Victim of fraud? How a Freezing Order can maximise your chance of recovering stolen funds

In the past decade, Australian businesses have lost hundreds of millions of dollars to employee fraud, most often through false invoicing and electronic funds transfers.

In such cases, a Freezing Order can be used to protect an organisation’s prospects of recovering stolen money.

What is a Freezing Order?

A Freezing Order, also known as Mareva Order, can prevent a fraudster from reducing the value of assets to avoid having to pay a judgment against them. It is a good way to reduce the chances of them disposing of their ill-gotten gains.

When to apply for a Freezing Order

An interim Freezing Order can be applied for on an urgent basis without the need for the defendant to appear before the Court or even be notified of the action.

What are the requirements for an application?

An applicant for a Freezing Order must:

• Prove that judgment has been given in their favour or that they have a good arguable case. A ‘good arguable case’ is one that ‘is more than barely capable of serious argument, and yet not necessarily one which the judge believes would have a better than 50 per cent chance of success’.

• Prove there is danger that a judgment may not be satisfied because the (prospective) debtor is going to abscond, remove or dispose of the assets or diminish their value.

• Where an application is brought against a third party, prove that there is a danger that any judgment will be wholly or partly unsatisfied because the third party:

  • holds or is exercising a power of disposition over the assets of the fraudster

  • is in possession of or has control or influence over the assets of the fraudster

  • may be obliged to disgorge assets or contribute towards satisfying any judgment at a later time.

• Address discretionary considerations; for example, show that the applicant has acted expeditiously and without delay.

• Provide an undertaking to the Court to submit to any order the Court may make regarding the payment of compensation to any person affected by the operation of the Freezing Order.

• If the application is brought in the absence of the defendant, make full disclosure of all material facts.

Form of orders

When formulating the proposed orders, the value of the assets restrained should usually not exceed the maximum amount of the likely claim. The proposed orders should also exclude legitimate dealings by the defendant, such as payment of ordinary living expenses and reasonable legal expenses.

Ancillary orders

The Court may also make ancillary orders, for example:

• Orders to disclose the nature and value of assets.

• Orders for the delivery of assets.

• Orders restraining the respondent from leaving the jurisdiction.

Recent cases

• Guildford Montessori Kindergarten Pty Ltd v Wehbe [2022] NSWSC 1560. Here, the Supreme Court of New South Wales granted Interim Freezing Orders against the CEO and financial controller of a family business and his wife in a matter involving $7.1 million. The Court was satisfied there was a good arguable case that the money was misappropriated and that this was a strong ground for believing the defendants would likely seek to dispose of their assets unless restrained.

• Concept Commercial Interiors Pty Ltd v Baxter [2022] FCA 1388. The Federal Court of Australia made an Interim Freezing Order on an ex parte basis in a matter involving $1.2 million. The Court ruled there was a prima facie case against the director of the company for insolvent trading and that there may be a risk of dissipation of assets if a Freezing Order was not made.

• Creative Promotions Pty Ltd v Wu [2022] FCA 1150. The Federal Court of Australia granted a small family-owned business Interim Freezing Orders on an ex parte basis against an employee in relation to an alleged fraud of $2.5 million. The Court ruled there was a prima facie case for relief; there was a danger that the prospective judgment would be wholly or partly unsatisfied because the assets of the prospective judgment creditor may be disposed of, dealt with or diminished in value; and that the balance of convenience favoured the granting of the orders.

Conclusion

If an organisation becomes the victim of employee or contractor fraud, it is imperative to obtain immediate legal advice regarding a Freezing Order. A successful application can see assets preserved so that any future judgment can be satisfied.

If you require help, please contact Jennifer Shaw or any of our Organisational Fraud, Corruption and Investigations team.

Author: Jennifer Shaw