Fraud and Freezing Orders

Introduction

Corporate fraud, among both employees and company directors, continues to be an expensive issue in Australia. Regarding occupational fraud – fraud committed by individuals against the company which employs them or of which they are director – the majority of the fraud is committed at the employee or managerial level. Fraud at the executive and director levels constitutes a smaller percentage of the total fraudulent events suffered by businesses but has a higher median financial cost.^[1]

Dealing with fraud is vital, but often challenging. Turning to the courts for relief is one way of recovering one’s losses, but certain risks arise when dealing with dishonest or unscrupulous opponents who are likely to sell or dispose of assets to avoid paying a potential judgment debt.

Freezing orders

A critical tool in the arsenal of victims of fraud is the ability to apply for a freezing order. The approach taken by courts regarding the imposition of freezing orders in cases involving fraud, which we discuss below, means that victims of fraud should not hesitate to consider applying for a freezing order when trying to recover improperly or fraudulently obtained funds.

The requirements for a freezing order

When applying for a freezing order, the applicant is required to prove that:

• it has a good arguable case in their cause of action; and
• there is a danger that a judgment debt or prospective judgment debt will go unsatisfied due to the debtor fleeing the jurisdiction or disposing of assets in some way.

These requirements place the onus on the plaintiff to present sufficient evidence to prove their case. When arguing that a plaintiff has grounds to believe that there is danger to assets, that danger needs to be real and cannot be based on mere suspicion – a legitimate risk of dissipation needs to be established.

Applicable principles

Freezing orders are not intended to be readily available to plaintiffs who are merely concerned that a defendant will be unable to satisfy a judgment debt. They have the specific purpose of preventing the abuse or frustration of the processes of the Court by preventing a defendant from disposing of assets so as to deprive a plaintiff of the fruits of any judgment obtained: Jackson v Stirling Industries Ltd (1987) 162 CLR 612, 625.

Similarly, the purpose of a freezing order is to preserve the status quo, not change it in favour of the plaintiff, and only prevent expenditure by the defendant that is not legitimate, having regard to ensuring there is no dissipation of assets. In that respect, a high degree of caution is required before making a freezing order: Cardile v LED Builders Pty Ltd (1999) CLR 380, 403.

Freezing orders can never operate to prevent a defendant from accessing its own assets to meet legitimate expenses such as ordinary living, business, and legal expenses. In that sense, the sole function of a freezing order is to ensure processes of the Court are not frustrated by removal from the jurisdiction, dissipation, or misapplication of assets which will be available to meet any eventual judgment: Goumas v McIntosh [2002] NSWSC 713 at [23].

Good arguable case

In assessing whether a plaintiff has a good, arguable case against the defendant, they are required to demonstrate that the case is more than barely capable of serious argument, though not necessarily requiring a better than fifty per cent chance of success: Lambros v Urbanlux Homes Pty Ltd (in liq) [2021] NSWSC 1615 at [39].

Danger of judgment or potential judgment going unsatisfied due to debtor absconding or otherwise removing assets

In assessing the danger of a defendant dissipating its assets to evade a potential judgment debt, the court is to make an assessment having regard to the following factors:

• whether the defendant, by attempting to put their assets out of reach, is seeking to frustrate the court’s power to grant an effective remedy: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319, 331.
• whether the plaintiff has established a real danger that by reason of the defendant absconding or removing assets of the jurisdiction or disposing assets within the jurisdiction, the plaintiff will not be able to have the judgment satisfied if successful in the proceedings: Frigo v Culhaci [1998] NSWCA 88 at [16].
• whether the plaintiff has established on a reasonably arguable case on legal and factual matters that there is evidence of such an intention by the defendant: Cardile v LED Builders Pty Ltd (1999) CLR 380, 408.
• whether there are any discretionary factors the Court should take into account, such as (but not limited to) whether:
  1. the applicant has proceeded diligently and expeditiously; or
  2. a money judgment has been recovered.

• proceedings are available against a third party that have not been commenced: Re HPack Investments Pty Ltd [2020] NSWSC 1638 at [45].

Freezing orders in fraud cases

The judge in any matter has discretion as to whether to grant a freezing order. However, in cases concerning fraud, courts have developed a legal doctrine which operates to the benefit of applicants who have been the victims of fraud.

Where a plaintiff has established, or has a good arguable case for, fraud on the part of the defendant, the court will consider this sufficient evidence to establish a legitimate danger of the defendant dissipating its assets to evade a potential judgment debt.

This doctrine was first outlined in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 (Patterson) where it was held that “where a defendant was there alleged to have fraudulently misappropriated a large amount of money, comprising the bulk of his or her assets, and the evidence was consistent with such an allegation, then it may be reasonable for the court to infer that “he is not the sort of person who would, unless restrained, preserve his assets intact so that they might be available to his judgment creditor.”

Where typically an applicant needs to adduce evidence of a defendant’s intention to dissipate assets, in cases of fraud the court may be prepared to accept that such a defendant is inherently likely to evade potential judgment – even without additional evidence of an intention to hide assets.

Recent application of the doctrine

This doctrine was recently applied in the 2022 case of Guildford Montessori Kindergarten Pty Ltd v Wehbe [2022] NSWSC 1560. The Supreme Court upheld a freezing order restricting the defendants in that case from dealing with their assets up to the amount of the claim, being $7.1 million, on the basis that previous fraudulent conduct was sufficient evidence to establish a future risk of dissipation of assets. The Court held that, “the conclusion that there is a good arguable case that Remy [a defendant] has misappropriated large sums of money itself provides a strong ground for believing that there is a real danger that the defendants will seek to dispose of their assets unless restrained.”

Despite not having any additional evidence of Remy’s intention to dispose of the money, his past conduct in misappropriating funds was sufficient to justify the imposition of a freezing order.

Key takeaways

Despite the fact that freezing orders constitute a serious imposition on a defendant’s right to do with their own assets what they please, in circumstances of fraud, courts have demonstrated a ‘common sense’ approach.

Despite being traditionally reluctant to impose freezing orders unless there is clear, tangible evidence of an attempt to dispose of assets, in circumstances of fraud courts are willing to accept, without further evidence, that a fraudster who has obtained funds by dishonest means is likely to attempt to dissipate those funds to thwart any attempts at recovery.

By lowering the requirement to prove additional evidence of dissipation in respect of fraudsters, courts have enabled freezing orders to become a powerful tool for plaintiffs involved in these types of matters.

Queries

If you have any questions about this article, please get in touch with an author or any member of our Litigation & Dispute Resolution team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

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[1] M. Le Marchant, ‘Occupational Fraud in all sizes,’ Bishop Collins Chartered Accountants (2 September 2020)