Westpac Banking Corporation v Sentox Pty Ltd (No 3)

I delivered reasons for judgment in this matter on 27 June 2024: Westpac Banking Corporation v Sentox Pty Ltd (No 2) [2024] NSWSC 783. At that time, I invited the parties to make submissions on the form of orders I should make consistently with those reasons. This judgment is concerned with those orders. It assumes familiarity with my earlier judgment and uses the same abbreviations as used in that judgment.

The parties’ submissions were made primarily by reference to the orders proposed by the Bank. I have started with those orders and deal in this judgment with the orders that are not agreed.

The Bank seeks leave to proceed against Sentox and Cheeky Farms (proposed orders 1 and 6) under s 471B of the Corporations Act 2001 (Cth). Leave is required because both companies are now in receivership.

On the findings I made, Sentox holds its 20 percent interest in a share in Sydney Markets on trust for the Bank because that share was acquired using funds obtained by fraud from the Bank. Also, on the findings I made, the Bank is entitled to a declaration that Cheeky Farms holds certain chattels on trust for the Bank because those chattels were acquired using funds of the Bank that were also obtained by fraud. It is usual to grant leave under s 471B to permit a plaintiff to pursue a proprietary claim, since claims of that type cannot be accommodated by the usual proof of debt process: see, for example, Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 per Barrett J at [40]. Leave is not opposed by the receivers or any other party. Accordingly, leave should be granted.

The Bank seeks judgment against Mrs Musumeci in the following terms:

The Bank seeks judgment in those terms to cater for the possibility that Mrs Musumeci is bankrupted, since her bankruptcy will not affect the Bank’s ability later to pursue a judgment in its favour based on the tort of deceit: see Bankruptcy Act 1966 (Cth), s 153(2)(b). In the Bank’s submission it is desirable for the Court to make it clear now how much of the judgment amount falls within the exception created by s 153(2)(b). On the other hand, Mrs Musumeci objects to judgment in those terms on the basis that judgment should not be given for different amounts.

I accept that judgment cannot be given for different amounts. However, I can see no reason why the Court should not make a declaration concerning the amount the Bank is entitled to recover relying on the tort of deceit. Such a declaration has utility, since it avoids disputes in the future concerning the amount that falls within the exception created by s 153(2)(b) of the Bankruptcy Act. Neither the Bank nor Mrs Musumeci objected to that course. Accordingly, order 2 should be replaced by the following orders:

The Bank seeks judgment against Mrs El-Ahmad in the amount of $10,782,116.44.

In my earlier judgment, I found that Mrs El-Ahmad was guilty of the tort of deceit because she knowingly uploaded false invoices to the Bank’s electronic system intending the Bank to advance funds by reference to those false invoices (Judgment at [117], [118]). I also said (at [119]):

Mrs El-Ahmad submits that properly understood my judgment amounted to a finding that she was only liable in the tort of deceit in respect of the invoices she uploaded. There was no finding that she uploaded all the invoices from 2016, and the Bank did not prove which invoices Mrs El-Ahmad did upload. Consequently, in her submission the Bank has failed to prove the amount of its loss, with the result that it is not entitled to judgment for any amount.

I do not accept that submission. I found that Mrs El-Ahmad knew that the invoices she uploaded were false. Although not expressly stated in paragraph [119] of my judgment, it is implicit in that paragraph that I accepted the Bank’s submission that if it had known of Mrs El-Ahmad’s deceit it would not have advanced any money from 2016. It follows that on the findings I made, Mrs El‑Ahmad was liable for all the Bank’s losses after that time even if she was not the only person to have submitted false invoices to the Bank. On a fair reading, my judgment could not be understood as holding that Mrs El-Ahmad was only liable for the invoices she uploaded.

There is no suggestion that the Bank has miscalculated the damages to which it is entitled on that basis. Accordingly, the Bank is entitled to judgment against Mrs El-Ahmad in the amount that it claims.

The Bank seeks declarations that it has an equitable charge over properties owned by Mrs Musumeci in Strathfield and Bossley Park and a property owned by Mrs Musumeci and Mr Giuseppe Musumeci as joint tenants in Haberfield (where Mr Giuseppe Musumeci lives) on the basis that money it advanced as a consequence of Mrs Musumeci’s fraud was used to pay principal and interest on mortgages over those properties.

In my earlier judgment, I observed that no claim was made by the Bank against Mr Giuseppe Musumeci, that he was only joined because the orders the Bank did seek would affect him, that he did not participate in the hearing and that consequently, he should be given an opportunity to make submissions on the question whether the declaration sought in relation to the Haberfield property should be made before making that order. He did appear (by counsel) at the hearing on 4 December 2024 to resist the declaration. In doing so, he adopted the arguments of Mrs Musumeci, which are dealt with below.

Mr Giuseppe Musumeci also submitted that any declaration should be limited to Mrs Musumeci’s interest in the Haberfield property. However, it was pointed out during the hearing that such an order would not necessarily prevent the Bank from applying for an order for the appointment of trustees for the sale of the Haberfield property under s 66G of the Conveyancing Act 1919 (NSW). The orders proposed by the Bank sought a declaration that the Bank holds an equitable lien over the whole of the property. However, those orders sought to protect Mr Giuseppe Musumeci’s position by providing for a stay of the order by which the declaration is made until he vacates the property or dies. However, Mr Giuseppe Musumeci did not agree with that order and in written submissions filed after the hearing he pressed for an order that confined the declaration to Mrs Musumeci’s interest, assuming any declaration was made.

Mrs Musumeci submitted that my earlier judgment left open the question whether any of the declarations in relation to the three properties should be made. In the alternative, she sought leave to reopen my earlier judgment to argue that the declarations should not be made. During the hearing, I indicated that I was inclined to accede to Mrs Musumeci’s request to reopen my judgment if that was necessary. The points that Mrs Musumeci wished to advance were not raised at the hearing of the matter or dealt with in my judgment. More significantly, consistently with my earlier judgment, they were points that Mr Giuseppe Musumeci was entitled to raise, and it would be unsatisfactory for the Bank’s entitlements against Mrs Musumeci to be resolved on a different basis from its entitlements against Mr Giuseppe Musumeci. Accordingly, the hearing proceeded on the basis that it was open to Mrs Musumeci to challenge the declarations sought by the Bank.

Mrs Musumeci submitted that there were only two bases on which the Bank was entitled to the declarations it sought. The first was if the Bank could trace the amount it claimed into the three properties in question. The second was if the Bank could establish that it was entitled to be subrogated to the mortgagees’ rights. In her submission, neither argument was available to the Bank in this case.

As to tracing, Mrs Musumeci accepts that the Bank is entitled to trace the money it advanced into each of the three properties to the extent that the money was used to pay off the principal owing on the mortgage over that property, but she submitted that it was not entitled to trace into the property money that was simply used to pay interest on the mortgage. The only evidence in relation to tracing did not distinguish between amounts used to pay principal and amounts used to pay interest. It followed, according to Mrs Musumeci, that the Bank had failed to prove that any money it advanced could be traced into the properties.

The principal case relied on by Mrs Musumeci is the decision of the Court of Appeal in Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 (Heperu). In that case, a fraudster deposited cheques given to him by the appellant into an account controlled by him but in his wife’s name and then used the funds to make mortgage repayments on properties owned by his wife. One question in the case was whether the appellant had a proprietary claim against the properties owned by the wife. The leading judgment was given by Allsop P, with whom Campbell JA and Handley AJA agreed. After a detailed review of the relevant authorities, his Honour pointed out that the appellant had remedies both at law and in equity against the wife but only to the extent that it could prove that the misappropriated funds could be traced into assets held by her. In identifying the traceable assets, it was necessary to “focus upon the value properly attributable to the earlier receipts derived from misappropriations and still retained by the volunteer at the relevant time. The proper approach to the assessment of this and its relationship to the funds received would be a matter for assessment” (at [157]). Allsop P earlier observed (at [123]) that in carrying out that assessment:

Moreover, further borrowings on the security of the properties may have reduced or eliminated any equity, with the result that the mortgage payments could not be traced to anything of value held by the wife. As Allsop P said (at [156]):

The Court of Appeal had not heard argument on some of the issues raised in Allsop P’s judgment. Accordingly, the matter was adjourned for a month to give the appellant an opportunity to consider if “it can be demonstrated, with precision, that some benefit in a traceable interest in the properties can be shown at the relevant time to found a personal claim”, in which case the matter would be remitted to the Equity Division for assessment: at [170].

As to subrogation, Mrs Musumeci accepts that the Bank may be entitled to be subrogated to the mortgagees’ rights under the relevant mortgages to the extent that the Mrs Musumeci’s obligations under those mortgages have been discharged. That concession was consistent with the following statement of Allsop P in Heperu at [135]:

There is some force in Mrs Musumeci’s submission that subrogation is not available unless the misappropriated funds are used to discharge the mortgage. Moreover, it is difficult to see how it could justify a declaration that the Bank has equitable charges over Mrs Musumeci’s properties. The nature of the right to subrogation is that it permits one person to stand in the shoes of another because that person has paid an amount that the other is entitled to receive or recover from a third party (in this case, the mortgagor). Consequently, it is on payment of the amount due under the mortgage that the person making the payment is entitled to stand in the shoes of the mortgagee. That is quite a different circumstance from a declaration concerning the existence of an equitable charge. It is true as Black J points out in Angus Carnegie Gordon in his capacity as liquidator of Lyon Form Pty Ltd (in liq) & Anor v Leon Plant Hire Pty Ltd (in liq) & Ors [2015] NSWSC 397 at [68], that there is authority in support of the proposition that subrogation is available even where the payment only partially discharges the mortgage: see Raulfs v Fishy Bite Pty Ltd [2008] NSWSC 1195 at [28]ff and the cases cited there. However, it is not necessary to consider this issue further, since I have concluded that the Bank is entitled to the relief it seeks irrespective of any right of subrogation.

In my opinion, the present case is distinguishable from Heperu. That case was concerned with the right to trace and to follow misappropriated funds into property owned by an innocent volunteer. In the present case, the Bank seeks proprietary relief against the person guilty of the fraud to the extent that the misappropriated funds were used to maintain property belonging to the fraudster (Mrs Musumeci). The rights against an innocent volunteer only arise when the volunteer is made aware that he or she has received property obtained by fraud. It is at that point that the volunteer becomes under an obligation to return whatever remains of the assets or their traceable proceeds. If the property consists of funds that have been used to improve or to maintain real property, a question arises concerning what remains of those funds given, for example, that the property may have decreased in value between the time the funds were received and the time the volunteer became aware of the fraud. Allsop P should not be understood as saying in Heperu that interest payments could not be traced into the property. Rather, the point that his Honour was making was that by the time the volunteer became under an obligation to return what remained of the misappropriated funds, it could not be said that anything remained of the funds without a detailed enquiry into what had happened to the value of the volunteer’s interest in the property following the payment.

No such issue arises in tracing funds in the hands of the fraudster. The funds are impressed with a trust and the fraudster is bound to return them from the moment they were misappropriated: Blackman v S Freedman & Co (1910) 12 CLR 105; [1910] HCA 58, per O’Connor J at 110; Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426; [1912] HCA 67 at 432; Robb Evans v European Bank Limited [2004] NSWCA 82 at [111] per Spigelman CJ; Sze Tu v Lowe [2014] NSWCA 462 at [141] per Gleeson JA (with whom Meagher and Barrett JJA agreed) . If they are used to pay interest on a mortgage, the fraudster obtains the immediate benefit of the payment in terms of discharging an obligation under the mortgage and in doing so preserving the equity of redemption in the property. There is no reason why the value of that benefit should not be treated as the amount of the payment. And since the payment was impressed with a trust, the true owner of the funds is entitled to an equitable lien to secure repayment of the amount paid.

As to Mr Giuseppe Musumeci, in my opinion, no order should be made in relation to his interest in the property. As he points out, a charge can be created over the interest of one joint tenant in respect of property owned by a number of joint tenants: see, for example, Andrews v Wilcox [2008] NSWSC 280; Allen Taylor & Co Pty Ltd t/as Boral Timber and Ors v Norman Leslie Harrison [2010] NSWSC 1021 at [32]-[34]. The Bank did not advance a case against Mr Giuseppe Musumeci. Consequently, it would not be appropriate to give any relief against him. Instead, the order proposed by Mr Giuseppe Musumeci should be made.

Mr Giuseppe Musumeci submitted that the Court should still stay the order in respect of the Haberfield property until he vacates the property or dies. However, I can see no reason for staying an order that does not concern his interest in the property. No stay would be granted if Mrs Musumeci had freely granted security in her interest in the property. The position should not be any different because the Bank’s interest arises as a consequence of her fraud.

The Bank seeks the following order:

Mrs Musumeci did not object to a continuation of the asset preservation orders made by the Court on 6 October 2021 and extended on 12 November 2024. However, she submitted that the orders should have an end date and proposed the date on which the limitation period in respect of the enforcement of the judgment debts arising from this judgment expire – that is, 12 years from the date judgment is pronounced: see Limitation Act 1969 (NSW), s 17. The Bank did not object to that proposal.

Accordingly, para 21 of the Bank’s orders should be amended so that it reads:

Taking these matters into account, the Court makes orders in terms of Annexure A to this judgment.