The discovery that a formerly trusted employee has been defrauding their employer throws up a lot of questions. How could this have happened? Do I have to involve the police? And sometimes most importantly, am I ever going to see the stolen money again?
Freeze a jolly bad fellow (allegedly)
The answer to the third question often depends upon taking swift legal action, including an application for “freezing orders” – that is, orders preventing the fraudster from disposing of the ill-gotten gains by “freezing” the fraudster’s assets. Freezing orders are not granted automatically, but a recent decision in the Supreme Court of New South Wales has indicated that in cases of employee fraud, freezing orders will be granted “almost for the asking”.
The Court identified two important reasons why the orders were appropriate in employee fraud cases, namely:
“A person who steals money would be irrational if they did not try to hide it”
“in the majority of [employee fraud] cases what has been misappropriated is liquid money. That is the easiest form of asset to hide”.
In the recent case, the employer alleged that the former employee had fraudulently paid to himself amounts for allowances, a bonus, and the payment of “double salary”. The employer also claimed to be entitled to repayment of a payment in lieu of notice, and sought to freeze monies to provide security for the employer’s legal costs. The original orders provided for an amount of up to $500,000 to be frozen.
The former employee sought the variation of the orders to allow him to pay amounts of living expenses, and to provide him with a larger entitlement to pay legal fees than was permitted under the original orders. The Court identified approximately $190,000 of payments which the Court regarded as being “most questionable”, and decided that reducing the amount of the order to $250,000, on the basis that this would provide the employee with additional funds to be put towards legal and living expenses whilst still providing the former employer with certainty that a significant sum would be preserved to satisfy any judgment.
It is also worth noting that freezing orders will be granted more readily where there is evidence that assets (especially liquid money) will be taken out of Australia. In this case, the former employer sought to argue that because the employee was on a 457 visa, the employee would need to leave the country unless he obtained new employment. However, that argument didn’t find much favour with the Court, because it was the employer which had terminated the contract of employment. As a result, said the Court, the employer had “precipitated” the risk of which the employer complained (namely, that the former employee may need to leave the country).
Access to the funds – but whose funds are they?
A second recent case involved a solicitor who had allegedly defrauded a client of the firm which had previously employed the solicitor. In that case, the original freezing orders permitted the solicitor to use funds from a frozen account for living expenses and to fund his legal fees. However, as the amounts which had allegedly been defrauded dwarfed the funds to which the solicitor could lay legitimate claim, the consequence was that the solicitor was, in effect, spending the allegedly stolen funds to defend himself against a claim to recover the allegedly stolen funds. The Court said that this involved allowing the former solicitor to access money:
“to which he has no legal or moral right to enable him to spend it on his own living expenses and on private representation of his choice”.
As a result, the orders were varied to prevent the former solicitor having any access to the funds at all (which also meant that the solicitor’s legal team no longer had to confront the thorny issue of whether by receiving fees, the legal team was also involved in a breach of trust, making the legal team liable to return their fees to the allegedly defrauded plaintiff).
Employee fraud cases are not the only cases in which freezing orders are are available, but they provide an increasingly common example of cases in which freezing orders will be made. These cases make it clear that when an employee’s fraud is discovered, an employer who moves swiftly can expect equally swift assistance from the courts. The employee may have looted the storehouse, but if the employer moves quickly, the employee may not be able to see the loot for the freeze.
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