Ross McNaughton, the general manager of NAB’s strategic business services, which deals with troubled loans,  said NAB had only come to realise the Goanna Downs property did not directly secure the business debts of National Music when it was preparing for the royal commission appearance.

Mr Hodge asked Mr McNaughton: “You now understand that NAB had no lawful entitlement to insist on the full proceeds of Goanna Downs being used to pay down the debts of National Music?”

“That’s correct,” Mr McNaughton replied.

Mr Hodge then took Mr McNaughton to emails suggesting NAB had told Mr Dillon he needed to pay down the business debt with the proceeds of the sale of his home.

In response, Mr McNaughton defended the bank's conduct by saying  the Goanna Downs property was still held as "direct" security for the liabilities of Mr Dillon, who had given a personal guarantee over the business loan.

He said the loans to National Music had only been made available because they were supported by Mr Dillon's guarantee, and backed by the charge over the property.

But he also agreed that in 2015, Mr Dillon had no personal liability under the guarantee.

Mr McNaughton conceded it was "not ideal" that Mr Dillon had been shocked when the bank wanted to take the proceeds of the sale. He said the bank "could have been clearer" in explaining its position to Mr Dillon before the house was sold.

Earlier, NAB's barrister, Wendy Harris, QC, sought to discredit Mr Dillon's evidence by questioning his memory.

Mr Dillon said he planned to use a portion of the sale proceeds to buy a home in Melbourne, and he had been given an assurance this would be acceptable by NAB banker Shaun Basset.

But Mr Harris argued there was no record of this in any documents, and Mr Basset also told the commission he would not have given such an assurance.

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'Highly unlikely'

Ms Harris put it to Mr Dillon that there was nothing in the bank’s evidence that it had given Mr Dillon any assurance about the sales proceeds, and it would be “highly unlikely” to have done so.

"Do you accept that the absence of that important detail from Mr Basset's near contemporaneous note may be a more reliable indicator as to whether or not that assurance was given than your unassisted recollection?" she asked.

"No, I don't accept that," Mr Dillon replied.

Later, Ms Harris produced emails between the bank and Mr Dillon's solicitor that suggested Mr Dillon would invest the proceeds of the sale of Goanna Downs in financial investments. These did not mention the purchase of a property.

"With the passage of time, is it possible that you are mistaken in what you say you told Mr Basset about needing the proceeds of sale to buy another property?" she asked.

Mr Dillon replied: “No, it is simply not possible.”

The hearing continues.