Westpac Banking Corporation v Sentox Pty Ltd

Additional background

1. The Fresh Express business was established by Mr Musumeci at Flemington Markets in October 1994. At that time, Mrs Musumeci worked as a freelance hairdresser, having sold a hairdressing salon she had owned between 1988 and 1993. Mrs Musumeci continued working as a hairdresser until 1996, when she became pregnant with her and her husband's first child.
2. During that time, Mr Musumeci operated several other businesses including 32 juice bars and three retail fruit shops. Ms El-Ahmad, who had worked in one of the juice bars, started working for Fresh Express in about 2003, originally in a quality assurance role. Over time, her responsibilities expanded to include administrative tasks such as recording the receipt of stock, entry of sales information and bills into Fresh Express's computer system and counting the till. She commenced working for Sentox when it acquired the Fresh Xpress business.
3. In about 2010, Mr and Mrs Musumeci decided to sell the Fresh Xpress business to Mr Ortato, who established Sentox and CAO for that purpose. It is unclear whether at that stage Mrs Musumeci worked in the business. Her affidavit evidence gives the impression that she did not start working in the business until she became a director of and acquired the shares in Sentox. However, there are contemporaneous records which suggest that at least by about 2010 Mrs Musumeci was working in the business. Ultimately, nothing turns on the issue, since the Bank's pleaded case is that Mrs Musumeci was not aware of the fraud before 2014, although it had its genesis at the time Sentox applied for the Initial IDF, if not before.
4. In connection with the acquisition of the business by Sentox, the Bank provided financing to Sentox in the form of the Initial IDF. Sentox lodged the application for the facility on 7 February 2011. The Bank's credit approval memorandum records that the profits of the business (then owned by Fresh Express as trustee for the Fresh Express Unit Trust) were $751,000 in 2008, $841,000 in 2009 and $1,001,051 in 2010. It appears that the figures for 2008 and 2009 came from accounts that had been prepared by Fresh Express's accountants who had provided them to Mrs El‑Ahmad who, in turn, had provided them to Mr Musumeci, to be passed on to the Bank. Those accounts show that sales in 2008 were $16,366,639 and sales in 2009 were $15,863,692. The material provided to the Bank by Mr Musumeci also included tax returns and a Receivables Reconciliation Summary as at 14 January 2011, which recorded the total due from debtors as $4,993,453.35.
5. The terms of the Initial IDF are set out in a letter dated 28 March 2011 from the Bank to Sentox and in "enclosed General Standard Terms (11/2010 version)". The facility was expressed to be subject to the following "preconditions", among others: 1. An executed sale and purchase agreement between Fresh Express and Sentox for the purchase of the business for $1,000,000; 2. An executed consultancy agreement between Sentox and Mr Musumeci confirming a three year period and remuneration of $250,000 per annum; 3. Keyman insurance policy on Mr Musumeci to be amended to show Sentox as the employer and the policy to be assigned to the Bank.
6. Under the terms of the Initial IDF, the Bank agreed to purchase "debts" from Sentox at 80 percent of their face value (as adjusted in accordance with the General Standard Terms). Sentox agreed to provide a first registered fixed floating charge over its assets and a guarantee given by Mr Ortato to secure its obligations under the facility. The letter setting out the terms of the Initial IDF also contained the following terms: The following debtors and/or invoices are not to be funded unless other arrangements satisfactory to, and at the absolute discretion of, St George Bank, are agreed: 1) Common debtor/creditors unless a non offset letter is executed Debtor Funding 2) Related entity debtors 3) Foreign debtors and foreign currency debtors 4) Debtors who are private individuals Proof of Delivery Signed proof of delivery/service must exist for each invoice and be provided upon request Delivery Invoices are not to be financed unless goods have been delivered or service provided completed.

1. On 29 March 2011, Mrs El-Ahmad provided the Bank with a copy of the business's debtors ledger as at 1 April 2011 showing the total due as $3,955,729.85. More will be said about the process by which advances were made under the facility shortly. However, it appears that the debtors shown on that list represented the initial list of debts acquired by the Bank and that, as a result, Sentox became entitled to draw down 80 percent of that amount under the facility.
2. On 21 April 2011, Sydney Markets Limited approved the transfer of the shares giving occupancy rights to the Stand to CAO as to 80 percent and Sentox as to 20 percent.
3. Mr Ortato was not suited to the business. In July 2013, Mrs Musumeci contacted Mr Odlum, the Bank's relationship manager for Sentox between 2011 and 2015, and told him that she was proposing to replace Mr Ortato as the director and shareholder of Sentox. By that stage at least, Mrs Musumeci managed the Fresh Xpress office located at the Stand and she received a small salary from the business.
4. Mrs Musumeci explained to Mr Odlum that she would become the owner of Sentox because her husband was involved in litigation. Mr Odlum told Mrs Musumeci that he would need to get details of her financial position because the Bank would need to release the guarantee given by Mr Ortato and obtain a guarantee from her. Shortly after that conversation, the Bank was given a statement of Mrs Musumeci's financial position, which was summarised in a credit review dated 19 July 2013 that was prepared by the Bank for the purpose of considering the application for a change in ownership of Sentox and an annual review to be undertaken by the Bank of the Initial IDF. Documents of that type were referred to internally by the Bank as "BLASTs".
5. Mrs Musumeci submits that there is no evidence that she provided a statement of her financial position to the Bank. There is no direct evidence that she did. However, the likelihood is that the information was provided by her or at her direction, since it is apparent from the BLAST dated 19 July 2013 that the request for the information was made directly to her.
6. For reasons which are not entirely apparent from the evidence, there were delays in considering the proposed change in control of Sentox. The Bank wanted to obtain a copy of Sentox's annual accounts and to conduct its own audit of the facility before approving a new one. In early 2014, Mr Musumeci had discussions with representatives of Bendigo Bank about obtaining a new facility through it. In the meantime, on or about 10 March 2014, the shares in Sentox and CAO were transferred to Mrs Musumeci. She had previously replaced Mr Ortato as the sole director of both companies.
7. On 20 June 2014, representatives of the Bank met with Mr and Mrs Musumeci at the Stand. Prior to that meeting, Mrs El-Ahmad had emailed Mr Odlum a copy of Sentox's tax returns for the year ending 30 June 2013 which showed a profit of $1,440,626. During the meeting, Mrs Musumeci showed Mr Odlum a copy of the terms proposed by Bendigo Bank. Mr Odlum told them that the Bank would be able to match those terms. Mr Musumeci response was that the Bank would need to be able to better them.
8. Ultimately, Mr and Mrs Musumeci decided that Sentox should remain with the Bank. In August 2014, Sentox entered into a new invoice discounting facility with the Bank (the IDF) with a limit of $5,000,000. The IDF was contained in a facility offer letter dated 5 August 2014, an invoice discounting agreement (IDA) and general standard terms. The letter contained similar terms to the terms of the Initial IDF, including an obligation that Mrs Musumeci provide a guarantee. It named the borrower as "Sentox Pty Ltd … as trustee for Sentox Discretionary Trust …".
9. Clause 2.1 of the IDA provides: You assign to us all debts existing at the commencement date or arising after that time, in consideration of us entering into this agreement. Title to each debt existing at the commencement date vests in us on the commencement date. Title to each debt arising after the commencement date automatically vests in us when it arises.
10. Under cl 4.1 of the IDA, the Bank agreed to pay the "purchase price" of an approved debt on the day before its "recourse date". Under cl 3 of the IDA, each debt is an approved debt unless it is classified by the Bank as a "disapproved debt". The purchase price of an approved debt was stated in the letter to be 85 percent of the face value of the debt, but that seems to have been an error. The uncontradicted evidence is that the Bank purchased approved debts for 80 percent of their face value.
11. Under cl 11 of the IDA, a request for payment under the IDF could be made using Cashflow Connect or be made by email, fax or telephone. Cashflow Connect is an online web-based portal provided by the Bank which permitted (and permits) borrowers under invoice discounting facilities, including Sentox, to submit information and to request drawdowns. It was the principal means by which Sentox made drawdowns under the IDF. In order to make a drawdown, Sentox was required to upload debtor invoice information (in batches). The system requires the person uploading the information to tick a box certifying that the goods the subject of the invoices have been delivered, that the debts arising under the invoices are transferred and that the original invoices containing the same details have been provided to the customer before the information can be uploaded. After the certification is given and the information in relation to each invoice is entered, the Bank was notified that an invoice batch had been submitted. The Bank then either approved or disapproved the invoice batch (it could disapprove individual invoices). Most often, it disapproved individual invoices because payment was outstanding for more than 90 days. Once the Bank had given its approval, Sentox was notified through Cashflow Connect of the total amount available under the facility for drawdown and could make a drawdown using the Funding Screen. The amount of the drawdown was transferred to Sentox's trading account.
12. Under cl 12.1 of the IDA, Sentox agreed to administer the accounts of debtors and collect the debts as agent for the Bank. Clause 12.4 of the IDA provides: Unless we direct otherwise, all payments must be deposited into the nominated account. You must give us details of each payment deposited and the debt to which it relates. We are exclusively entitled to all amounts in the nominated account.
13. It is apparent from this clause that the allocation to payments against invoices was made by Sentox. To the Bank's knowledge, a substantial number of Fresh Xpress's customers paid in cash (and not into the nominated account). Cash payments made to Sentox were paid into an ANZ account and Sentox made payments from that account into the nominated account.
14. Sentox was also obliged to provide the Bank with various other information in relation to the facility. Of most significance, at the end of each month, it was required under cl 15.1(a) to provide a "month end reconciliation", which included a statement setting out the balance brought forward from the previous month, the value of invoices issued for the month, the amount of any debit and credit notes issued, the amount of payments received (including the date of payment, amount paid and how the payment was made) and the amounts of any dishonoured cheques and of refunds paid. That information together with a balance sheet as at the end of the month and a profit and loss statement for the financial year to date were then emailed to Sentox's relationship manager at the Bank who distributed it to the Bank's account managers. The Bank would review the information. If the information could be reconciled with the amount funded for that month, the facility was closed out for that month and Sentox was able to arrange for the next month of invoices to be funded from the facility.
15. The Bank also conducted periodic audits of the facility and for that purpose obtained a number of documents from Sentox including a debtor ageing summary prepared by Sentox for the purpose of the audit (which was to be compared with the information retained on Cashflow Connect as part of the audit), sample debtor confirmations (for debts selected in advance by the Bank) which were either emails or were obtained orally in the presence of the auditor, sample invoices and delivery dockets (again, for debts selected in advance by the Bank), sample remittance advices and bank statements. Initially, the audits were conducted twice yearly and later three times a year. They were conducted at Sentox's office at the Stand. The first audit was conducted on 11 August 2014. Most of the audits were conducted by Mr David Brown. It is his uncontradicted evidence that Ms Musumeci always insisted on being present during the audits and that Mrs El-Ahmad was also present, and that he would go through the Bank's audit template with them.
16. Each year, as part of the Bank's annual review, Sentox provided the Bank with a copy of its financial statements and tax returns, which were prepared by its accountants. More will be said about those later in this judgment.
17. Clause 14.1 of the IDA relevantly provides: You declare, in relation to each debt, that: (a) the details given to us of the debt, the debtor, the related documents and the goods or services are complete and correct; … (d) it is valid and binding and enforceable in accordance with the terms of the contract and for the full face value less only any allowance, discount, credit or rebate shown on the invoice; (e) the debtor is liable to pay the invoice by the earlier of the payment date specified on the invoice or the recourse date; … (h) it has arisen as a result of a bona fide and arm's length transaction in the ordinary course of your business … (k) you are not aware of any reason why it will not be paid in accordance with the terms of the contract; … (r) the debtor has an established place of business; …
18. Clause 14.2 relevantly provides: … (d) all the information given by you or on your behalf (such as financial statements) is correct and not misleading; … (f) you have not withheld any information that might have caused us not to enter into any arrangement with us; …
19. Clause 14.3 provides: You must tell us whenever anything happens which would mean you could not truthfully repeat all the declarations in this agreement.
20. Clause 16 relevantly provides: You are in default if: (a) you do not pay on time any amount payable under an arrangement with us in the manner required by it; or (b) you do something you agree not to do under an arrangement with us or you don't do something you agree to do under an arrangement with us; or (c) … (d) you give, or a guarantor or another person gives, us incorrect or misleading information (including through your declarations in this agreement) in connection with an arrangement with us; or …
21. Under cl 17.2, the Bank was entitled to terminate the facility immediately and without notice if Sentox was in default under the IDA, at which point the total amount owing became payable.
22. The IDA was signed by Mrs Musumeci on 2 September 2014. The guarantee given by Mrs Musumeci was signed by her on the following day. Her signature was witnessed by Mr Odlum. Clause 2.1 of the guarantee provides: You unconditionally and irrevocably guarantee payment to us of the guaranteed money. If the customer does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether or not we have made demand on the customer).
23. Mrs Musumeci also signed a certificate in which she states: 2. I have been given the opportunity to obtain independent legal advice (and financial advice) in relation to my liability under the Documents but do not consider this necessary 3. I have received the Documents and have been given the opportunity to read the Documents. I have signed the Documents freely and voluntarily and not by reason of any undue influence by any person.
24. According to evidence given by Mrs Musumeci, her husband told her that he had decided that Sentox should remain with the Bank (rather than move its business to Bendigo Bank) and told her on or about 5 August 2014 that Mr Odlum would be coming to Sentox's offices at the Stand that day for her to sign some documents. She says that her husband and Mr Odlum met and that Mr Odlum then called her into the meeting and asked her to sign some documents. She asked what they were. He replied that they were documents that were replacing the old documents held by the Bank following her appointment as the sole director of Sentox. She says that she asked if she should obtain legal advice. According to her, Mr Odlum replied that that was unnecessary since the documents "are simply just an update of the old documents, there is nothing of concern that you should worry about". She said that Mr Odlum appeared impatient, and told her not to worry about having her signature witnessed. He said that he would do that. She also says that she did not appreciate that she was giving a guarantee and that if she had she would not have signed the documents but would have taken them to her lawyer and obtained independent legal advice.
25. Mrs Musumeci's evidence is contradicted by Mr Odlum. He says that it was his invariable practice to go through loan documents carefully with a customer and, in particular, to explain the limit of the credit facility, the interest rates, the fees and charges and the security. He says it was also his invariable practice to point out the main features of any guarantee, including the name of the guarantor, in whose favour the guarantee was given and the limit of the guarantee. He was not cross-examined on that evidence.
26. The limit of the IDF was increased on six occasions and on each of those Mrs Musumeci signed an amendment to the guarantee given by her as well as a declaration that she had been given the opportunity to obtain independent legal advice, which included the paragraphs set out above.
27. The first increase (to $6,000,000) occurred on 24 August 2016. By that stage Ms Kristina Kogias had replaced Mr Odlum as the relationship manager. According to Mrs Musumeci, on or about 24 August 2016, Ms Kogias came to the Stand without prior notice and asked her to sign the documents relating to the increase. Ms Musumeci asked if she could read them but says that she was told by Ms Kogias that they were standard documents and that she just needed them signed so that she could increase the facility straight away. Mrs Musumeci says that Ms Kogias stood over her while she signed the documents and then took them to a workstation and asked Mr Thimma Reddy Turnuseema (who is invariably referred to as "Reddy"), an employee of Sentox, to witness Mrs Musumeci's signature. Ms Kogias then took the documents away with her. Mrs Musumeci says that she trusted Ms Kogias and that only recently has she realised that she executed the documents "without being afforded the opportunity to question the bank on the purpose of providing such guarantee".
28. Mrs Musumeci's evidence is inconsistent with the objective evidence. The Bank's records indicate that the documents were couriered to her on 26 August 2016 and that the signed documents were returned to the Bank on the same day. That explains why Mrs Musumeci's signature was witnessed by Reddy.
29. In October 2016, MPI purchased 5 adjoining properties in the Northern Territory for a total cost of $7,642,400 of which Mr Howard has traced $1,266,209 to funds advanced by the Bank under the IDF. The balance of the funds were advanced by ANZ Bank. The properties operated as a mango farm. After the properties were acquired, a packing shed was constructed on them. Mr Howard has identified payments totalling $4,034,396.47 which were made to construct the packing shed of which $2,139,851.25 have been traced to funds advanced by the Bank under the IDF. On 8 March 2017, Cheeky Farms entered into a contract to purchase a mango grading packing line for a purchase price of €695,000 (approximately $969,386). Of the total purchase price, Mr Howard has traced $417,025 as coming from the IDF. Mr Howard has also traced an amount of $262,558.58 from funds advanced under the IDF to repayments made by MPI and a further $192,997.20 to repayments made by Cheeky Farms.
30. The second increase to the IDF (to $7,000,000) occurred on or about 13 April 2017. Mrs Musumeci accepts that on this occasion the documents were couriered to her. She says that when she received them, she rang Ms Kogias and asked her what she (Ms Kogias) wanted her to do. Mrs Musumeci says that Ms Kogias just told her to sign the documents and return them "so I can have the funds to you this afternoon", which is what Mrs Musumeci says she did. Mrs Musumeci says that she did not appreciate that she was signing a personal guarantee and that had she, she would not have signed it. Mrs Musumeci seeks to give the impression in her affidavit evidence that Ms Kogias put pressure on her to sign the documents, but that is not plausible. The Bank's internal records suggest, as might be expected, that it was Mrs Musumeci who was putting pressure on the Bank to get the documents to her so that the facility limit could be increased and Sentox could make additional drawdowns.
31. The third increase (to $8,000,000) occurred on or about 17 July 2017. On that occasion Ms Kogias was on leave and Mr Samuela Nasio, an account executive with the Bank who worked with Ms Kogias and who was working out of the Liverpool branch at the time, was responsible for arranging for the documents to be signed. According to Mrs Musumeci, she was told that the documents were available in the Liverpool branch to be signed. Mrs El-Ahmad drove Mrs Musumeci to the Liverpool branch and called Mr Nasio who came down to the car with the documents. Mrs Musumeci says that she signed the documents in the car. She says that Mr Nasio was waiting impatiently outside the car while she did so. Again, she says that she did not appreciate that she was signing a guarantee and that had she done so she would not have signed it. On this occasion, Mrs Musumeci's signature was witnessed by Mrs El‑Ahmad.
32. Mrs Musumeci's account is contradicted by Mr Nasio. According to him, it was his normal practice to courier documents to a customer to be signed. His recollection is that at Mrs Musumeci's request, he met Musumeci in the carpark to collect the signed documents. His evidence is that he has never asked a customer to sign documents in a car.
33. The fourth increase (to $9,500,000) occurred on or about 28 March 2018. According to Mrs Musumeci, Ms Kogias brought the relevant variation documents to her at the Stand. Ms Kogias asked if Mrs Musumeci could sign the documents quickly because she had to leave. Mrs Musumeci agreed. Ms Kogias then took her to each page to be signed. Mrs Musumeci says that she felt under pressure to sign the documents and that as soon as they were signed Ms Kogias took them. Again, Mrs Musumeci's evidence is that she would not have signed the documents if she had known that she was personally guaranteeing the loan and that she had not seen the documents again until the commencement of these proceedings. Ms Kogias denies that version of events. She says that it was her invariable practice when asking a client to sign a guarantee to explain to the client that that is what he or she is being asked to sign and to recommend that the client obtain legal advice.
34. The fifth increase (to $12,500,000) occurred on or about 15 April 2019. By that stage Ms Maria Savvas had replaced Ms Kogias as the relationship manager. According to Mrs Musumeci, on 16 April 2019, Ms Savvas came to the Stand with the variation documents. Ms Savvas had a day off and was dressed casually. They sat at a desk and Ms Savvas flicked through the documents to the pages to be signed and asked Mrs Musumeci to sign in the places marked. According to Mrs Musumeci, Ms Savvas then took the documents to Mrs El‑Ahmad to witness Mrs Musumeci's signature. Again, Mrs Musumeci says that she was not given an opportunity to read the documents and would not have signed them if she realised that she was signing a guarantee. Ms Savvas did not give evidence.
35. The sixth increase (to $15,000,000) occurred on or about 28 August 2019. Mrs Musumeci again says that Ms Savvas brought the documents to her to sign, that she was not given an opportunity to read them and that she would not have signed them if she knew that she was giving a guarantee.
36. Following a number of debtor enquiries made by the Bank in August 2020 and an audit in October 2020 which had an overall result of "unsatisfactory", on 11 December 2020 the Bank issued a default notice under the IDF. On 15 December 2020, it appointed Mr Barry Kogan of McGrathNicol as an investigative accountant of Sentox. On the evening of 15 December 2020, one of Mr Kogan's employees, Mr Chris Johnson, sent an email to Mrs Musumeci requesting a copy of the Aged Receivables for Sentox, which Mrs Musumeci provided the following morning. Mr Kogan's staff were unable to verify any of the debtors stated on that list. Later that day, Mr Kogan had a telephone conversation with Mr and Mrs Musumeci and their then solicitors, during which Mr and Mrs Musumeci informed him that Sentox's annual turnover was between $4m - $5m and that its debtor balance "is about $50,000 - $100,000". Mr Kogan reported that information to the Bank on the same day.
37. On 21 December 2020, the Bank appointed Mr Kogan as Receiver and Manager of Sentox.
38. On 25 January 2021, the Bank issued a demand to Mrs Musumeci under the guarantee.

The nature of the fraud

1. The fraud perpetrated by Sentox had four main elements. First, Sentox kept two sets of accounts. One set was kept using MYOB accounting software and the other was kept using Wizard accounting software. All the information provided to the Bank was generated from the MYOB system. It is the Bank's case that the information kept using the MYOB system was entirely fictitious and that the information kept using the Wizard system represented the true financial position of Sentox. More will be said about that allegation shortly. Second, the fraud involved generating false records relating to the supply of goods by Sentox, including false invoices and the recording of the details of those invoices in the MYOB system. It was also obviously necessary to record other false information in the MYOB system, such as the costs of sale, although exactly how that was done is not clear from the evidence. Third, Sentox generated false financial statements and tax returns from the information kept on the MYOB system, which it provided to the Bank. The evidence is that those false documents were created by Sentox's accountants. Sentox also created tax returns apparently based on information retained in the Wizard system, which were lodged with the tax office. Fourth, Sentox drew on funds available under the IDF relying on false information uploaded to the Cash Connect system that had been extracted from the MYOB system. It paid a large proportion of those funds to accounts it controlled and then used those funds to make payments into the nominated account, giving the appearance that the invoices were being paid by the debtors whose debts had been sold to the Bank. The evidence is that of the amount paid into the nominated account, $334,872,881.60 (approximately 93.7 percent of the total deposits into the nominated account) was paid from accounts owned, controlled or associated with the Musumeci Defendants or Mrs El-Ahmad. The need for increases in the IDF over time arose from the fact that some of the funds drawn down on the IDF were syphoned off for other purposes.
2. The Musumeci Defendants did not take issue with the description of the fraud outlined in the previous paragraph. On the other hand, Mr Baron-Levi, who appeared for Mrs El-Ahmad, did. In his submission, the Bank had not established that all the debtor information contained in the MYOB system was false (or that all the information contained on the Wizard system was accurate). It is doubtful that much turns on whether that submission is correct or not. However, I am satisfied that at least the records contained in the MYOB system relating to invoices were all false. The evidence of Mr Kogan is that the debtor verification exercise carried out by his staff on 16 December 2020, which occurred by reference to a debtor list generated from the MYOB system, revealed that of those debtors that Mr Kogan's staff were able to contact, none acknowledged any substantial debt owing to Sentox, whereas the list of debtors provided to Mr Kogan by Mrs Musumeci showed that the total amount owing was $20,940,138.20. The evidence given by Mr Kogan is consistent with the admission made by Mr and Mrs Musumeci (I say "Mr and Mrs Musumeci" because Mr Kogan's evidence is that the admission was made by one in the presence of the other without objection) during the telephone call on 18 December 2020 that the debtor balance was about $50,000 - $100,000.
3. Mr Baron-Levi objected to evidence given by Mr Kogan of the debtor verification exercise, and McGrathNicol's records relating to that exercise, on the basis that it was hearsay evidence of representations made by the individual debtors (no objection was taken because the evidence was given by Mr Kogan rather than the relevant member of his staff). However, in my opinion, that evidence was admissible under s 64 of the Evidence Act 1995 (NSW) (Evidence Act). The effect of that section is to permit the Court to admit first-hand hearsay "if it would cause undue expense or undue delay, or would not be reasonably practicable, to call the person who made the representation to give evidence". In the present case, there is no reason to think that the evidence was unreliable. It was consistent with the admission made by Mr and Mrs Musumeci and it would have caused undue expense and delay to require each person contacted by McGrathNicol to attend court simply for the purpose of denying that they owed Sentox money.
4. Mr Baron-Levi submitted that the Court could not be satisfied that the lodged tax returns did not understate Sentox's revenue and that it could not be satisfied that none of the invoices recorded on the MYOB system were genuine. Some of them may have been. There is no direct evidence that every invoice entered into the Wizard system was genuine and that every invoice entered into the MYOB system was false. The evidence from Mr Kogan and the admission made by Mr and Mrs Musumeci related to a point in time, and plainly do not address each invoice. However, in my opinion, the nature of the fraud makes it a reasonable inference to draw. There is no evidence that the nature of the fraud changed over time. The nature of the fraud made it natural to keep an accurate set of accounts and a false set. Sentox would need an accurate set of accounts for its own purposes, such as chasing true debtors. There is no suggestion that it kept a third set of accounts for that purpose. To intermingle true and false invoices in the two sets of accounts would lead to confusion and make it difficult for those who participated in the fraud to know what the true position was. It is unlikely that that is what happened.

Is Mrs Musumeci liable in the tort of deceit?

1. In order to establish that a person is liable in the tort of deceit, it is necessary to establish that (1) the person made a false representation; (2) the person made the representation with the knowledge that it was false or that the person was reckless as to whether the representation was false or not; (3) the person made the representation with the intention that it would be relied upon by the plaintiff; (4) the plaintiff acted in reliance on the false representation; and (5) the plaintiff has suffered loss or damage which was caused by reliance on the false representation: Magill v Magill (2006) 226 CLR 551 (Magill) at [114] per Gummow, Kirby and Crennan JJ. Each of the five requirements is strictly enforced due to the serious nature of an allegation of fraud: ibid.
2. In the present case, the focus was on the second requirement. Mrs Musumeci accepted that the last three requirements were satisfied, and there appears to be little debate that Mrs Musumeci made false representations to the Bank when she provided the Bank with financial statements and tax returns generated from the MYOB system. The question is whether she knew they were false (or was reckless as to whether they were false or not). In my opinion, the evidence clearly establishes that Mrs Musumeci knew that the financial statements and tax returns that she provided to the Bank were false.
3. The evidence establishes a pattern in which Mrs Musumeci or Reddy each year requested Sentox's accountants to prepare financial statements and tax returns "for Bank purposes" which Mrs Musumeci provided to the Bank knowing that they were false. It is unnecessary to set out the facts in relation to each year. It will be sufficient to focus on the position in 2014 and 2015. The evidence suggests that the pattern started in 2011, after the Bank had provided the Initial IDF. However, the Bank's pleaded case is that "From 2014, [Mrs Musumeci] provided or caused to be provided Financial Information and Documents to [the Bank]" which were false. Consequently, it is appropriate to focus on events from that time.
4. On 11 April 2014, Reddy sent an email to Mr Gerard Quin, Sentox's then accountant, which was copied to Mrs Musumeci, saying "Pls find attachment MYOB Data file for preparation of Financials 2012-13 for Bank purpose". At about the same time, Mrs Musumeci sent Mr Quin an email saying "Reddy will export 2013 file we have already done 2011, 2012. …"
5. On 21 April 2014, Mr Quin sent Mr and Mrs Musumeci an email attaching the financial statements for Sentox for the year ended 30 June 2013. The email asked them to review the accounts and raised several queries in relation to them. The financial statements indicated that the sales revenue for the 2013 financial year was $25,395,183.13 and the profit before tax was $1,440,626.36.
6. On 13 May 2014, Mr Quin sent Mr and Mrs Musumeci an email with the subject "Sentox 2013 Financials + Tax returns ready to review". The email states that the tax return has been prepared on an accrual basis and that "Net profit/taxable income is $945,064. Tax payable is $152,385". That figure is consistent with financial statements prepared at the time that were sent to Sentox (it is unclear whether they were sent to Mrs Musumeci) which indicates that the sales revenue for the 2013 financial year was $10,662,643.19 and the profit before tax was $945,064.08. The same figures are included in a tax return that was also sent to Sentox.
7. On 29 May 2014, Mr Quin sent Mrs Musumeci the "completed 2013 Trust tax return for Sentox Discretionary Trust & Trust financials". Those showed sales revenue of $25,395,183.13 and profit before tax of $1,440,626.36.
8. On 4 June 2014, Mr Quin sent Mr and Mrs Musumeci the last email in a chain dealing with the 2013 financial statements and tax return for Sentox which attaches what are described as final versions of those documents. The figures show sales revenue of $9,895,525.93 and profit before tax of $177,946.82. As is apparent from these figures, the principal difference between the draft sent on 13 May 2014 and the final version was the figure for sales revenue.
9. It is not easy to piece together precisely what happened in relation to the preparation of the 2013 financial statements and tax return. But two things are clear. First, two sets of financial statements and tax returns were prepared, one of which was for the Bank. The set of accounts with the higher numbers were prepared both for Sentox and the trust of which it was a trustee. Second, Mrs Musumeci was closely involved in giving instructions in relation to the preparation of the financial statements and tax returns. Copies were sent to her and questions concerning them were addressed to her.
10. It appears that the set of accounts that was sent to the Bank were for the trust. That prompted an email dated 9 July 2014 from Mr Odlum to Mrs Musumeci and Mrs El-Ahmad (but addressed "Hi Andrew, Kathie and Sahar") in which Mr Odlum asked a number of questions in relation to the correct trading entity and also sought a copy of the 2013 tax return "of the correct trading entity". Mrs Musumeci forwarded that email to Mr Gerard Quin, Sentox's accountant. Mrs Musumeci then spoke to Mr Quin. They agreed that Mr Quin would prepare a letter to the Bank explaining the position. The final version of that letter, which is dated 22 July 2014, said: … Sentox Pty Ltd is the legal owner of this business but the equitable owners are the beneficiaries as per the Trust Deed. So the business has not changed ownership from company to Trust as it was the original intention to be run through a trust. Due to confusion with the previous accountant and the director of Sentox Pty Ltd the Tax returns and BAS have been incorrectly prepared & lodged in the Company name only. As previously advised the ATO are in the process of adjusting the 2 accounts as between the company to the Trust. From then on, the relevant financial statements and tax returns are those of the trust and in 2015 Sentox lodged tax returns for the trust for both 2013 and 2014.
11. On 18 March 2015, Reddy sent Mr Quin an email with the subject "Tax Returns for Bank purpose - Sentox 2013 & 2014" saying "Could you please send us TODAY the above Tax Returns for Bank purpose …". The email was copied to Mr Musumeci. Reddy sent a follow up email to Mr Quin later that day. The following day Mr Quin replied including the tax returns for 2013 and 2014. It appears that that email was forwarded to Mrs Musumeci who forwarded the email chain to her husband. The attached 2013 tax return showed business income of $25,395,183 and taxable income of $1,440,626. The return for 2014 showed business income of $26,423,028 and taxable income of $1,250,266. Mrs Musumeci sent Mr Odlum a copy of the 2014 tax return under cover of an email dated 5 June 2015. In her covering email, Mrs Musumeci said "I have attached the letter you requested earlier this year, as well as the Tax return. I have sent this on a number of occasions, not sure why you haven't received it".
12. Prior to Mrs Musumeci sending her email to Mr Odlum, Mr Quin, on 27 April 2015, sent an email to Mr and Mrs Musumeci attaching a copy of the financial statements and tax return of the trust for 2013. The email said: As with previous email 2013 was lodged as a company return. I have now prepared the Trust tax return. Please review and if ok sign the declarations and the Trustees Mionuts [sic] in the financials and fax back to me for lodgement. In summary Trust made a net profit of $376366 but after the previous years losses the net Trsut [sic] income is nil and there is no distribution. The financial statements included with that email disclose sales revenue of $9,895,525.93 and a profit of $367,366.82 for the financial year ended 30 June 2013 (they disclose a loss of $275,417.78 for the prior year). The tax return discloses the same figures.
13. On 11 June 2015, Mr Quin sent Mrs Musumeci an email enclosing the final version of the financial statements and tax return for 2014. The covering email states "Pls review before sending on to bank". That version of the financial statements shows sales revenue of $26,423,148.70 and profit before tax of $1,250,263.78. The tax return contains the same figures (although they are rounded). Mrs Musumeci sent those documents to Mr Odlum on the same day.
14. On 28 October 2015, Mr Quin sent Mrs Musumeci an email which attached another copy of the tax return and financial statements for 2014. The covering email says: Please review your completed 2024 Trust Tax return and the Financial Reports (including the Trustees Resolution) & if ok sign the taxpayer declaration & Electronic declaration. It has resulted in a Loss of $243,654.42. The email asks that the completed documents be returned to Mr Quin. The attached documents disclose sales revenue of $10,373,361.03 and a loss of $243,654.42.
15. It appears from subsequent emails that there was a question whether Sentox would charge Fresh Xpress Agri management fees which would have the effect of reducing Sentox's losses but increasing those of another company controlled by Mr and Mrs Musumeci. While that issue was being sorted out and Mr Quin was chasing Mr and Mrs Musumeci for the signed 2014 accounts, Reddy, on 3 February 2016, sent Mr Quin an email that was copied to Mrs Musumeci which said he needed "financials for BANK purpose". The email added that "If you need still MYOB Data file Kathie will pass it to you through USB Soon".
16. As I have said the pattern of preparing separate financial statements "for Bank purpose" continued in later years. Those financial statements showed increasing revenue and profit. The last financial statements in evidence are those for the year ended 30 June 2019 which show sales revenue of $52,399,738.39 and net profit of $2,176,122.58. Those accounts were prepared by Mr Vince Carlo of GDC Tax Pty Ltd, who was Sentox's accountant from 2018. Relevantly, in an email dated 31 January 2020 to Reddy, Mr Carlo said "we are in the process of working on both the Bank financials and Proper financials at this stage and we do require certain items and information of which Natalie will request from yourself in due time." Reddy forwarded a copy of that email to Mrs Musumeci on 4 February 2020. On 6 February 2020, Mrs Musumeci sent an email to Reddy saying "Please have all sentox 2019 financial sent to Accountant". Mrs Musumeci sent Mr Carlo a couple of emails chasing up the accounts. In one dated 10 February 2020, she described the Bank as "jumping up and down". She eventually sent the accounts showing the figures set out earlier to the Bank on 25 February 2020. The correspondence suggests that accounts for tax purposes and tax returns for 2017, 2018 and 2019 were not prepared.
17. It is plain from this evidence that Mrs Musumeci knew that Sentox was preparing two sets of accounts. The set containing the higher figures was provided to the Bank. The set containing the lower figures (which Mr Carlo had described in an email that was copied to Mrs Musumeci as "the Proper financials") was used to prepare Sentox's and then the trust's tax returns. It is also apparent from the correspondence that Mrs Musumeci was the person primarily responsible for dealing with the Bank in relation to the accounts and giving instructions to the accountants in relation to their preparation.
18. Mr Allen submitted that even if it is accepted that Mrs Musumeci knew that there were two sets of accounts, the evidence does not demonstrate that she knew that the set that was provided to the Bank was false. That submission must be rejected. Both sets of accounts could not be correct. They were prepared in the same form, but one contained figures far greater than the other. They each, for example, purported to record Sentox's (or the trust's) revenue from sales and net profits.
19. There was a suggestion that one set of accounts was prepared on a cash basis and the other on an accrual basis. However, there is no basis for that suggestion. It is plain that both were prepared on an accrual basis. As Mr Williams, an expert accountant called by the Bank, pointed out in his report, both sets of accounts contained items for trade debtors and receivables, which would only be included in accounts prepared on an accrual basis. Moreover, the principal difference between accounts prepared on an accrual basis and accounts prepared on a cash basis is the timing of receipts and expenses. Consequently, over time it is to be expected that the two sets of accounts would record roughly the same level of revenue and expenses and the same level of profit. But in this case, the revenue and profit recorded in the accounts provided to the Bank were always much higher than the revenue and profit recorded in the other set of accounts.
20. It follows that Mr Allen's submission must amount to a submission that Mrs Musumeci knew that one set of accounts was false but that she did not know that it was the set that was provided to the Bank. That submission must be rejected. At best, it would suggest that Mrs Musumeci was recklessly indifferent to whether the information that was provided to the Bank was false, which would still be sufficient for a finding of liability in deceit. In any event, Mrs Musumeci was closely involved in giving instructions in relation to the preparation of the accounts. She was the sole director and shareholder of Sentox and it is apparent that she together with her husband ran the Fresh Xpress business. It is inconceivable in those circumstances that she would not have had a reasonable amount of knowledge about Sentox's business, and which set of accounts was correct and which was not, or that she really believed that the accounts sent to the Bank were correct and that the other set of accounts were artificially low for tax purposes. That conclusion is supported by the fact that the set of accounts containing the higher figures were described in emails that were either sent or copied to Mrs Musumeci as being prepared "for Bank purpose", which suggested that those were the accounts that were prepared for a specific purpose. It is also supported by the fact that Mrs Musumeci insisted on being present during the audits conducted by the Bank. There would be no reason for her to do so if she believed that the accounts provided to the Bank were correct.
21. Mrs Musumeci was aware from evidence served by the Bank that the Bank relied on the fact that each year Sentox to Mrs Musumeci's knowledge prepared two set of accounts. However, she says nothing in any of the affidavits she swore about that allegation. Indeed, she does not address the allegation of fraud against her in any of her affidavits at all. In my opinion, this is a case where, as a consequence, the Court can more readily draw the inference that Mrs Musumeci had no basis for thinking that the accounts provided to the Bank were accurate, since, if she had, she would have given it: see Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-9 per Handley JA.
22. It follows that Mrs Musumeci is liable in the tort of deceit.

The claim under the guarantee

1. Having regard to the conclusions I have reached and the concession made by Mr Allen, the claim under the guarantee must succeed.
2. I should nonetheless say something briefly about Mrs Musumeci's cross-claim based on the Contracts Review Act.
3. Section 7(1) of the Act relevantly provides that "Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result" do various things, including refusing to enforce the contract.
4. In the present case, Mrs Musumeci's evidence suggests that her case is that the guarantee and the extensions to it she signed are unjust because she was pressured into signing them and she was not aware that she was giving a guarantee.
5. In my opinion, that claim must fail at a factual level. As I have said, the BLAST dated 19 July 2013 indicates that the Bank told Mrs Musumeci that she would need to provide a guarantee and asked her to provide a statement of her financial position, which is what Mrs Musumeci did. She must have appreciated that the only reason the Bank was interested in her financial position (as opposed to that of Sentox) was because it required her to give a guarantee. Mr Allen submitted that there was no evidence that it was Mrs Musumeci who gave it a statement of her financial position. But the evidence is that the request was made of her and the only reasonable inference is that either she provided the information or asked someone else to do so.
6. Mrs Musumeci's evidence that on each occasion she was pressured into signing the guarantee or an extension of it by a representative of the Bank must be rejected. The evidence given by Mrs Musumeci was formulaic and the Bank had no opportunity to test it. It was denied by three of the relevant Bank employees who were cross-examined and who came across as plausible witnesses. It is not plausible that each of the Bank's employees behaved in the same way. Some of the evidence given by Mrs Musumeci is contradicted by the contemporaneous records. In particular, contrary to Mrs Musumeci's evidence, the documents relating to the first increase were couriered to her and she had an opportunity to read the documents before she signed them in the presence of Reddy. Mrs Musumeci says that at the time she signed the 3 September 2014 guarantee she was told that there was "no need" for her to consult her lawyer about the contents of the document. That evidence is not plausible when the box above her signature states that "You should obtain independent legal advice", and she signed a certificate stating that she had been given an opportunity to obtain independent legal advice but had declined that opportunity. If Mrs Musumeci's evidence is to be believed, she was pressured to sign each set of documents including the guarantees and then thought nothing about them until the next occasion she was asked to sign the documents and faced similar pressure. That evidence is not plausible, and I reject it.
7. It follows that the cross-claim based on the Contracts Review Act would fail even if the allegations of fraud against Mrs Musumeci were not made out.

Tracing

1. The uncontested evidence of Mr Howard is that the following amounts can be traced from amounts advanced by the Bank under the IDF to amounts used to reduce secured loans over the following properties owned wholly or partly by Mrs Musumeci: Kingston Street, Haberfield $123,330.66 Howard Street, Strathfield $1,205,970.78 Bossley Road, Bossley Park $134,570.25

Mrs Musumeci owns the property at Haberfield with Mr Giuseppe Musumeci as joint tenants. Mr Giuseppe Musumeci is Mrs Musumeci's father-in-law.

1. Consistently with the concessions made by the Musumeci Defendants, the Bank is entitled to assert a charge over the Strathfield and Bossley Park properties or to claim a proportionate share of those properties. The position is less clear in relation to the Haberfield property. There is no suggestion that Mr Giuseppe Musumeci had knowledge of the fraud. Consequently, any relief could not affect his interest in the property. On the other hand, it is not clear what relief the Court could give that would not affect his interest. It will be necessary to hear further submissions before making any orders in respect of that property.

The case against Mrs El-Ahmad

1. It is important to bear in mind that in order to succeed against Mrs El-Ahmad, it is not necessary for the Bank to establish that she was aware of precisely how the fraud worked and of each component of it. Rather, what the Bank must prove is that Mrs El-Ahmad made representations to the Bank which she knew to be false (or was reckless as to whether they were false or not). As finally put, it was the Bank's primary case that Mrs El-Ahmad made representations by uploading the details of fictitious invoices to the Cashflow Connect system and that she knew that those invoices were fictitious or was reckless as to whether they were fictitious or not.
2. Mrs El-Ahmad submitted that, put in that way, the Bank's case went beyond its pleaded case. I do not accept that submission. In para C78 of the Further Amended Commercial List Statement (FACLS), the Bank pleads that "From 2014, the eighth defendant provided or caused to be provided Financial Information and Documents to the plaintiff". It gives the following particulars of that allegation: The Financial Information and Documents were supplied or caused to be supplied by the eighth defendant to the plaintiff through a system maintained by the plaintiff known as Cashflow Connect and/or in the alternative by email to the plaintiff. Affidavit of Richard Bow affirmed 31 August 2021 at [37], [54], [62], [65], [85], [91], [95], [97], [100] and [107]. "Financial Documents and Information" is defined in para C23 to mean "debtor ledgers, management accounts, month end reconciliations [sic] and aged debtor lists". Paragraph 62 of Mr Bow's affidavit is particularly relevant, since it describes the process by which invoices were uploaded to the Cashflow Connect system. Paragraphs C80 and C81of the FACLS relevantly allege: C80 The Financial Information and Documents provided to the plaintiff from at least 2016 was false in the following respects: a. The Financial Information and Documents materially overstated the quantum of debts owed to [Sentox]. b. The Financial Information and Documents included purported debts of [Sentox] which were not valid, binding or enforceable. c. The debtors referred to in the Financial Information and Documents were not liable to pay the purported invoices of [Sentox]. d. … C81 At the time the Financial Information and Documents referred to in the preceding paragraph were provided to the plaintiff, the eighth defendant knew that the Financial Information and Documents were false as set out in the preceding paragraph.
3. Although there is no express pleading that Mrs El-Ahmad uploaded the details of invoices to Cashflow Connect, it is pleaded that she provided the Financial Information and Documents to the Bank, and there is no dispute that she did so by uploading details of the invoices to Cashflow Connect. Consequently, what is alleged is that by uploading the details of invoices to Cashflow Connect Mrs El-Ahmad knowingly provided false information to the Bank.
4. That case is consistent with the way the Bank opened its case against Mrs El‑Ahmad. Paragraph 111 of the Bank's opening submissions alleges that Mrs El-Ahmad made false representations in a number of ways including (in para (b)) by "[uploading] invoice information to Cashflow Connect, the first step in obtaining funding for invoices under the IDF. This invoice information was not, and could not have been, true". It was not suggested that this allegation went beyond the pleaded case.
5. Mrs El-Ahmad also submitted that the case sought to be advanced by the Bank was inadequately particularised. In her submission, it was necessary for the Bank to identify the invoices that were fictitious and those that Mrs El-Ahmad knew to be fictitious. Again, I do not accept that criticism of the Bank's case. The case against Mrs El-Ahmad is that she knew that the details of the invoices she uploaded to Cashflow Connect were false. The Bank sought to prove that case by inferences from what Mrs El-Ahmad did know. Mrs El-Ahmad was on clear notice that that was the case that she had to meet. And provided the Bank proves that case to the requisite standard in accordance with the principles stated in Briginshaw v Briginshaw (1938) 60 CLR 336 and s 140 of the Evidence Act, that is sufficient to satisfy the first two requirements of the tort of deceit. It is not necessary for the Bank in addition to identify each invoice that Mrs El-Ahmad knew to be false.
6. Mrs El-Ahmad seeks to defend the claim against her in two principal ways.
7. First, relying on an analogy to principles developed in the context of claims for breach of s 18 of the Australian Consumer Law, Mrs El-Ahmad submits that she did not make any representations to the Bank because in giving information to the Bank she was acting as a mere conduit for others. However, that principle has no application to the tort of deceit. Section 18 of the Australian Consumer Law (like its predecessor, s 52 of the Trade Practices Act 1974 (Cth)) imposes strict liability in relation to conduct that is misleading or deceptive or likely to mislead or deceive. It is in that context that courts have held that a person who acts as a mere conduit for another in passing information on cannot themselves be said to have engaged in misleading or deceptive conduct: see Care A2 Plus Pty Ltd v Pichardo [2024] NSWCA 35 at [106]ff per Bell CJ (with whom Stern JA and Basten AJA agreed); Wong v Citibank Ltd [2004] NSWCA 396 at [13]ff per Beazley JA with whom Sheller and Bryson JJA agreed). But the question of what conduct is necessary to amount to engaging in conduct that is misleading or deceptive is a different question from the question whether a person makes a representation for the purposes of the tort of deceit. The first question requires the court to characterise a representation as conduct having a particular quality. The second simply requires the court to determine whether a person engaged in a particular act. In the tort of deceit, the required quality of the act (that the person knew that the representation was false) is to be found in the second requirement identified in Magill.
8. There is no doubt that Mrs El-Ahmad made representations to the Bank when she uploaded details of invoices to Cashflow Connect. As I have explained, as part of the process of uploading the invoices, Mrs El-Ahmad was required to tick a box certifying that the goods the subject of the invoices had been delivered, that the debts arising under the invoices were transferred and that the original invoices containing the same details had been provided to the customer. Mrs El-Ahmad accepts that she did that "hundreds of times". She says that she never read what she was certifying, but that does not mean that she did not make representations in terms of the certification. The question whether a representation was made is to be determined objectively. It does not depend on whether the representee actually read the document containing the representation.
9. Moreover, Mrs El-Ahmad must have understood, at least in a general sense, that the process of uploading details of invoices to Cashflow Connect was the first step by which the Bank lent money against those invoices. Her evidence was that every morning two piles of invoices were left on her desk, one to be entered into the MYOB system, which she understood were the invoices to be funded by the Bank, and the other to be entered into the Wizard system, which she understood to be unfunded invoices. Her evidence is that she was trained by the Bank to operate the Cashflow Connect system and, in particular, trained to upload invoice details from the MYOB system. Consequently, to the extent that her subjective views are relevant, she must have understood that by uploading the invoices she was representing that the invoices accurately recorded the debts owing to Sentox, since she understood that it was by reference to those invoices that the Bank would advance money.
10. The second way in which Mrs El-Ahmad seeks to defend the claim against her is that she submits that the Bank has not proved that she knew that any of the details of invoices she uploaded to Cashflow Connect were false. In my opinion, that submission must be rejected.
11. The starting point is that from the time Sentox entered into the Initial IDF and before, Mrs El-Ahmad knew that that Sentox kept two sets of accounts. She gave this evidence: Q. You were the person solely responsible for inputting information into both systems; is that right? A. Not solely responsible. Q. Who else was responsible? A. We had bookkeepers, other staff members. Q. I see, who were they in 2011? A. Wouldn't be able to remember. Q. The Wizard system that you refer to at paragraph 16(a), did that system produce invoices? A. Yes. Q. Then the MYOB system that you refer to over the page at subparagraph (f), that also produced invoices? A. Yes. Q. So you describe those tasks here and you inputted information into the two systems? A. Yes. Q. How did you choose between which system you would input information into? A. Okay, so prior to 2011 it was SMCS and non-SMCS customers. Q. So which system was used for SMCS customers? A. The Wizard system. Q. And so MYOB was used for non-- A. Non-SMCS.
12. The effect of Mrs El-Ahmad's evidence is that after 2011 - that is, after the Initial IDF was entered into - she understood that unfunded invoices were recorded in the Wizard system and invoices funded under the facilities were recorded in the MYOB system. However, that evidence cannot be accepted for a number of reasons.
13. First, it was Mrs El-Ahmad's evidence that the Bank had indicated in advance which invoices it would fund and which invoices it would not and she appeared to accept that that was by reference to the debtor. She gave this evidence: Q. Correct me if I'm wrong. I think the evidence you're giving is, your understanding was that the bank had made a decision about whether the particular debtor was a debtor they were prepared to fund. A. Yes. Q. It follows from that that a debtor could not be both a funded or unfunded debtor on your understanding, is that right? A. My understanding is it was either funded or unfunded. Earlier in her evidence she explained "They just weren't approved, the ones - they weren't approved for whatever reason, they didn't pass their [meaning the Bank's] due diligence".
14. It follows from this evidence that a debtor could not both be funded and unfunded and consequently could not be included in both the MYOB and Wizard systems. However, Mrs El-Ahmad was taken to a number of examples of reports generated from the Wizard and MYOB systems in the same periods which listed amounts owing from the same debtors. In the case of the reports from the MYOB system, the amounts of the invoices were much larger. Mrs El‑Ahmad herself described the differences as "huge". So, for example, at the time McGrathNicol was appointed receivers, they were provided with a list of what Mrs El-Ahmad said were unfunded debtors which showed that Sentox was owed $1,518 by Salim Greenacre, whereas the material provided to the Bank showed that a customer with the same name owed $700,395. Similarly, the list provided to McGrathNicol showed that Tony Lahood owed $72, whereas the information provided to the Bank indicated that a customer with that name owed $431,462.
15. Faced with this evidence, Mrs El-Ahmad was unwilling to concede that, even though the names of the debtors were the same, they were the same debtors. She pointed out that the reference numbers for the relevant debtors in the two reports were different. Consequently, her evidence was that they must be different customers. When pressed with further examples, Mrs El-Ahmad's final position appeared to be that she just focussed on the customer numbers and that it did not occur to her customers with the same names were the same customers. Her evidence on this topic is completely implausible and I do not accept it.
16. Second, contrary to the affidavit evidence given by Mrs El-Ahmad, she was involved in collecting debts owed by customers recorded in the Wizard system. In cross-examination, she was taken to a number of examples of emails she had sent to customers chasing up the payment of invoices. The tone and content of the emails suggest that she had some knowledge of and relationship with the customers. She sought to explain these examples by saying that she was simply following instructions (from Mr Musumeci). But even if that is true, it does not undermine the significance of the evidence. Her evidence that she was not involved in chasing up payment was at best misleading and reflects poorly on her credibility. By giving the affidavit evidence she did, Mrs El-Ahmad was seeking to give the impression that she had no relevant knowledge about Sentox's business except the process of entering invoices, whereas the true position is that she must have gained some knowledge of the business and its customers from her interactions with them.
17. Third, and related to the second point, one of the customers that Mrs El-Ahmad chased for payment was Woolworths. Again, consistently with Mrs El-Ahmad's evidence, Woolworths was an unapproved customer. However, Mrs El-Ahmad could not possibly have believed that Woolworths had failed to meet the Bank's "due diligence".
18. Fourth, one of the customers included in the MYOB system was M & N Abbas, who are Mrs El-Ahmad's parents. Mrs El-Ahmad accepts that she saw the customer name "multiple times". The information provided to the Bank suggests that they were large customers of Sentox. The MYOB records indicated that as at December 2020, they owed Sentox $698,859. Mrs El‑Ahmad gave evidence that her parents were growers who also had a shed at Flemington Markets. When she was questioned about the apparently large purchases that they were making from Sentox, Mrs El-Ahmad said that she had not spoken to her parents since 1997 and she sought to give the impression that she knew nothing about their business. When confronted with telephone records which indicated that she had rung her mother on 48 occasions during a one-month period, she said that she rang her mother's number to speak to her sister who did not have her own telephone (although her evidence concerning the fact that her sister did not own a telephone is not recorded in the transcript). In addition, she gave evidence that she had made up with her parents in the past two or three years, although she said that she had never discussed with them the amount that they are said to owe Sentox. Again, this evidence is completely implausible, and I do not accept it.
19. Fifth, there is evidence that, at least on some occasions, Mrs El-Ahmad was involved in reconciling the payment of accounts. So, for example, on 20 May 2014, Reddy sent Mrs El-Ahmad a debtor list which showed total debtors of $192,401.80 and asked her to "go through it with debtors movement and workout with Kathie". On 2 June 2014, Reddy sent Mrs El-Ahmad an email saying: Morning Sahar Just want to confirm the Sales for the weekending 31/5/204 [sic] (27/5 to 31/5) is as below: WW $11,448 SMCS $37,264 NON-SMCS $8,566 Cash $7,181

Is it ok? The reference to "WW" appears to be a reference to Woolworths. The reference to "SMCS" is a reference to a payment system operated by Sydney Markets.

1. Another example is an email dated 20 June 2018 sent by Mrs El-Ahmad chasing up the payment of several invoices payable by Lou's Produce. The email attaches a number of invoices with handwriting on them which Mrs El‑Ahmad accepts "could be" hers, which seeks to reconcile which invoices have been paid.
2. These examples support the conclusion that Mrs El-Ahmad knew more about Sentox's business and had a greater involvement in it than she suggests. The first two emails, in particular, suggest that Mrs El-Ahmad had a clear understanding of the size of the business, which was quite different from the impression that would be gained from the information supplied to the Bank. It is not plausible that the debtors figures attached to the first email and the sales figures set out in the second email were only intended to be the figures for unfunded sales. Mrs El-Ahmad could give no explanation for why she was sent the first two emails.
3. Sixth, there is other evidence to suggest that Mrs El-Ahmad's role in the business was much greater than she suggests it was. She obviously worked closely with Mr Musumeci. Mr Musumeci continues to operate the Fresh Xpress business at Flemington markets (through CAO) and Mrs El-Ahmad continues to work for that business. Mrs El-Ahmad was involved in sending monthly reconciliation reports to the Bank. She was present when the Bank conducted its audits. According to a home loan application Mrs El-Ahmad completed in May 2016, her salary from Sentox was $171,000. When questioned about that evidence, she gave a series of evasive answers. She said that she did not know what her salary was in 2016 (or, indeed, what it is now). She also said that the $171,000 was her "promised salary", without conceding that she ever received it. She denied that the amount of $171,000 suggested that she held a position of seniority. She gave this evidence: A. I, I just explained it. In that industry my husband doesn't hold a position of senior and he is - on that I, I could pull up one of his payslips in 30 seconds and, and show you that and he's not in any way - he does not have a senior role. So I know you didn't ask me that but he's my husband and I can compare myself to him directly because he did not have a senior role at all. In fact, he's, just works on the floor like as nothing special in any way, shape or form, no education required, nothing, just works there as a labourer. This evidence is evasive and implausible. Her salary coupled with her evasive evidence suggests that she occupied a trusted and senior role in Sentox.
4. It is also noteworthy that Sentox was a small business with no more than about six or seven employees. When questioned about the number of employees in the business, Mrs El-Ahmad gave evasive answers saying that "I don't have access to payroll at all". Mrs El-Ahmad had worked in the business for an extended period of time. She occupied a position of some seniority and trust. The information supplied to the Bank by Mrs El-Ahmad suggested that the scale of the business was far greater than it was. It is not plausible given the size of the business and Mrs El-Ahmad's role in it that she was unaware of the true scale of the business.
5. Seventh, on one occasion, Sentox paid a large sum of money to Mrs El-Ahmad, which she subsequently disbursed in accordance with instructions given to her by Mr Musumeci. Mrs El-Ahmad made one payment from a branch at Flemington markets to Sentox's account with the Bank. On the same day she transferred the balance of the amount to Sentox's ANZ account from which four payments were then made to the nominated account purportedly from different debtors. Mrs El-Ahmad could give no explanation for her conduct other than that she was following the directions of Mr Musumeci. Her evidence is that the money had been paid into her account by mistake and that she had returned the money as soon as the mistake had been discovered. But it seems implausible that the payment was a mistake. It is more likely that the money was paid through her account as part of the process of creating the false impression that the invoice amounts uploaded to Cashflow Connect were being paid. Mrs El-Ahmad accepts that it was part of her duty to reconcile amounts paid into the nominated accounts with invoices. Given her close relationship with Mr Musumeci and her role in reconciling payments into the nominated account, it is reasonable to infer that she knew the true purpose of the payment into her account.
6. On another occasion in 2011, Sentox paid money into an account in the name of Gem Fruitz Pty Limited, which was then paid into the nominated account. Mrs El-Ahmad was one of two authorised signatories on the account into which the money was paid. She gave evidence that she has no recollection of that fact and knows "absolutely nothing" about Gem Fruitz, although she accepts that she knew two of the people who had served as directors of the company, including a Mr Enzo Mammone. Neither Mr nor Mrs Musumeci was authorised to operate the account. The evidence is that on at least one occasion, Mrs El-Ahmad authorised the transfer of $30,000 from the account (although not to the nominated account). She could give no explanation for the fact that she was a signatory on the account or of the payment she did authorise, except to suggest that someone else had operated the account using her log-in details. That explanation is implausible. The only reasonable inference that can be drawn from the fact that Sentox paid money to Gem Fruitz which then made payments to the nominated account is that Gem Fruitz was established as a fictitious customer of Sentox and that the payments out of its account to the nominated account were made to create the false impression that the payments were in respect of product supplied to Gem Fruitz. Mrs El‑Ahmad's role as a signatory on the account and the evidence that she operated the account on at least one occasion suggest that she knew the true purpose of Gem Fruitz.
7. Taking these matters together, I am satisfied to the requisite standard that Mrs El-Ahmad knew from at least 2014 (to choose a date that corresponds to the pleaded case) that the invoice details she uploaded to Cashflow Connect were false. The invoice details did not record details of actual sales made by Sentox which the Bank had agreed to fund, and Mrs El-Ahmad must have known that. Mrs El-Ahmad's evasive and implausible answers together with the objective facts demonstrate that Mrs El-Ahmad must have known the true position.
8. Mrs El-Ahmad also submitted that the third requirement for the tort of deceit set out in Magill was not satisfied in this case. It is not easy to follow Mrs El‑Ahmad's submissions on this aspect of the case. By uploading the invoice details to Cashflow Connect, Mrs El-Ahmad must have intended the Bank to advance funds by reference to that information. To her knowledge that was the whole purpose of uploading the information.
9. Mrs El-Ahmad did not dispute that the Bank relied on the information uploaded to Cashflow Connect and that it suffered loss as a consequence. It follows that Mrs El-Ahmad is liable in the tort of deceit.
10. The amount claimed by the Bank represents the amount that it lent Sentox since 2014 on the basis that but for the deceit it would not have lent that money. However, as noted earlier, the Bank's pleaded case against Mrs El-Ahmad is that "[t]he Financial Information and Documents provided to the plaintiff from at least 2016 were false …" (emphasis added). And its case is that at the time that information was provided to the Bank Mrs El-Ahmad knew that it was false. Accordingly, the claim against Mrs El-Ahmad is limited to the period from 2016. Any judgment against Mrs El-Ahmad must reflect that fact.

Orders and costs

1. The Bank is entitled to judgment against Mrs Musumeci under the guarantee she gave together with interest calculated in accordance with the guarantee. It is also entitled to an order for indemnity costs against Mrs Musumeci, again in accordance with the terms of the guarantee. The Bank is also entitled to damages against Mrs Musumeci in the tort of deceit. However, those damages are less than the amount recoverable under the guarantee, and plainly the Bank is not entitled to both amounts. The cross-claim brought by Mrs Musumeci should be dismissed.
2. In addition, the Bank is entitled to proprietary relief against the properties owned by Mrs Musumeci in Strathfield and Bossley Park. It will be necessary for the Bank to elect between a charge securing the amount it advanced or a declaration that part of the property is held on trust for the Bank in the proportion that the amount advanced bears to the value of the property. It will also be necessary to hear further submissions on whether the Bank is entitled to proprietary relief in respect of the property in Haberfield that is owned by Mrs Musumeci and Giuseppe Musumeci as joint tenants.
3. The Bank is entitled to proprietary relief against each of Cheeky Farms, MPI and CAO and to orders that they pay equitable compensation. As to Cheeky Farms and MPI, again the Bank will need to elect between the relief it seeks. As to CAO, the Bank seeks and there is no reason why a declaration should not be made to the effect that CAO holds its 80 percent interest in the Stand on trust for the Bank.
4. The Bank also seeks a declaration that Sentox holds its 20 percent interest in the Stand on trust for the Bank. The Bank may well be entitled to that relief, but that declaration could not be made unless the Bank was given leave to proceed against Sentox and the liquidator was given an opportunity to be heard on that application.
5. The Bank seeks to delay the election it is required to make in relation to the property owned by Cheeky Farms and MPI until that property is sold by the receivers appointed to those companies, since the relief it seeks may be affected by the surplus that is available from the sale of those properties after the holders of prior ranking securities have been paid. During the hearing, I indicated that I would be prepared to give the Bank a reasonable time in which to make its election once judgment was given, but that it could not postpone its election indefinitely.
6. The Bank also seeks its costs against the Musumeci Defendants (other than Mrs Musumeci, who is liable to pay costs on an indemnity basis under her guarantee) on an indemnity basis. In my opinion, an order for indemnity costs is not warranted in this case. An order for indemnity costs is not made to punish a fraudster for their fraud. Rather, relevantly it is made as a sanction against a party because of the way in which the party has conducted the proceedings, such as where a party maintains an unarguable case or conducts the proceedings in a way that causes unreasonable delay and expense: Chaina v Alvaro Homes Pty Ltd [2008] NSWCA 353 at [111]-[113]; Ng v Chong [2010] NSWSC 127 at [19], [20]; Sewell v Zelden (No 2) [2010] NSWSC 1181 at [53]; Wentworth v Rogers [1999] NSWCA 403 at [85].
7. In the present case, leaving Mrs Musumeci aside, the Musumeci Defendants did not seek to defend the case at the hearing, and the hearing was conducted efficiently. It is true that the Musumeci Defendants did defend the case until shortly before the hearing. However, much of the work done by the Bank before the hearing related to its proprietary claims and its claims against Mrs Musumeci. The work in relation to the proprietary claims (and, in particular the work done in relation to tracing) would have been necessary in any event. A substantial part of the lay evidence led by the Bank related to the claim against Mrs Musumeci, who is already liable to pay costs on an indemnity basis. In my opinion, no further order for indemnity costs is warranted.
8. The Bank is also entitled to judgment against Mrs El-Ahmad in the tort of deceit. However, as I have explained, consistently with its pleaded case, it is only entitled to damages from the beginning of 2016 - that is, it is only entitled to recover amounts it advanced under the IDF from the beginning of 2016 together with interest on those amounts at Court rates. That amount will need to be calculated.
9. The Bank also seeks an order for costs against Mrs El-Ahmad on an indemnity basis. At the conclusion of the hearing, Mr Baron-Levi indicated that his client wished to be heard on costs. I should give her that opportunity.
10. The Bank seeks a number of other declarations relating to the defendants' conduct. Some of those declarations could be made now. However, there is no particular advantage in making those declarations in advance of the other orders to be made in the case.
11. Accordingly, the only orders I make today are to: 1. Direct that by 4.00 pm on 17 July 2024 the parties serve and provide to my Associate draft short minutes of order setting out the orders they seek together with a brief outline of submissions (to the extent necessary) in support of those orders; 2. Stand the matter over to 23 July 2024 or such other date as is fixed with my Associate to deal with any remaining issues in relation to the orders that should be made consistently with these reasons for judgment.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 June 2024