16 June 2010 and 10 July 2010.

410 Finkelstein J delivered the first Federal Court judgment on 17 June 2010. He ordered that the first Federal Court judgment be served on the CBA and AHT as he treated the proceeding as inter parties.

411 In the first Federal Court judgment, Finkelstein J concluded that:

(1) there was an oral agreement reached between Mr Reynolds of Milfoil and Mr Santamaria of MBG on 2 July 2013 as recorded in the letter from Milfoil to MGB dated 3 July 2009;[15]

(2) under that agreement, Milfoil agreed to purchase stock to be supplied by 13 Chinese suppliers with Milfoils' advance. Milfoil then sold the goods to local customers of MGB on the basis that MGB would proceed to receive the purchase price and account to Milfoil for the amount due to it;[16]

(3) if Milfoil received from MGB's customers more than was due to it, the surplus was to be paid or held in trust for MGB;[17]

(4) the RWP was evidence by which Milfoil was able to identify the stock which it purchased and the customers to whom the clothing was sold;[18] and

(5) this was notwithstanding that the RWP is inaccurate because it included reference to clothing that was received or dispatched prior to the agreement with Milfoil on 3 July 2009. His Honour concluded that Milfoil was not entitled to the proceeds of sale of 'pre-agreement' stock. He noted that Milfoil had probably received some 'pre-agreement' stock proceeds in the $92,000 it had received 'perhaps $11,170.70' but that amount was not the subject of the Federal Court proceeding.[19]

412 I note in passing that there seems to be an inconsistency in the first Federal Court judgment between [27] and [29]. In [27], his Honour proceeds on the basis that, under the Milfoil agreement, Mercury would receive all the purchase price for the stock purchased with the Milfoil advance and account for it to Milfoil. In [29], his Honour proceeds on the basis that the consequence of what was agreed was that 'if Milfoil received more from the company's customers than was due to it, the surplus would be paid to or held in trust for the company'. I have set out in section 7.4 above the terms of the Milfoil agreement which I have found.

413 Following the first Federal Court judgment, Mr Traianedes sought to argue that nearly all the amounts which were the subject of the Federal Court proceeding related to pre-agreement stock (i.e. stock purchased prior to the Milfoil agreement). This was on the basis of the date of shipment recorded in the invoice from the overseas suppliers. Mr Traianedes claimed that:

(1) $167,980.96 of the $237,029.33 received by AHT related to pre-agreement stock;

(2) $9,504 of the $35,499.43 held by the receivers was related to pre-agreement stock; and

(3) $12,783.95 of the $22,246.91 received by the administrator related to pre-agreement stock.

414 Mr Traianedes also asserted that $41,987.70 of the $92,896.82 already received by Milfoil related to pre-agreement stock. I will deal with this evidence, which was relied upon in this proceeding, further below.

415 Finkelstein J delivered a further judgment in the Federal Court proceeding on 21 October 2010 (the 'second Federal Court judgment').[20]

416 In the second Federal Court judgment, Finkelstein J concluded that Mr Traianedes was estopped from relying upon new evidence of the extent to which the stock referred to in the RWP was pre-agreement stock.[21] This was this was because he concluded that Mr Reynolds was dissuaded from taking further action to enforce Milfoil's rights in September 2009 because he was provided with the RWP and told that it showed stock which had been purchased by Milfoil.[22] As a result, Finkelstein J ordered that Milfoil was entitled to:

(2) $35,499.43 being received by the receivers plus interest;

(3) $22,246.91 held by Mr Traianedes plus interest; and

(4) its costs of the proceeding on an indemnity basis forming part of the costs of the administration of MBG's deed of company arrangement.

417 As a result of these orders, Milfoil has only received $57,815.03 being the total of the amounts ordered in (2) and (3) above. In sending this amount Mr Traianedes stated that these amounts represented the 'balance' of the funds held by him as the Deed Administrator. There were no further funds to pay Milfoil's legal costs. No funds were received from AHT in satisfaction of the orders as AHT was placed into liquidation.

418 The evidence of Mr Traianedes in the Federal Court proceeding relating to the shipping of the stock recorded in the RWP was also relied upon in this proceeding. It was included in [71]-[76] of Mr Traianedes's statement which refers in turn to his affidavit sworn 16 June 2010.

419 In summary Mr Traianedes gave evidence that he analysed shipping documents of Mercury to determine when the stock listed in the RWP was shipped. This is summarised in items 6 and 7 of the supplementary court book, the latter of which is a revised version of the RWP. Significantly, but by reason of the task undertaken, it does not record any further invoice numbers for goods that were to be supplied to the RWP customers. However it does record that the shipment of some of the goods appeared to have been cancelled, for example all of the un-invoiced goods to be supplied to Myer from the supplier Baiyi.

420 Further Mr Traianedes swore an affidavit dated 10 July 2010 in which he sought to reconcile the funds received from retail customers in the RWP with the invoices listed in the RWP and to reconcile the RWP in respect of the three sums which were the subject matter of the Federal Court proceeding.

421 In undertaking these tasks, many inaccuracies in the RWP were identified. Further, I am unsure if all of this work undertaken by Mr Traianedes is reliable. In any event, Finkelstein J found there was an estoppel between the parties from denying that the RWP recorded stock purchased with a Milfoil advance. I note Mr Traianedes concluded that the amount of $237,029.33 held by AHT included the $31,423.78 paid by Ed Harry on 30 September 2009 and swept to AHT on 7 October 2009.

422 This proceeding was issued in 2013. The claims made in the proceeding have changed over time. Originally, Milfoil's claim was limited to the stock recorded in the RWP in the sum of $606,896.66, called 'the goods'. It claimed that the goods were held on trust for Milfoil and it was entitled to their proceeds of sale.

423 On 26 February 2015, Milfoil filed an amended statement of claim claiming the sum of the proceeds of sale of all stock released by the 13 Chinese suppliers who received part of the Milfoil advance. This was based upon a tracing exercise undertaken by Milfoil. As noted above, the amount of stock released was said to be valued at $2,043,250, called the 'stock', and resulted in proceeds of sale from MBG customers (to which Milfoil was entitled) of $3,090,538. Milfoil claimed that that stock was the property of Milfoil and the proceeds of sale of the stock were to be held in trust for it. In the alternative, Milfoil maintained its original claim that the stock identified in the RWP was held on trust for Milfoil.

424 As a result of the amended statement of claim, by summons dated 14 December 2015, the CBA sought orders that Milfoil's expanded claim be stayed or dismissed because it was inconsistent with the findings of the first Federal Court judgment which determined the terms of the Milfoil agreement, its nature and the stock purchased pursuant to it.

425 First, the CBA contended that there was an issue estoppel as to the extent of the terms of the Milfoil agreement as Finkelstein J found they were set out in the 3 July Milfoil letter: to the extent that allegations were now made inconsistent with that letter, Milfoil was issue estopped from making those allegations. Second, the CBA contended that in the first Federal Court judgment Finkelstein J decided MBG would never take title to the goods. Third, the CBA contended that Finkelstein J had determined that the RWP set out the goods purchased by the Milfoil advance and that Milfoil were estopped from contending to the contrary.

426 In the first instance, Hargrave J found that there was no issue estoppel based on the Federal Court decisions:

(1) relating to all the terms of the Milfoil agreement, based on his conclusion that Finkelstein J held that 3 July Milfoil letter included some but not all of the terms of the July agreement; or

(2) that MBG would never take title to the goods.[23]

427 However, Hargrave J concluded that there was an issue estoppel which prevented Milfoil from now contending that stock other than that listed in the RWP was the subject of the Milfoil advance.[24] This finding was the subject of appeal. The Court of Appeal held that Finkelstein J did not find that the RWP comprised the totality of goods that were the subject of the Milfoil agreement.[25] In doing so, the Court of Appeal found that:

(1) Finkelstein J held that title in the goods purchased with the Milfoil advance passed to Milfoil;[26]

(2) if Milfoil received from Mercury's customers more than it was due, the surplus would be paid or held in trust for Mercury;[27] and

(3) there was an estoppel which prevented the parties from denying that the RWP identified the stock which belonged to Milfoil notwithstanding it may be unreliable.[28]

428 In allowing the appeal, the Court of Appeal concluded that Finkelstein J was not determining the question of whether the Milfoil agreement was confined to the stock that was recorded in the RWP i.e. he did not determine that the RWP compromised the totality of the stock that was the subject of this agreement.[29] This is in circumstances where Finkelstein J expressly found that the Chinese suppliers had released goods to a value well in excess of the Milfoil advance.[30]

In respect of the Milfoil agreement alleged in paragraph 8 of the current statement of claim:

(1) what were the terms found by Finkelstein J in the previous judgments in the Federal Court proceeding?; and

(2) which of the terms alleged in paragraph 9(a) to (e) and (g) of the current statement of claim have been established by the evidence?

430 In summary, Milfoil submitted that under the Milfoil agreement, Mercury would sell the stock purchased with the Milfoil advance to retailers in Australia as trustee for Milfoil and, if Mercury received any proceeds of sale of the stock from retailers, it would also hold the proceeds on trust for Milfoil pending payment of the Milfoil advance, the agreed interest and the agreed fee of $70,000. This is the gist of the allegations in [9(a)-(g)] of the third further amended statement of claim.

431 In summary, the CBA submitted that Milfoil had not established on the balance of probabilities these terms of the July agreement. Further, it submitted that the legal characterisation of the July agreement was that, in selling the stock purchased with the Milfoil advance, Mercury was acting as agent on behalf of an undisclosed principal, namely Milfoil. The CBA submitted that that relationship was quasi-fiduciary in nature giving rise to an obligation on the part of Mercury to account to Milfoil as principal.

432 I have set out my conclusions in relation to the terms of the Milfoil agreement in section 7.4 above which generally accords with the terms alleged in [9(a)-(g)] of the third further amended statement of claim. I note that these conclusions are generally consistent with the conclusions of Finkelstein J in the Federal Court proceeding, and Hargrave J and the Court of Appeal in this proceeding set out above.

433 There are some differences. For example, [9(b)] of the third further amended statement of claim alleges that Mercury would sell the stock 'as trustee for the plaintiff'. I have not concluded that Mercury acted as trustee at this time: in my view, it is unnecessary to do so for the purpose of the issues for determination.

434 I note that Hargrave J and the Court of Appeal were more concerned with the trust which arose in favour of Mercury in the event that Milfoil received more money than it was entitled to retain. This was the primary intention of the parties given that the Mercury customers were to be directed to pay Milfoil direct. As I set out above, in breach of one of the principal obligations under the Milfoil agreement, that did not happen.

435 However, as set out in section 7.4 above, Mr Reynolds and Mr Santamaria discussed on 3 July that any proceeds of sale that were inadvertently paid to Mercury would be held on trust for Milfoil. That is also consistent with the last sentence of the fourth paragraph of the 3 July Mercury letter i.e. 'in the event that payment is paid to [Mercury] in error, [Mercury] agreed that the payment is held in trust for them for Milfoil Pty Ltd and will pay the funds across immediately to Milfoil'.

Was the CBA aware of Milfoil's interest in the stock purchased and/or released by the Milfoil advance, or the proceeds of sale thereof, on 10 August 2009? If so, was the CBA given sufficient information to identify that stock or the proceeds of sale thereof?

437 In summary, Milfoil alleged that the CBA was notified[31] and had knowledge[32] of Milfoil's interest in the stock released by the Milfoil advance and, relevantly, that proceeds of sale thereof in the hands of Mercury were held on trust for Milfoil. This was because of the matters disclosed by Mr Reynolds during the conversation with Mr Barbagallo.

438 Further, Milfoil submitted that the CBA had sufficient knowledge of Milfoil's interest at this time. Counsel for Milfoil relied upon the test for knowledge set out in Baden, which refers to five different categories of knowledge, namely:

(i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.[33]

439 Milfoil relied upon in final submissions Baden categories (i), (ii) and (iv).

440 In summary, the CBA submitted that it was not notified and did not have knowledge of Milfoil's interest in the stock released by the Milfoil advance or that proceeds of sale thereof in the hands of Mercury were held on trust for Milfoil. This was based upon the evidence of Mr Barbagallo, Ms Dunlop and Mr Vincent about the 10 August conversation.

441 Even if the CBA was aware of Milfoil's general claim to an interest in the proceeds of sale of the stock purchased with the Milfoil advance, the CBA submitted its officers did not have sufficient knowledge, based upon Mr Reynolds' own version of the 10 August conversation, to identify in any meaningful way those proceeds of sale. This is in circumstances where Mr Reynolds could not at that time identify the stock purchased with the Milfoil advance or the proceeds of sale thereof.

442 Finally, the CBA submitted that only actual knowledge i.e. Baden category (i) had been alleged and the Court could not make any finding based on any other Baden category.

443 In Farah Constructions Pty Ltd v Say-Dee Pty Ltd ('Farah'),[34] the High Court considered in some detail the requisite knowledge for the purposes of the second limb of Barnes v Addy,[35] for knowing assistance in a breach of trust. In Farah, the High Court did not determine the requisite knowledge for the purposes of the first limb of Barnes v Addy, for knowing receipt, which is the relevant claim here.

444 However, the Full Court of the Federal Court considered the requisite degree of knowledge for knowing receipt in Grimaldi v Chamelon Mining NL (No 2) ('Grimaldi').[36] The Court held that Baden categories (iii) and (iv) were sufficient to impose liability for knowing receipt as they are consistent with equity's concern for the state of conscience of the defendant. That rider is important: recipient liability is 'fault based'. The Court in Grimaldi adopted the comments of Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd[37] that '[u]nconscionability cannot be fictionalised, and the grounds on which constructive trust liability is imposed should be real and substantial'.[38]

445 The principles in Grimaldi have been followed by other intermediate appellate courts.[39]

446 As to the nature of Baden categories (iii) and (iv), the Full Court in Grimaldi said:

The first two categories of "knowledge" require no comment. The third involves such a calculated abstention from inquiry as would disentitle the third party to rely upon lack of actual knowledge of the trustee's or the fiduciary's wrongdoing. The fourth reflects what seems to have been accepted provisionally by three judges of the High Court in Consul Developments ... It is, in essence, an understandable, objective, default rule designed to prevent a third party setting up his or her own "moral obtuseness" as the reason for not recognising an impropriety that would have been apparent to an ordinary person ... It is the surrogate of actual knowledge.[40]

447 As set out in section 8.3.7 above, I have concluded that the CBA was aware of Milfoil's interest in stock purchased with the Milfoil advance on 10 August 2009. This is notwithstanding the denials of Mr Barbagallo and the evidence of Ms Dunlop and Mr Vincent. In my view, it is more likely than not that during the 10 August conversation Mr Reynolds said words to the effect that he or Milfoil had purchased stock with the Milfoil advance and wished to protect the proceeds of sale of that stock.

448 However, I am unable to conclude that the CBA had sufficient information at that time to identify the stock or the proceeds of sale that were the subject matter of the trust asserted by Milfoil in the 10 August conversation. Indeed, as I set out above, on the evidence before me, Mr Reynolds was not able to identify the stock in which Milfoil had an interest at this time and thus was not able to identify in any meaningful way the proceeds of sale of such stock other than by reference to the retail customers' name.

449 This is relevant not only to actual knowledge in Baden categories (i) and (ii) but also to Baden category (iv). The information provided by Mr Reynolds in the 10 August conversation did not in my view give the CBA knowledge of circumstances which would indicate facts to an honest and reasonable person as to which stock or proceeds were in fact held on trust. This is because, other than name of the retail customer to whom the stock purchased with the Milfoil advance was supplied, Mr Reynolds could not identify the stock whose proceeds he sought to claim or trace.

450 It is regrettable that the attempts made by Mr Reynolds to obtain the relevant information from Mercury about the stock purchased did not produce any meaningful results until the first version of the RWP was prepared in early September. But, in my view, that was not the fault of the CBA. That is significant. I consider that to impose liability in these circumstances would be inconsistent with the fault-based nature of knowing receipt liability set out in Grimaldi. In my view, I can see no real or substantial basis on the facts as at 10 August for equity to impose liability upon the CBA for the liability asserted.

451 As a result, I have concluded that the CBA was aware of Milfoil's interest in stock purchased and/or released by the Milfoil advance, or the proceeds of sale thereof, on 10 August 2009. However, the CBA was not given sufficient information to identify that stock or the proceeds of sale thereof at that time.

452 For completeness, I consider that the third amended statement of claim and the way in which the case was conducted was sufficient to raise a case of knowledge based upon Baden categories (i), (ii), and (iv) relied upon by counsel for Milfoil in final submissions. This case has always been about what the CBA knew of Milfoil's interest in the stock purchased with the Milfoil advance and what the CBA knew about the extent of that interest. In relation to the extent of that interest, the issue at trial was whether the CBA had sufficient information in August 2009 and again in September/October 2009 to identify that stock or the proceeds of sale thereof. It did so by giving evidence of what it knew and what it did not know. It also so did so by giving evidence of the steps it took to identify the proceeds of sale of the Milfoil stock as set out in section 13 above.

If yes to question 2:

(1) did the CBA receive those proceeds of sale?; and

(2) if so, is a constructive trust imposed on the CBA in respect of such proceeds and, if so, did the CBA breach that trust by appropriating any and which of those proceeds for its own benefit?

454 It is unnecessary to decide this issue as the answer to question 2 is no.

Was the CBA made aware of Milfoil's interest in the stock purchased and/or released by the Milfoil advance or the proceeds of sale thereof in late September and/or early October 2009:

(1) by receipt by the CBA of the RWP made available in the negotiations of the Sale Agreement and/or of the letters dated 2 and 6 October 2009?

(2) by receipt by the administrator of the letters dated 23 September, 28 September and 30 September 2009 enclosing the RWP and otherwise by the RWP being made available in the negotiations of the Sale Agreement?

(3) by receipt by the receivers of the letters dated 29 September 2009 and dated 29 September but sent on 30 September 2009 enclosing the RWP and otherwise by the RWP being made available in the negotiations of the Sale Agreement?

456 I have concluded that the CBA was made aware of Milfoil's interest in the stock purchased and/or released by the Milfoil advance or the proceeds of sale thereof by receipt by the CBA of the RWP made available in the negotiations of the Sale Agreement and/or of the letters dated 2 and 6 October 2009.

457 Based on what Mr Barbagallo was told by 10 August and the further information obtained on 30 September and 1 October in the process that led to the Sale Agreement, the CBA was aware that Milfoil had advanced $500,000 to purchase stock in its own name in order for Mercury to meet customer orders and that the proceeds of sale of that stock as recorded in the RWP belonged to Milfoil.

458 As I set out in section 12.1 above, Mr Brooks and Mr Vincent attended the negotiations of the Sale Agreement on behalf of the CBA. They kept Mr Barbagallo informed of developments. Mr Brooks received a copy of the RWP on 30 September 2009 from either Mr Martin or Ms Campbell.

459 Further, I have concluded that the administrator and the receivers were also aware of Milfoil's interest in stock purchased by the Milfoil advance or the proceeds of sale thereof by their receipt of the RWP made available during the negotiations of the Sale Agreement in light of the letters received before that time. In the case of Mr Traianedes, I refer to the letters dated 23 and 30 September 2009, and in the case of the receivers, I refer to the letter dated 29 September 2009. However, I do not consider that this knowledge can be attributed at law to the CBA.

460 Milfoil appeared to assert that the each of the administrator and the receivers were the agents of the CBA. No authority was relied upon to support this assertion.

461 At law, the administrator is the agent of the company which he or she is appointed to administer. This is reflected in s 437B of the Corporations Act which provides that when performing a function or exercising a power, the administrator is taken to be acting as the company's agent.

462 As to the receivers, at law, a receiver appointed under an instrument generally acts as the agent of the company to which he or she is appointed. This is consistent with cl 9.4 of the MBL charge and of the MBG charge.

463 As a result, I have concluded that neither Mr Traianedes nor the receivers were the agents of the CBA for the purpose of attributing knowledge, or at all.

If yes to question 4, was the CBA given sufficient information in the RWP to identify that stock or the proceeds of sale thereof?

465 On reflection, this question is not appropriate to answer separately from issue 6. This is because of the basis upon which liability is sought to be imposed on the CBA as explained in answer to issue 6. However it is important to make some observations about this issue now.

466 As noted above, the RWP listed only five Mercury customers. For each customer, the RWP contained the name of the Chinese supplier, the style number of the goods and the amount to be paid by the retail customer to Mercury, whether invoiced or not. But thereafter, the RWP did not contain the same information for each customer.

467 As noted above, where invoices had been recorded as issued, the RWP relevantly recorded the invoice number, the date the invoice was sent, the anticipated date of payment by the retail customer and whether payment had been received by Mercury and/or paid to Milfoil. This information was not provided where the RWP recorded that no invoice had been sent.

468 Further, for different customers, different levels of information was provided. In the case of Kmart, the RWP listed eight separate supplies, totalling approximately $162,000, six of which were recorded as having been invoiced. In the case of Ed Harry, the RWP listed five separate supplies, totalling approximately $205,000, all of which were recorded as having been invoiced. By contrast, in the case of David Jones, the RWP listed four supplies, totalling approximately $12,500, none of which were recorded as having been invoiced.

469 The provision of the Mercury customers, the invoice value of the goods supplied, the details of any invoice sent, the anticipated date of payment and whether payment had been received by Mercury and/or paid to Milfoil is significant. These circumstances would have enabled a third party, like the administrator or CBA, to review any payments received from Mercury customers in order to determine whether they related to any such Mercury customers listed in the RWP. It may that further information or enquiries were required.

470 However, the ability to determine whether a payment received from one of the five Mercury customers related to an amount on RWP was more difficult where no invoice had been issued.

471 In my view, these issues are relevant to the degree of knowledge or notice the CBA had of whether particular payments deposited into CBA accounts were for amounts recorded in the RWP. However, as noted above, it is more appropriate that I deal with these issues in the next section in the context of whether any of the amounts recorded in the RWP were in fact deposited into the CBA accounts and, if so, the liability (if any) that may be imposed as a result.

If yes to question 5:

(1) did the CBA receive the proceeds of sale of stock listed in the RWP?; and

(2) if so, is a constructive trust imposed on the CBA in respect of such proceeds and, if so, did the CBA breach that trust by appropriating any and which of those proceeds for its own benefit?

473 In summary, Milfoil contended that if the CBA had notice of Milfoil's interest from the time it received the RWP then the Court should infer that the CBA received the proceeds of sale of the stock recorded in the RWP. It did so on the basis that:

(1) the Court should be satisfied that the funds were received into the CBA accounts; and

(2) the CBA then disbursed funds from its account by sweeping them to AHT with notice of Milfoil's interest in breach of trust.

474 These submissions were generally consistent with the matters alleged in [41] and [45] of the third amended statement of claim. Milfoil submitted that the suggestion that the CBA carefully assessed whether payments swept to AHT were properly Milfoil's should be rejected: rather, if the CBA failed to identify those amounts it was the result of the CBA 'shutting its eyes' or not making enquiries to ensure such sums were properly identified.

475 Milfoil also submitted that the CBA received and retained the benefit of the sale of the Milfoil stock in another 'more subtle' way. It contended that, in order to recover its secured debt (being the major part of the price paid under the Sale Agreement), it agreed to transfer the sums received from Mercury debtors after 30 September to AHT. Thus Milfoil submitted the CBA only obtained the repayment of its secured debt by transferring the Mercury debts which in fact included amounts collected on behalf of and held on trust for Milfoil.

476 Milfoil submitted that it should have been paid at least the following sums referred to in the RWP prepared by Mercury and circulated by Mr Reynolds on 30 September 2009:

(1) the amount specified as 'due and payable' in the RWP: $82,614.12;

(2) the amount specified as 'due [(i.e. to be received)] by 31 [October]' in the RWP: $233,163.97;

(3) the amount specified as 'not invoiced' in the RWP: $198,221.79.

477 In summary, the CBA submitted that Milfoil had not established on the balance of probabilities that the CBA received the proceeds of sale listed in the RWP. The CBA submitted that the essence of the claim of knowing receipt under the first limb of Barnes v Addy is 'receipt' by a defendant of property with the requisite knowledge that it is subject to trust or fiduciary obligations.

478 The CBA submitted that the Court should not infer that the funds referable to the RWP were received by the CBA. The practices adopted by Mercury to the effect that all receipts were paid into the first and/or second CBA accounts were not adopted after the administrator and the receivers were appointed in mid-September and certainly not after the sale on 1 October 2009. This is particularly so where neither the administrator nor the receivers were acting as agent(s) for the CBA.

479 To the contrary, the CBA submitted that on the basis of the evidence of Mr Traianedes and Ms Campbell (and consistent with the position in the Federal Court proceeding) in relation to funds in the RWP:

(1) $35,499.43 was paid to the receivers, then paid to Mr Traianedes as deed administrator pending the determination of the Federal Court proceeding: this was then paid to Milfoil as a result of the Federal Court proceeding;

(2) $22,246.91 was collected by Mr Traianedes and held by him pending the determination of the Federal Court proceeding: this was then paid to Milfoil as a result of the Federal Court proceeding;

(3) $237,029.33 was paid to AHT and held by it pending the determination of the Federal Court proceeding. It was not paid to Milfoil in accordance with orders made in the Federal Court proceeding because AHT was subsequently placed into liquidation; and

(4) the balance of the value of the stock in the RWP of $219,251.17 cannot be accounted for but there is no evidence that the CBA received any of those monies.

480 The CBA submitted that the lack of evidence in respect of the balance of the value of the stock in the RWP was due to the fact that the records of Mercury had been destroyed in the ordinary course by Mr Traianedes and that they might have been available if Milfoil had issued this proceeding promptly, as foreshowed in the Federal Court proceeding. It submitted that the lack of evidence meant that Milfoil cannot prove this aspect of its case, relying upon Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq).[41]

481 Finally, the CBA submitted that if money is paid into a bank account which is trust money, even if the bank knows that it is trust money, it is not relevantly received by the bank for the purpose of the first limb of Barnes v Addy; it is relevantly received by the bank's customer and the bank only receives it as agent for that customer. In doing so, counsel relied upon the judgment of Millett J in Agip (Africa) Ltd v Jackson ('Agip').[42]

482 In the course of considering this submission after oral argument, I noted a related basis of liability for agents who deal with trust property inconsistently with the terms of the trust, also referred to by Millett J in Agip. I will refer to that basis of liability as liability for inconsistent dealing. This appeared relevant to the 'sweeping' case run by Milfoil i.e. that the CBA, knowing of Milfoil's interest in the stock purchased with the Milfoil advance, applied the proceeds of sale of that stock inconsistently with Milfoil's interest.

483 As is evident from section 13 above, the CBA filed witness statements setting out the steps taken by CBA to ensure that funds swept to AHT did not contain proceeds of sale to which Milfoil was entitled. Much of the cross-examination of Mr Brooks and Ms Campbell was directed to this issue. This sweeping case and the steps taken by the CBA consistent with Milfoil's interest were certainly 'in the ring' at trial. Further, in closing submissions, counsel for the CBA conceded that the pleadings 'may well cover sweeping of the account'.

484 As a result, in late April 2019, I sought further submissions from the parties on this related basis of liability for agents who deal with trust property inconsistently with the terms of the trust (i.e. liability for inconsistent dealing) and its applicability, if any, to the facts of this case. Further submissions were provided on 15 May 2019 by both Milfoil and the CBA.

485 Milfoil submitted that liability for inconsistent dealing arises in this case. The CBA submitted that this kind of liability only arose where the defendant was a volunteer who did not have notice at the time of receipt i.e. otherwise than a bona fide purchaser for value without notice. The CBA submitted that neither was present here. Further, it reiterated that Milfoil had not proved that the CBA received proceeds of sale of stock in the RWP with the result that Milfoil had not proved that the CBA had dealt with those proceeds inconsistently with Milfoil's interest.

486 Before considering the legal bases of liability, as noted above, the CBA submitted that actual knowledge was the only type of knowledge Milfoil alleged the CBA had, with the result that the types of knowledge in Baden categories (ii) and (iv) are not proper bases upon which to make findings in this proceeding. As set out in section 18.3 above, I consider that the third amended statement of claim and the way in which the case was conducted were sufficient to raise a case of knowledge based upon Baden categories (ii) and (iv).

487 What has become known as the 'first limb' of Barnes v Addy is based upon the following statement by Lord Selborne LC in that case:

Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. ... But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.[43]

488 The words used by Lord Selborne LC - receive and become chargeable with some part of the trust property - are not in their terms clear. Over time, the authorities have tried to set out relevant principles upon which strangers might be made liable to account as constructive trustee within the first limb of Barnes v Addy. In summary, those requirements are 'receipt' of the relevant property and notice or knowledge that it is trust property being dealt with inconsistently with the trust (either at the time of receipt or subsequently while the property remains in the stranger's possession or control).[44]

489 In Agip, a case relied upon by the CBA, Millett J dealt with the principles of knowing receipt. His Lordship noted the principles may apply to a variety of different situations, which included two main classes. It is appropriate that I set out the context in which Millett J reached these conclusions, his Lordship first quoting from the judgment of Peter Gibson J in Baden:

"It is clear that a stranger to a trust may make himself accountable to the beneficiaries under the trust in certain circumstances. The two main categories of circumstances have been given the convenient labels in Snell's Principles of Equity (28th ed.) pp. 194, 195, 'knowing receipt or dealing' and 'knowing assistance'. The first category of 'knowing receipt or dealing' is described in Snell ... as follows: 'A person receiving property which is subject to a trust ... becomes a constructive trustee if he falls within either of two heads, namely: (i) that he received trust property with actual or constructive notice that it was trust property and that the transfer to him was a breach of trust; or (ii) that although he received it without notice of the trust, he was not a bona fide purchaser for value without notice of the trust, and yet, after he subsequently acquired notice of the trust, he dealt with the property in a manner inconsistent with the trust.' I admit to doubt as to whether the bounds of this category might not be drawn too narrowly in Snell. For example, why should a person who, having received trust property knowing it to be such but without notice of a breach of trust because there was none, subsequently deals with the property in a manner inconsistent with the trust not be a constructive trustee within the 'knowing receipt or dealing' category?"

I respectfully agree. In my judgment, much confusion has been caused by treating this as a single category and by failing to differentiate between a number of different situations. Without attempting an exhaustive classification, it is necessary to distinguish between two main classes of case under this heading.

The first is concerned with the person who receives for his own benefit trust property transferred to him in breach of trust. He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was a breach of trust; or if he received it without such notice but subsequently discovered the facts. In either case he is liable to account for the property, in the first case as from the time he received the property, and in the second from the time he acquired notice.

The second and, in my judgment, distinct class of case is that of the person, usually an agent of the trustees, who receives the trust property lawfully and not for his own benefit but who then either misappropriates it or otherwise deals with it in a manner which is inconsistent with the trust. He is liable to account as a constructive trustee if he received the property knowing it to be such, though he will not necessarily be required in all circumstances to know the exact terms of the trust.[45]

490 I will return to this second, distinct class, being liability for inconsistent dealing, later in these reasons.

491 I have already dealt in section 18.2 above with the concept of knowledge or notice in the context of knowing receipt. I wish now to deal with the concept of 'receipt'. In Farah, the majority of the High Court highlighted the importance of receipt.[46] Indeed the respondent in that case sought to expand the law of knowing receipt beyond the concept of actual receipt. The majority said:

The change in the law in Australia for which the respondent contended was part of a more comprehensive submission that the law conform to the following three propositions.

" (i) A third party who has directly received a financial benefit as a result of a non-trivial breach of trust or fiduciary duty should be accountable for that benefit to the fiduciary of the trust/duty if he/she knew or had reason to know of the essential facts which constituted the breach.

...

However, to substitute para (i) for the first limb of Barnes v Addy would be a radical change: it abandons the requirement for receipt of property, and it alters the notice test. To introduce a change of that kind would call for very careful examination of the possible consequences.[47]

492 Generally, receipt in this context means receipt for the use and benefit of the person who has received the property. This has given rise to issues where the trust property is money deposited into a bank account of the customer: has the bank relevantly received the property for a claim for knowing receipt?

493 I was referred to a number of texts to the effect that when a bank receives a payment, it does so as agent for the customer and it does not 'receive the trust funds for its own use and benefit.[48] The distinction is often referred to as 'ministerial', rather than 'beneficial', receipt. To support this proposition, these texts refer primarily to the following comments of Millett J in Agip relied upon by the CBA:

In either class of case it is immaterial whether the breach of trust was fraudulent or not. The essential feature of the first class is that the recipient must have received the property for his own use and benefit. This is why neither the paying nor the collecting bank can normally be brought within it. In paying or collecting money for a customer the bank acts only as his agent. It is otherwise, however, if the collecting bank uses the money to reduce or discharge the customer's overdraft. In doing so it receives the money for its own benefit.

This is not a technical or fanciful requirement. It is essential if receipt-based liability is to be properly confined to those cases where the receipt is relevant to the loss.[49]

494 This passage proceeds on the basis that it is only where the customer's account is an overdraft in debit that the bank relevantly receives the funds for the purposes of the first class: in other cases, the bank merely acts as the customer's agent.

495 This passage had been followed in Robb Evans of Robb Evans & Associates v European Bank Ltd.[50] In that case, Spigelman CJ (with whom Handley and Santow JJA agreed) considered the tension between:

(1) the general principle of banking law (based on the decision of the House of Lords in Foley v Hill[51]) that the relationship between banker and customer is not one of principal and agent, but creditor and debtor, with the result that money deposited with the bank becomes the bank's own property for its own use a benefit; and

(2) the qualification that the bank does not generally 'receive funds' for the purposes of a claim for knowing receipt.

496 Spigelman CJ noted that there was no authoritative statement of the basis on which this 'special treatment' of banks rests: he suggested it may be an application of the equitable maximum that equity looks to intent, not to form. Spigelman CJ went on to conclude that there was 'clear authority' that in this area of the law, a bank does not 'receive' moneys deposited into a current account in the normal course of its operations unless the bank appropriates the receipt in reduction of the overdraft. His Honour relied upon another decision of the New South Wales Court of Appeal in Travel Service International Pty Ltd v Qantas ('Qantas'),[52] on Agip, on another single-judge decision in England and on two single-judge decisions in New Zealand.[53]

497 For completeness, I note that in Adams v Bank of New South Wales ('Adams')[54] the New South Wales Court of Appeal adopted the ministerial receipt qualification in concluding that a solicitor who held money 'as agent of the client' and subject to the client's direction did not relevantly 'receive' those funds for the purposes of knowing receipt.[55] The relevant statute provided that a solicitor was obliged to pay money held in a trust account in accordance with the client's instructions. The solicitor was concerned that, if he paid the money to the client on the client's instructions, the client may apply those funds in breach of trust. In that case, Moffitt P (with whom Hutley and Samuels JJA agreed) said:

If the solicitor suspects that upon the money being paid to the client, he will apply some or all of it for purposes inconsistent with the client's duty as trustee ... no ground arises for the solicitor to refuse to perform his obligation as solicitor and pay the money as directed by his client. ... If he were to refuse what should he do? Should he conduct some inquiry concerning his suspicions, or commence some proceedings or go behind his client's back to the supposed beneficiaries? What is he to do with the money in the meantime? What defence would he have if he withheld the money and were sued by his client?[56]

498 Counsel for the CBA properly drew to my attention the criticism of this passage in Agip. In Uzinterimpex JSC v Standard Bank Plc[57] ('Standard Bank'), Moore-Bick LJ (with whom Sir Antony Clarke MR and Laws LJ agreed) considered that there were good grounds for the criticism of the overdraft distinction drawn by Millett J. In doing so, his Lordship noted the distinction in the cases between receiving funds as agent and receiving funds for one's own benefit and referred with approval to the general principle of banking law in Foley v Hill.[58] Further, Moore-Bick LJ referred to the chapter by Michael Bryan entitled Recovering Misdirected Money from Banks: Ministerial Receipt at Law and in Equity published in Restitution and Banking Law (1998, ed. Rose). In that chapter, Mr Bryan argues that, by virtue of the debtor and creditor relationship between banker and customer, money received by a bank as at the moment of its receipt is beneficially received, as the bank is entitled to use that money for its own purposes.

499 Standard Bank was decided after Robb Evans. My researches do not reveal that Standard Bank has been the subject of further detailed consideration. However, the different approaches in respect of beneficial and ministerial receipt were noted by Edelman J in Nicholson v Morgan [No 3];[59] but it was unnecessary for his Honour to resolve the issue in that case.

500 In these circumstances, I consider that the law in Australia is as set out in Qantas and re-affirmed in Robb Evans.

501 When considering these authorities, like Moore-Bick LJ in Standard Bank, I felt some unease about the application of the special rule for banks in this context. That unease has been much reduced, if not eliminated, because of the related liability referred to in Agip by Millett J, namely, inconsistent dealing, to which I will now turn.

502 As noted above, the second class of case of liability was described by Millett J in Agip as follows:

The second and, in my judgment, distinct class of case is that of the person, usually an agent of the trustees, who receives the trust property lawfully and not for his own benefit but who then either misappropriates it or otherwise deals with it in a manner which is inconsistent with the trust. He is liable to account as a constructive trustee if he received the property knowing it to be such, though he will not necessarily be required in all circumstances to have known the exact terms of the trust.[60]

503 The basis of this liability appears to be the decision of Sir James Bacon V.C. in Lee v Sankey where he said:

It is well established by many decisions, that a mere agent of trustees is answerable only to his principal and not to cestuis que trust in respect of trust moneys coming to his hands merely in his character as agent. But it is also not less clearly established that a person who receives into his hands trust moneys, and who deals with them in a manner inconsistent with the performance of trusts of which he is cognizant, is personally liable for the consequences which may ensue upon his so dealing.[61]

504 As noted by Charles Harpum in his chapter 'The Basis of Equitable Liability',[62] the existence of this category was endorsed by Bowen LJ in Soar v Ashwell[63] and has often been acknowledged, including by Viscount Cave in Taylor v Davies,[64] by Romer J in Re Eyre-Williams[65] and by Millett J in Agip.

505 There is Australian authority for such a class of liability. It was referred to by Hansen J in Koorootang Nominess Pty Ltd v Australian and New Zealand Banking Group Ltd where his Honour noted that this was:

... the second of two subsets of recipient liability - namely, the liability of a person who receives trust money in a ministerial capacity (that is, not for his own benefit) who thereafter deals with money inconsistently with the trust.[66]

506 I note in passing that in Fistar (another case relied upon by the CBA) reference was made to the second class of case identified by Millett J in Agip. Fistar was not a case about knowing receipt. However, Leeming JA (with whom Bathurst CJ and Sackville AJA agreed) said:

The second is that liability under the first limb of Barnes v Addy is not the only way in which a recipient of trust property may become bound in conscience to account for it. A person who receives trust property, otherwise than as a bona fide purchaser for value without notice, but innocently, and thereafter acquires notice of the trust and deals with it in a manner inconsistent with the trust, will also be liable as a constructive trustee. Although this is similar to first limb Barnes v Addy liability, it is conceptually distinct, because it is the subsequent dealing, rather than the receipt of property, that founds liability...[67]

507 His Honour noted that this class of liability was identified by Millett J in Agip and then also referred to Lewin On Trusts in the section entitled 'Inconsistent Dealing by Lawful Recipients of Trust Property'.[68] The learned authors of that text state:

If money vested in an agent on the instructions of his principal is in equity the beneficial property not of the principal but of some third party, then the agent will not become liable as constructive trustee by dealing with the money for the principal and with his authority in a manner inconsistent with the equitable ownership of the money unless he has knowledge, within types (1) to (3) of the Baden classification, that the money was trust money rather than the beneficial property of his principal. Want of probity on the part of the agent is requisite so as to fix him with liability as a constructive trustee.[69]

508 Further, Leeming JA also referred to 'J Dietrich and P Ridge, Accessories in Private Law, (2015, Cambridge University Press) at 203'. That page of that text includes the section entitled 'Dealing inconsistently with trust property'. At page 202, the learned authors state, relying on Agip among other cases:

An agent or other person who receives trust property in a 'ministerial' capacity, rather than for personal benefit, but then knowingly deals with it in a manner that is contrary to the trust, will be liable to account in equity. This is so whether the knowing dealer misappropriates the property for personal benefit or otherwise deals inconsistently with it and whether or not the dealer acts in good faith. Although knowing dealing has been authoritatively recognised as a distinct category of liability, the cases are sparse.[70]

509 The learned authors note that there is a concern in the relevant authorities not to unduly compromise an agent's obligations (contractual or otherwise) to follow a client's instructions, with the result that the requisite culpability is 'high', referring to Adams.[71] Further, the learned authors note that inconsistent dealing is also distinct from accessorial liability as it may or may not involve another breach of duty.[72]

510 As a result, I consider that liability for inconsistent dealing is related to liability for knowing receipt but is a separate basis of liability.

511 The CBA contended that the relevant person (i.e. stranger) must be a volunteer and not have notice of the trust at the time of receipt. This was supposedly based on both the comments of Millett J in Agip, relying upon the passage of Peter Gibson J in Baden, set out at [489] above and the comments of Leeming JA in Fistar set out at [506] above. Indeed, the CBA submitted that it was not a volunteer in this case because it received funds 'in satisfaction of the debt o[73]d to it by MBG'.73 That position seems contrary to the primary defence of the CBA (set out above) that the proceeds of sale deposited into the relevant accounts of the CBA were not beneficially received by it.

512 In any event, as noted in the passage set out at [489] above, Peter Gibson J in Baden did not accept the limited basis of liability set out in Snell that the relevant person was not a bona fide purchaser for value without notice of the trust. Neither did Millett J in Agip. Indeed, it was a result of Millett J not accepting the limited basis of liability in Snell that his Lordship went on to consider the two main classes of liability and, in particular, the second class of case also set out at [489] above.

513 Based on my consideration of the authorities, the principles which underlie them and the texts referred to above, I have concluded that the relevant principle is that a person who receives trust property in a 'ministerial' capacity (rather than for personal benefit) and then knowingly deals with it in a manner that is contrary to the trust will be liable to account in equity.

514 In my view, it is not material whether the knowledge was obtained at the time the person received the trust property ministerially or later. What is relevant is that the person had the requisite knowledge at the time of their dealing with the trust property in a manner that is inconsistent with the terms of the trust.

515 I have also considered the requisite degree of knowledge or notice required for liability to attach in these circumstances. I am conscious of the need to not unduly compromise an agent's obligation to follow the instructions of its principal. However, in my view, it is appropriate that the requisite degree of knowledge for such liability be consistent with the principles applicable to knowing receipt set out in section 18.3 above. Those principles reflect equity's concern for fault-based liability and the conscience of a defendant, as set out in Grimaldi. Those principles are consistent with a want of probity and a high degree of culpability.

516 I have carefully considered whether Baden category (iv) knowledge is sufficient. I have concluded that it is, particularly having regard to the fact that the Full Court in Grimaldi considered Baden category (iv) as a 'surrogate of actual knowledge'. As a result, I have concluded that Baden categories (i) to (iv) are sufficient to impose liability for inconsistent dealing.

22.3 Analysis: Were proceeds of sale of stock received by the CBA?

22.3.1 Proceeds of sale of stock purchased with the Milfoil advance

517 The issue to be addressed is whether the CBA received the proceeds of sale of the stock recorded in the RWP for the purposes of a claim for knowing receipt or inconsistent dealing. As I have said, the inaccuracies of the RWP as a list of the stock purchased with the Milfoil advance have bedevilled the parties, and the courts, since late 2009. They bedevil the parties and the Court still. I will deal with this issue shortly.

518 A more general question was raised at trial, namely, whether all the proceeds of sale of the stock purchase with the Milfoil advance were deposited into a CBA account. Although not strictly relevant in light of Milfoil's final submissions, it is appropriate that I say something about it.

519 On the evidence before me, I am not able to make any finding that all proceeds of sale of the stock purchased with the Milfoil advance were paid into a CBA account because to this day there is uncertainty as to exactly what all of that stock in fact was. It appears that some of the stock in fact purchased with the Milfoil advance was recorded in the RWP. However, as I set out below, it appears very difficult to identify if and when the proceeds of sale of the stock recorded in the RWP were received.

520 Further, it may be that other stock was purchased with the Milfoil advance or that the stock purchased with the Milfoil advance was directed to a different customer. This is consistent with the evidence set out above that Mr Reynolds was informed in August and September 2009 that the stock purchased with the Milfoil advance was redirected to Ed Harry and that Milfoil was entitled to receive the proceeds of sale of that stock to Ed Harry in the sum of $470,000 (excluding GST). This is also consistent with the payments made by Ed Harry on 30 September of $245,749.23 and 30 October of $236,301.47. However, I am unable to conclude, on the evidence before me, that this was in fact the case, particularly given the conduct of Mercury and Milfoil after the 4 September list was prepared.

521 As to the proceeds of sale of the stock listed in the RWP, for the most part, I am not satisfied, on the balance of probabilities, that they were deposited into a CBA account. While Milfoil submitted this could be inferred, much of the evidence before me is to the contrary of such an inference.

522 For example, Milfoil submitted that the Court can infer that the CBA received the amounts listed in the RWP as due to be paid by 31 October 2009, totalling $233,163.97. As set out in section 13.4 above, that sum included four invoices issued to Ed Harry referred to in the RWP, totalling approximately $170,000. However, as set out in that section, the payment of those invoices formed part of the sum of $236,301.47 paid directly by Ed Harry to AHT on 30 October 2009. Thus, the proceeds of sale of those four Ed Harry invoices listed in the RWP were never deposited into a CBA account, at all. That is entirely inconsistent with the inference Milfoil seeks this Court to draw.

523 Milfoil also submitted that it can be inferred that the CBA received the amounts in the RWP which had not been invoiced, totalling $198,221.79. This includes stock supplied to Kmart, Myer and David Jones. I reviewed the statements of all four CBA accounts for the period from 30 September 2009 to 31 December 2009 to see if they record receipt of payments from any of these three Mercury customers. While the identity of the payee of every deposit into those accounts is not entirely clear on the face of the statements, I have not been able to identify any payments from any of these three customers. Thus, the evidence before me seems inconsistent with the inference asserted by Milfoil. It may be that, like the $236,301.47 payment by Ed Harry referred to above, payments of the amounts which were not invoiced were made directly by these retail customers to AHT.

524 Milfoil also submitted that it can be inferred that the CBA received the amounts in the RWP recorded as paid to Mercury and due and payable to Milfoil as at the date of the RWP, totalling $82,614.12. That sum consists of:

(1) a payment from Shanton Retail of $13,396.90, with an anticipated payment date of 2 September 2009;

(2) four payments from Kmart, each with an anticipated payment date of 22 September 2009; and

(3) a payment from Ed Harry of $32,238.74, with an anticipated payment date of 30 September 2009.

525 I reviewed the statements of all four CBA accounts for the period from 1 September to 30 September 2009 to see if they record receipt of payments from any of these three retail customers in the RWP. Once again, while the identity of the payee of every deposit into those accounts is not entirely clear on the face of the statements, I have only been able to identify one payment from any of these three customers: the sum of $245,749.23 received from Ed Harry in the third CBA account on 30 September 2009 (as referred to above). I will deal with this further below.

526 For completeness, I reviewed the statements of all four CBA accounts for the period from 1 September to 31 December 2009 to see if they record payments from any of the five Mercury customers in the RWP. Once again, while the identity of the payee of every deposit is not entirely clear on the face of the statements, the only payment I can identify is that referred to in the previous paragraph. Thus the evidence before me seems inconsistent with the inference asserted by Milfoil.

527 I have also considered the tracing of proceeds of sale of the stock listed in the RWP relied upon by the CBA as set out in [479] above. On the evidence before me, the sum of $22,246.91 was received by Mr Traianedes as administrator and then held as deed administrator. It is unclear what account this amount was deposited into. That money was held by Mr Traianedes in his capacity as deed administrator pending the determination of the Federal Court proceeding. In any event, it was subsequently paid to Milfoil pursuant to the orders made in the Federal Court proceeding.

528 The position in relation to the sum of $35,499.43 which was paid to the receivers is less clear. As set out in [405] above, PPB as agent for the CBA wrote to Mr Traianedes on 10 December 2009 advising that 'the bank is currently in possession of $35,499.43 ... which was provided during the receivership'. On the evidence before me, I am unsure what account this amount was deposited into. That sum was also paid to Mr Traianedes pending the determination of the Federal Court proceeding. In any event, it was subsequently paid to Milfoil pursuant to the orders made in the Federal Court proceeding.

529 As to the payments which the CBA says were paid directly to AHT, totalling $237,029.33, I refer to my comments in [522] above. It appears that the CBA was correct that at least $170,000 of this sum, which comprised invoices referred to in the RWP, was paid directly to AHT. As to the balance of $219,251.17 of the total amount referred to in the RWP which the CBA submitted could not be accounted for, as set out in [479] above, I refer to my comments in [526] above.

530 In these circumstances, I am unable to infer that the proceeds of sale of all of the stock purchased with the Milfoil advance recorded in the RWP were deposited into a CBA account.

531 The above analysis relates to whether the CBA received the proceeds of sale of stock in the RWP in the general sense that those proceeds were deposited into one of the CBA accounts. Based on the authorities set out in section 22.2.2 above, liability for knowing receipt by the CBA could only arise if it were established that the CBA applied the proceeds of sale of the stock in the RWP in satisfaction of the overdraft account (i.e. the second CBA account). However, the plaintiff did not seek to make such a submission.

532 Rather, Milfoil made a more subtle submission, namely, that the CBA in effect relevantly 'received' the proceeds of sale of the stock in the RWP for the purposes of a claim for knowing receipt by obtaining from the sale of the Business and Assets of MBG full payment of Mercury's outstanding liability to the CBA.

533 In my view, that does not constitute 'receipt' in the sense required by the authorities such as Farah. Rather, this argument by Milfoil resembles more the 'financial benefit' argument of the respondent in Farah set out in [491] above and which the majority in that case declined to adopt. In these circumstances, Milfoil's submission must fail.

22.4 Analysis: Did the CBA knowingly sweep the RWP sale proceeds to AHT?

534 As noted above, Milfoil submitted that the CBA swept the proceeds of sale of stock in the RWP to the AHT. This was premised on the basis that it could be inferred that the CBA received all of the proceeds of sale of that stock. For the reasons set out in section 22.3.2 above, that cannot be inferred.

535 Further, the submission is inconsistent with the evidence of the funds that were in fact swept to AHT by the CBA. As set out in section 13 above, for the most part, the amounts swept to AHT did not relate to customers named in the RWP.

536 Once again, there is one exception: the sum of $245,749.23 received from Ed Harry on 30 September 2009 in the third account and swept to AHT on 7 October 2009. On the evidence before me, that sum included an amount of $31,432.78 for payment of the stock supplied to Ed Harry by reference to invoice 628320 in the RWP.

537 This payment by the CBA was inconsistent with the rights of Milfoil contained in the Sale Agreement and recorded in the RWP. This then raises the issue of whether the CBA should be liable for inconsistent dealing if it had sufficient knowledge that this payment contained the proceeds of stock supplied to Ed Harry in the RWP within Baden category (i), (ii) or (iv).

538 In my view, it is clear that the CBA did not have actual knowledge of this consistent with Baden category (i). Further, on the evidence before me, no one turned their mind to whether this payment contained or might have contained the proceeds of stock supplied to Ed Harry in the RWP before the payment was made to AHT on 7 October 2009. As I set out below, there was a failure to make further enquiries by the CBA. However I am satisfied that there was no designed or calculated failure to do so.[74] As a result, in my view, it is also clear that the CBA was not wilfully blind consistent with Baden category (ii).

539 It is then necessary to consider whether the circumstances would indicate to an honest and reasonable person in the shoes of the CBA that the $245,749.23 paid by Ed Harry and swept to AHT on 7 October 2009 by the CBA contained proceeds of sale of stock sold to Ed Harry in the RWP, consistent with Baden category (iv).

540 I have found this a difficult question to answer. In a large part, the answer turns on the information contained in the RWP. But there are other matters relevant to the answer to this question, including the Acknowledgement Deed, the Direction Deed and the knowledge of the CBA of payments into the CBA accounts. It is also relevant to consider what the CBA did not know.

541 As noted above, the RWP contained a variety of information, not all of which was easy to understand. The RWP clearly listed Ed Harry as one of the five customers who owed Milfoil money. It also clearly recorded that one of the Ed Harry invoices (invoice 628320) had been issued on 14 July 2009 and that the anticipated date of payment of it was 30 September 2009.

542 It also recorded that the amount for that invoice had been paid but it did not indicate the date on which it was paid. This is because the 'Milfoil payment status' column for that invoice stated 'Pymnt Rec' (i.e. payment received) but did not indicate on what date. This was in contrast to some other invoices which were recorded in the 'Milfoil payment status' column as 'Paid' (i.e. paid to Milfoil). Further, from the grey shading contained in the RWP it could be inferred that that sum had not been paid to Milfoil.

543 From its operation of the third CBA account, the CBA was aware that 'EDH PTY LTD' had deposited the sum of $245,749.23 into that account on 30 September 2009.

544 Further, the CBA knew from the Acknowledgment Deed which it executed on 1 October 2009 that that the sum of $245,749.23 from Ed Harry had been received or 'presented' prior to Completion, along with other funds from other customers listed therein, totalling $746,605.53. It also knew from the Acknowledgement Deed that:

(1) MBG and the administrator acknowledged that all those funds were 'the property of [AHT], and form part of the Assets, under the terms of the [Sale] Agreement'; and

(2) MBG and the administrator 'irrevocably and unconditionally directs, and agrees to procure, the Receiver and the [CBA] to pay [those] Funds' to AHT.

545 The CBA also knew from the Direction Deed that the administrator irrevocably authorised and directed the CBA to pay funds, including the $245,749.23 from Ed Harry, to AHT.

546 I am unable to conclude that these circumstances would indicate to an honest and reasonable person in the shoes of the CBA that the $245,749.23 from Ed Harry included payment of invoice 628320 referred to in the RWP.

547 This is for a number of reasons. First, the amount received from Ed Harry on 30 September 2019 was a lump sum: it was not broken down into invoice payments. Second, the RWP did not inform the reader that invoice 628320 was in fact paid on 30 September 2009, only that 30 September 2009 was the anticipated date for payment. However, the RWP did indicate that this invoice had been paid to Mercury by the time the RWP had been prepared.

548 Third, the Acknowledgement Deed made plain that the administrator acknowledged that the sum of $245,749.23 received from Ed Harry was the 'property' of AHT and formed part of the Assets to be sold to AHT. It then provided that the administrator irrevocably and unconditionally directed the CBA to pay that sum to AHT. This was then confirmed by the Direction Deed. These are significant factors to be taken into account in determining what a honest and reasonable person would appreciate in all the circumstances. This is in a context where it was the administrator, in charge of the books and record of Mercury, who was in the best position to determine whether payment for invoice 628320 was in fact included in the $245,749.23.

549 In my view, further enquiries were required before an honest and reasonable person in the shoes of the CBA would know that the $245,749.23 in fact contained payment of invoice 628320 in the RWP.

550 As a result, it has not been established that the CBA had knowledge consistent with Baden category (iv).

551 I have considered whether an honest and reasonable person would know from all these circumstances that the payment of $245,749.23 did contain some of the proceeds of the sale of stock in the RWP. For the reasons set out above, I am unable to reach that conclusion. I remain of the view that further information was required.

552 It goes without saying that the failure of the CBA to make further enquiries, to the say the least, was regrettable. But, as I have said, in these circumstances, there is no basis to conclude that the failure to do so was the result of wilful blindness on the part of the CBA.

553 As noted above, some authorities and texts suggest a reluctance to impose liability for inconsistent dealing on agents because it may give rise to conflicting duties. But that has not been a factor in reaching this conclusion. It is true that I have taken into account the Acknowledgement Deed and the Direction Deed. However I have considered them in the context of all the factual circumstances which presented to the CBA. In my view, the obligations imposed on the CBA in those documents would not necessarily defeat a claim for inconsistent dealing if sufficient knowledge had been otherwise established.

If yes to any part of questions 3(2) or 6(2), is Milfoil entitled to equitable compensation in the sum of $486,574.34 or any lesser sum plus any and what interest paid to the Westpac bank?

555 As I have not answered any part of questions 3(2) or 6(2) 'yes', Milfoil is not entitled to compensation.

Does the plaintiff come to Court with 'unclean hands' as alleged in paragraph 47A of the current defence which would disentitle it to the equitable compensation referred to in question 7?

557 As Milfoil is not entitled to equitable compensation, it is not necessary to decide this issue. However, for completeness, it is appropriate I express some views on this defence.

558 The defence of clean hands was not raised until early during the trial. I gave leave for the CBA to amend its defence to include this defence on 14 November 2018. In the amended defence, the CBA alleged in summary that Milfoil is not entitled to equitable compensation because:

(1) by the 2015 amendments, Milfoil sought to expand its claim on the basis that the Milfoil advance purchased stock with a retail value of approximately $3 million; and

(2) the plaintiff used the processes of this Court in an improper, unconscientious and unmeritorious manner (which it has acknowledged by not pursing claims based upon the 2015 amendments in final argument).

559 In final submissions, the CBA sought to allege unclean hands on a broader basis, including the fact that Mr Reynolds:

(1) accused the CBA and Mr Barbagallo of stealing $509,000;

(2) made complaints to the same effect to the Fraud Squad and ASIC;

(3) made misleading statements in correspondence with Mr Traianedes and Mr Martin; and

(4) made the 2 October 2009 demand when he had no basis to do so.

560 As these further matters were not the subject of pleaded allegations, I do not consider it appropriate for the CBA to rely upon them. I will discuss this further below.

561 Milfoil disputed that the doctrine of clean hands had any application in this case. It submitted that it only applied to the plaintiff's conduct at the time it acquired its equitable rights, relying upon FAI Insurances Ltd v Pioneer Concrete Services Ltd ('FAI Insurances').[75]

562 The clean hands maxim is an expression of the principle that a person should not be permitted to take advantage of his or her own wrong, developed in equity.

563 In Meyers v Casey ('Meyers'), Isaacs J said:

[T]he maxim ... has not an unrestricted application. In the leading case of Dering v. Earl of Winchelsea Lord Chief Baron Eyre ... said:- "It is not laying down any principle to say that his ill conduct disables him from having any relief in this Court. If this can be founded on any principle, it must be, that a man must come into a Court of equity with clean hands; but when this is said, it does not mean a general depravity; it must have an immediate and necessary relation to the equity sued for; it must be depravity in a legal as well as in a moral sense."[76]

564 As to the first element, the facts of Meyers are instructive. The stewards of the Victorian Racing Club disqualified the plaintiff and his horse for suspicious practices in connection with the running of the horse in a race. The plaintiff brought an action seeking to have his disqualification declared invalid and to restrain the club from expelling him from his membership without being afforded procedural fairness. It was held that his misconduct in respect of the running of the horse did not disentitle the plaintiff to the relief claimed. This is because the relief he sought was independent of any misconduct. Isaacs J said:

[T]he rights asserted by the [plaintiff], namely, membership of the club and public right under the by-laws to enter the racecourse, of course exist, if at all, by reason of circumstances wholly independent of the alleged misconduct; the wrong he complains of, namely, his condemnation by an incompetent and unauthorized tribunal in the one case, and a disregard of natural justice in the other, are equally independent of any misconduct by him. ...

It is altogether different from the cases where the right relied on, and which the Court of equity is asked to protect or assist, is itself to some extent brought into existence or induced by some illegal or unconscionable conduct of the plaintiff, so that protection for what he claims involves protection for his own wrong.[77]

565 As Lord Brougham said in Attwood v Small[78] in a passage adopted by the Victorian Court of Appeal in Anaconda Nickel Ltd v Edensor Nominees Pty Ltd:[79]

... general fraudulent conduct signifies nothing; that general dishonesty of purpose signifies nothing; that attempts to overreach go for nothing; that an intention and design to deceive may go for nothing, unless all this dishonesty of purpose, all this fraud, all this intention and design, can be connected with the particular transaction, and not only connected with the particular transaction, but must be made to be the very ground upon which the transaction took place, and must have given rise to this contract.[80]

566 As to the second element, it is difficult to define with precision the types of impropriety which may be said to amount to a depravity in the legal as well as the moral sense. However, while the categories are not closed, there are four kinds of cases in which such impropriety has been found: where the plaintiff has been guilty of some type of misrepresentation, where the plaintiff has materially misled the Court or attempted to abuse its processes, where the plaintiff has been guilty of equitable fraud and where there has been gross sexual immorality.[81]

567 The principles were reviewed by Campbell J in Black Uhlans Inc v New South Wales Crime Commission & Ors[82] ('Black') where his Honour held:

(1) the two elements are a necessary condition for the application of the unclean hands defence but not a sufficient condition;

(2) other factors can always influence the exercise of the discretion: those factors include the injustice in permitting a defendant in breach of obligation to avoid an obligation to compensate the plaintiff; and

(3) in applying the unclean hands defence, it is necessary to identify what is the equity which the Court, absent the unclean hands, would be prepared to uphold.

568 The principles summarised in Black were referred to with apparent approval by the New South Wales Court of Appeal in Carantinos v Magafas.[83]

569 Finally, the rationale for the defence must be born in mind. As Young J said in FAI Insurances:

However, the more one examines the rule in its application in the cases, the more one can see that it is only if the right being sought to be vindicated by the plaintiff in a court of equity, is one which if protected, would mean the plaintiff was taking advantage of his own wrong, that the court will debar him from relief ...[84]

570 I do not consider that the CBA has established that the conduct of Milfoil and Mr Reynolds set out in [558] above constitutes depravity in the legal as well as moral sense. In my view, Milfoil was entitled to raise a claim on the basis that the stock purchased with the Milfoil advance was not limited to the stock recorded in the RWP.

571 This is in circumstances where Finkelstein J accepted that the evidence disclosed that the stock in fact purchased with the Milfoil advance exceeded the value of that advance. It was a fundamental premise of the 2015 amendments. The significance of this fact was apparent to the Court of Appeal when they gave leave for Milfoil to pursue the 2015 amendments as set out at [428] above. Further, I have also accepted, on the evidence before me, that the stock in fact purchased with the Milfoil advance exceeded the value of that advance as set out at [109]-[110] above. In any event, it was clearly not an abuse of process to prosecute a claim on that basis. As a result, the decision not to pursue the 2015 amendments in closing submissions does not by itself mean that Milfoil engaged in legally and morally depraved conduct.

572 Further, as noted above, I do not consider that the CBA is entitled to rely upon the conduct raised in final submissions set out at [559] above. But, in the event that it was entitled to do so, I do not consider that conduct (which in essence relates to Mr Reynolds' allegation that the CBA stole Milfoil's money) constitutes depravity in the legal as well as moral sense. In essence, this is because I consider that Mr Reynolds had an honest belief in those matters. I refer to my comments set out at [232]-[239] above. While I did not conclude, on the balance of probabilities, that Milfoil established that Mr Barbagallo made those statements at the 10 August conversation which formed the basis of the complaints of theft, they may have been said: that is certainly Mr Reynolds' view.

573 Further, I do not consider that either the conduct alleged in the defence or relied upon in final submissions has an immediate and necessary connection with the equity relied upon by Milfoil, in the sense that the equity now claimed was not brought into existence or induced by the conduct of Milfoil which the CBA now relies upon.

If yes to question 3(2) and/or 6(2), should the defendant be excused for any breach of trust pursuant to section 67 of the Trustee Act 1958 (Vic)?

575 The CBA also amended its defence during trial to allege that, if it were found to liable to the plaintiff in any way, the CBA acted honestly and reasonably in receiving and dealing with those proceeds and ought fairly be excused under s 67 of the Trustee Act from liability. Given my findings that the CBA is not liable to Milfoil, it is not necessary for me to determine this issue. Further, I do not consider it appropriate to do so. This is because the applicability of this defence depends very much on the nature of the breach found to exist.

576 In light of these reasons, Milfoil has failed to establish its claim. I will hear from the parties on the issue of costs.

[1] The parent company was Mercury Brands Ltd ('MBL'). Its main subsidiary was MBG which was the trading company. In these reasons I will refer to MBL and MBG as 'Mercury' unless otherwise necessary.

[2] $3,888.73 on 30 July 2009 and $4,929.38 on 27 August 2009.

[3] As set out below, in the course of the Federal Court proceeding, findings were made which bind the parties in this proceeding.

[4] This sum was ultimately listed in Schedule A to the third amended statement of claim ('Schedule A').

[5] This sum was ultimately listed in Schedule B to the third amended statement of claim ('Schedule B').

[6] Baden v SG Développement du Commerce SA [1992] 4 All ER 161 ('Baden').

[7] Traianedes in his capacity as Deed Administrator of Mercury Brands Group Pty Ltd (subject to Deed of Company Arrangement) v Mercury Brands Group Ltd [2010] FCA 583 ('first Federal Court judgment') [23].

[8] This was consistent with the handwritten notes of Mr Reynolds made on the 3 July 2009 Mercury letter 'NOT A FACILITY'.

[10] This time contained in the letter to Mr Traianedes dated 7 October 2009.

[15] First Federal Court judgment (n 7) [21].

[16] First Federal Court judgment (n 7) [27].

[17] First Federal Court judgment (n 7) [29].

[18] First Federal Court judgment (n 7) [34].

[19] First Federal Court judgment (n 7) [34].

[20] Traianedes in his capacity as Deed Administrator of Mercury Brands Group Pty Ltd (Subject to Deed of Company Arrangement) v Mercury Brands Group Pty Ltd (No 2) [2010] FCA 1140 ('second Federal Court judgment').

[21] Second Federal Court judgment (n 20) [13].

[22] Second Federal Court judgment (n 20) [14], [17].

[23] Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd [2016] VSC 223 (the 'primary judgment') [27].

[24] Primary judgment (n 23) [41].

[25] Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd [2017] VSCA 256 (the 'appeal judgment') [129].

[26] Appeal judgment (n 25) [114].

[27] Appeal judgment (n 25) [117].

[28] Appeal judgment (n 25) [118].

[29] Appeal judgment (n 25) [129].

[30] Appeal judgment (n 25) [127].

[31] See, eg, third amended statement of claim [15].

[32] See, eg, third amended statement of claim [16].

[33] Baden (n 6), 250.

[34] (2007) 230 CLR 89 ('Farah').

[35] (1874) LR 9 Ch App 244 ('Barnes v Addy').

[36] [2012] FCAFC 6; (2012) 200 FCR 296 [249]-[270] (Finn, Stone and Perram JJ) ('Grimaldi').

[37] [2001] NSWSC 448; (2001) 38 ACSR 404 [471].

[38] Grimaldi (n 36) [269].

[39] See, eg, Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732 [88] ('Fistar') (Sackville AJA; Bathurst CJ and Leeming J agreeing); Comgroup Supplies Pty Ltd v Products for Industry Pty Ltd & Anor [2016] QCA 88 [52] (Atkinson J; McMurdo P and Mullins J agreeing).

[40] Grimaldi (n 36) [261].

[41] [2000] HCA 25; (2000) 202 CLR 588 [53]-[56] (Gaudron, McHugh, Gummow and Hayne JJ).

[42] [1990] CH 265, 292 ('Agip').

[43] Barnes v Addy (n 35), 251-2 (emphasis added).

[44] See, eg, Farah (n 34), 143 [117], 144 [119], 145 [121].

[45] Agip (n 42), 291.

[46] Farah (n 34), 143 [117], 144 [119], 145 [121].

[47] Farah (n 34), 145 [121].

[48] Chloe Carpenter et al, Law of Bank Payments, ed Michael Brindle and Raymond Cox (Sweet & Maxwell, 2018) [3-164]; Lynton Tucker, Nicholas Le Poidevin, and James Brightwell, Lewin on Trusts (Sweet & Maxwell, 19th ed_,_ 2015) ('Lewin on Trusts'), 2093-5 [42-085]-[42-087]. However, these texts acknowledge that there may be circumstances in which liability will be imposed on the bank.

[49] Agip (n 42), 292.

[50] [2004] NSWCA 82; (2004) 61 NSWLR 75 ('Robb Evans'). It has also been followed in Heperu Pty Ltd & Ors v Morgan Brooks Pty Ltd & Ors (No 2) [2007] NSWSC 1438 [127]-[130] (Palmer J) and McNally v Harris [2008] NSWSC 659 [84] (White J).

[51] [1848] EngR 837; (1848) 2 HLC 28.

[52] (1988) 13 NSWLR 331 ('Qantas').

[53] Robb Evans (n 50) [171]-[174].

[54] [1984] 1 NSWLR 285 ('Adams').

[55] Adams (n 54), 291-2.

[56] Adams (n 54), 290-1.

[57] [2008] 2 CLC 80 [39]-[40] ('Standard Bank').

[58] [1848] EngR 837; (1848) 2 HLC 28.

[59] [2013] WASC 110 [4].

[60] Agip (n 42), 291.

[61] (1873) LR 15 Eq 204, 211.

[62] Charles Harpum, 'The Basis of Equitable Liability' in Peter Birks' (ed), The Frontiers of Liability (Oxford University Press, 1994) vol 1, 16.

[63] [1893] 2 QB 390, 396-7.

[64] [1920] AC 636, 651.

[65] [1923] 2 Ch 533, 539.

[66] [1998] 3 VR 16, 79.

[67] Fistar (n 39), 742 [45] (emphasis in original).

[68] Lewin on Trusts (n 48), 2103-2109.

[69] Lewin on Trusts (n 48), 2109 [42-125] (citations omitted).

[70] Joachim Dietrich and Pauline Ridge, Accessories in Private Law (Cambridge University Press, 2015) ('Accessories in Private Law'), 202.

[71] Accessories in Private Law (n 70), 202 nn 20.

[72] Accessories in Private Law (n 70), 203.

[73] CBA, 'Supplementary Submissions of the Defendant', Submission in 'Milfoil Pty Ltd v Commonwealth Bank Of Australia', S CI 2013 05109, 15 May 2019 [11].

[74] See, eg, Macquarie Bank Limited v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133, 145-6 (Tadgell JA with whom Winneke P agreed).

[75] (1987) 15 NSWLR 552, 554-6 ('FAI Insurances').

[76] [1913] HCA 50; (1913) 17 CLR 90, 123 ('Meyers') (citations omitted).

[77] Meyers (n 76) 123-4.

[78] [1838] EngR 515; (1838) 6 Cl & Fin 232 ('Attwood').

[79] [2004] VSCA 167; (2004) 50 ACSR 679.

[80] Attwood (n 78), 765.

[81] See Michael Bryan et al, The Principles of Equity, ed Patrick Parkinson (Lawbook Co, 2nd ed, 2003) [2934].

[82] [2002] NSWSC 1060 ('Black') [157].

[83] [2008] NSWCA 304 [51].

[84] FAI Insurances (n 75), 561.