The repayment agreement between Lakemba's Rissalah College and the NSW Education Department also states the school would lose all future funding if it ever employed, contracted or paid its former long-time principal, Ali Roude, or members of his family.

Mr Roude, an Order of Australia medallist, his wife Susan and his sister Nada, were sued by the 430-student primary school for allegedly benefiting from large unauthorised transactions.

The Roudes, who strongly denied the allegations, agreed to pay the school $300,000 as part of a separate 2015 settlement, without admitting fault.

Staff have previously complained of a severe lack of money in the school. One former senior teacher said in 2015 that staff had been forced to cut used stamps from old envelopes for reuse.

After a four-year legal battle, the NSW Civil and Administrative Tribunal declared in July the school's future funding would be conditional on improved governance and paid on a month-to-month basis.

An Islamic community leader, Mr Roude, told Fairfax Media he had done nothing wrong and the school had been cleared by six audits.

"It's a case of injustice," Mr Roude said. "But because we are locked up with the deed of settlement, I can't make any further comment on the case."

Mr Roude was the principal between 2007 and 2013, the period in which the school was found to be in breach of the Education Act. The Act makes it illegal for the NSW government to provide public funding to a school operating for profit.

The school has also been referred to the NSW Education Standards Authority, the Australian Taxation Office and the Australian Charities and Not-for-Profits Commission for investigation.

The July agreement states that Rissalah will miss out on 40 per cent of its state funding each year, roughly $567,000, until the $4.3 million is repaid.

Principal Naslie Styer, the fourth head of the school in four years, did not respond to written questions, including how the funding cut would affect students or whether parents had been formally notified.

The tribunal ordered that "future financial assistance is conditional upon the school board communicating with parents and the school community on the outcome of the investigation and the sanctions applied".

Almost all Rissalah's students come from non-English speaking backgrounds. It receives more than $6 million a year in federal and state taxpayer funding, up to 80 per cent of its annual budget.

The school charges students $2600 a year in tuition fees. It owns more than $8 million in real estate and despite litigation costs last year advertised for a project manager to help a transition towards a K-12 program.

Samih Zreika, a director of Rissalah College since 2000, said the tribunal settlement was "really unfair" and had been accepted against his own wishes.

"The management is very weak," he said.

Mr Zreika defended Mr Roude as having done "everything for the benefit of the school, to grow it up".

Mr Roude's wife, Susan, was employed as a school administrator and his sister Nada as head of community strategy. His niece, Roukaya Dannoun, another Rissalah employee who allegedly received an unauthorised payment, settled with the school along with the Roudes on a no-admissions basis.

In 2013, Rissalah became the first of seven Islamic schools to have its funding frozen after claims of financial mismanagement. Respected former PLC principal Bill McKeith began work on an "emergency repositioning" and funding was restored the following year.

Ali Roude, pictured leaving his home, was principal of the school in the years when it was found to be operating for profit. Photo: Ben Rushton

Mr Roude, who lives in a five-bedroom, five-garage stone home in Greenacre, with a letter R painted on top of its wrought-iron gates, had his contract terminated in June 2013.

But two years later, and just months after the $300,000 settlement, the board sought legal advice on a plan to allow Mr Roude to return, in a newly created chief executive role. Lawyers for the school strongly advised the board not to pursue the move.

Mr Roude remains deputy chairman of the Islamic Council of NSW, which has received hundreds of thousands of dollars in public funding per year.

He is also chairman of the Voice of Islam radio station, which broadcasts recitations of the Koran, Friday sermons, talk shows, and trivia from the Lakemba premises it rents from Rissalah.

The NSW Department of Education warned Rissalah in 2014 against selling the property to the radio station, arguing the sale would not be "at arm's length" given they shared directors.

A spokesman for the department said the NSW Minister for Education, Rob Stokes, was considering next steps in regards to the school.