Plaintiff v Defendant

2 The application previously came before Bell J in the Practice Court on 22 December. In his reasons for judgment[1] on the next day, 23 December, his Honour set out the background matters to the case and stated his reasons for then adjourning the application made by the defendants, namely, to enable the defendants to file further affidavit material in respect of two matters identified by his Honour.

3 I can briefly, therefore, state the background to the matter.

4 By originating motion dated 14 June 2011, the plaintiff, the Deputy Commissioner of Taxation, sought freezing orders under order 37A of the Rules of the Supreme Court in respect of the assets of the first defendant, Mr Tom Karas, and three related companies. It was alleged by the plaintiff that the first defendant and his companies had significantly under declared income for the purposes of their income tax returns.

5 On 15 June 2011, and subsequently on 28 June, Davies J made interim freezing orders. On 28 July, Her Honour made a final freezing order. Those orders prevented the defendants from disposing of or dealing with their assets. The orders contained the usual provision permitting the defendants to use their assets to pay reasonable legal fees.

6 On 1 December Associate Justice Zammit gave summary judgment for the plaintiff against the first defendant, Mr Karas, and the sum of $47,147,983.

7 As I have foreshadowed, in the present application, the defendants seek to be permitted to enter into a loan agreement, and, for that purpose, to execute a mortgage over a property owned by the first defendant at 164 Napier Street, Fitzroy, in order to enable funds to be obtained to pay their legal fees. Those fees are set out in some detail in the affidavit of the defendant's solicitor, Ms Louise Attwood, of 13 December 2011. Principally, the legal costs relate to allied proceedings in the Federal Court, which have been taken by the defendants in order to challenge the assessments of income tax made by the plaintiff. It is proposed to borrow the sum of $250,000 from Mr Nick Meletsis who is, as I understand it, the brotherinlaw of Mr Karas.

8 As I stated, Bell J heard the matter and gave judgment on 23 December. His Honour noted that while a large number of issues were raised in relation to the application made by the defendants, the commissioner, in the end, conceded that there were two particular issues of significance which required some focus. The first issue was the destination of the amounts of $525,000 and $1,388,000, which, before the freezing orders had been made, were deposited in the ANZ Bank account of Capital One on 15 March and 1 April 2011, and later withdrawn. The second matter, with which his Honour was concerned, was the destination of income of the second defendant, Capital One, from its money lending business. His Honour noted that that company is a shortterm money lender and the interest payable on amounts of that magnitude, whether singly or making up that total, would be expected to be large.

9 Bell J considered that both of the matters, referred to by the plaintiff, were relevant to the question whether the court should accede to the defendants' application, because, in the absence of any appropriate explanation, the court would not be satisfied that it would be necessary to encumber the Napier Street property to produce funds for the purposes of the legal fees required by the defendants to fund their litigation in the Federal Court.

10 It was for that reason that his Honour expressly adjourned the matter, and it has now come before me.

11 Pursuant to the order made by Bell J, a number of further affidavits were filed on behalf of the defendants. Indeed, Mr Karas has filed some five further affidavits, including one on today's date and also an affidavit sworn by the accountant to the defendants, Mr Barker.

12 The plaintiff has also taken the opportunity to file a further affidavit of Mr George Courier of 15 February.

13 In the adjourned application before me, the written submissions and oral submissions advanced on behalf of the plaintiff seek to traverse issues which, as I apprehend it, travel well beyond the two matters outlined by Bell J as requiring further attention, namely, the destination of the amounts of $1.9 million paid into Capital One's trust account, and the explanation as to what has become of the income of Capital One.

14 Mr Linden, who appears on behalf of the plaintiff, has sought to raise a variety of issues, including the transaction which initially gave rise to the freezing order, namely, a loan of $1 million by a relative of Mr Karas, which had the hallmarks of a transaction structured to conceal the true identity of Mr Karas, or one of his companies, as the lender. He also raised matters relating to the adequacy of affidavits sworn by the defendants pursuant to orders made by Davies J that they discover their assets. Further, he raised a matter relating to a mortgage by a company, 70 Nicholson Street Pty Ltd, to the first defendant for a debt of $755,000 which was subsequently discharged without any apparent payment to the first defendant in 2009.

15 I pointed out, in the course of argument, that it seemed to me that those matters were well beyond the issues, referred to by Bell J as requiring the further attention by the defendants in their affidavit. They do, however, provide some context to the present application, but, it would be seem to me, the issue before me as to whether the defendants have provided sufficient explanation of the two matters expressly identified by Bell J.

16 Before I turn to the further affidavit material, it is useful to outline, briefly, what I understand to be the appropriate principles which should guide me. They are, in brief, as follows.

17 First, the purpose of a freezing order under order 37A.02 is to prevent the frustration or inhibition of the court's processes by seeking to meet a danger that a judgment or a prospective judgment of the court will not be wholly or partly satisfied.

18 Secondly, it is recognised that such an order constitutes a significant interference with the rights of the persons against whom the order is made. Thus, at each stage of the supervision of such an order, the court must ensure that the reach of the order is no greater than that which is necessary to protect the processes of the court. In particular, it is necessary that the court, in determining an application such as this, ensure that the freezing order does not constitute an instrument of unfair oppression to the party in respect of whose assets the freezing order has been made.

19 The third principle is that, ordinarily, freezing orders, as they have done in this case, allow the person, against whom the orders are made, to have reasonable access to its assets, in order to be able to pay any reasonable legal fees, particularly any fees associated with litigation in respect of the debt or transaction which is the basis of the freezing order.

20 Fourthly, in his reasons for judgment on 23 December, Bell J identified two other important matters.[2] They are, first, that a freezing order is not an order for the appointment of the plaintiff as the de facto administrator of the defendants' business or assets. Secondly, and allied to that, if there is a basis for thinking that a defendant might have access to other sources of funds within its control, nonetheless that cannot justify seeking, in an application such as this, legal discovery of documents, or making detailed requests for the provision of information, which take the matter well beyond the scope of the type of application with which I am concerned.

21 Bearing those principles in mind, I therefore turn to the further material.

22 The first matter, that is the destination of the $1.9 million deposited into the account of Capital One with the ANZ Bank in March and April of 2011, is dealt with by the affidavit of Vince Barker sworn 6 February 2012. Mr Barker explained that the source of the two deposits, totalling $1.9 million, were withdrawals from the Capital One loan account with the Commonwealth Bank.

23 He set out, in some detail, 31 transactions which explain either the receipt or the disbursement of those funds.

24 Mr Linden, in his submissions, seemed to me to focus on two matters relating to them. First, he noted that there were payments made to the plaintiff, his wife, legal fees of his brother and in respect of legal fees of unrelated persons of $56,000 from those funds. Secondly, he pointed to some payments to related companies, totalling $383,000.

25 Those payments occurred before the freezing orders, and, on the face of it, there is nothing untoward in relation to those matters. Mr Linden raised a question as to the fate of the funds paid to the related companies, but, as M Greenberger pointed out in his submissions, those funds, if they are still in existence, would be covered by the freezing orders. The commissioner has had ample opportunity to identify what funds, if any, the defendants would have to pay legal costs without the necessity to mortgage the Napier Street property, and the commissioner has not sought to identify any such funds in this application.

26 The funds paid to Mr Karas, his wife and related persons do have relevance, in the sense that they indicate that, in that respect, the defendants were treating the moneys as their own moneys, and not simply moneys held on trust for someone else.

27 That brings me to the second issue, which really has been at the heart of the debate between the parties in the application before me, namely, the question as to whether Capital One Securities does have any income, from which it could fund the legal costs referred to in Ms Attwood's affidavit without the necessity to mortgage the property at Napier Street, Fitzroy.

28 Mr Karas, in his affidavit of 8 February, addressed that point in para.4 by stating that funds out on loan through Capital One Securities do not belong to Capital One Securities. The money out on loan is provided to Capital One Securities by various lenders who want their money placed with borrows as shortterm loans. The lenders receive the interest from the loan, and Capital One receives a brokerage fee for arranging the transaction between the lender and the borrower.

29 That explanation was supported by Mr Barker at para.10 of his affidavit. It supported the proposition that in that way, Capital One is not a lender in its own right and thus is not deriving other than a very minor income.

30 Mr Linden, in his submissions, focused on a number of matters, which he submitted raise a real doubt about the acceptability of the description of the business of Capital One as made by Mr Karas in his affidavit. First, he pointed out that that description is inconsistent with the characterisation by Mr Karas of the business of Capital One in affidavits he swore earlier in this proceeding on 22 June 2011 and 12 August 2011. In those affidavits, Mr Karas swore that Capital One lent clients' funds and also lent its own funds.

31 Secondly, Mr Linden submitted that there is no evidence proffered on behalf of the defendants to identify the clients from whom Capital One borrows money, and no evidence at all of any such borrowing by Capital One, or the receipt by Capital One of any such moneys.

32 The third matter, relied on by Mr Linden, was that the brokerage fee contained in five loan, which are referred to in the affidavit of Mr Barker, are very low, such as to give rise to the inference that that could not be the only income received by Capital One from the loan transactions. He submitted that that was inconsistent with Capital One simply being in a position of, as it were, a broker standing between the client and the ultimate borrower.

33 When those matters were pointed out to Mr Greenberger yesterday, he sought an adjournment for the purpose of preparing a further affidavit to explain the apparent inconsistency between Mr Karas's affidavit of 8 February and his earlier two affidavits. Mr Karas has now sworn a further affidavit of 22 June, in which he has explained that he had, in swearing his affidavit of 8 February, overlooked the fact that Capital One had in fact previously made two loans in its own right, and that he had overlooked that fact because those loans were quite unusual. In his affidavit he explained the circumstances of those two loans, made out of development proceeds from the sale of property at Gore Street, which were loaned shortterm to a friend called Mr Vinci. He has produced evidence of the repayment of those two loans, and of the use of the proceeds of those two loans, with the consent of the plaintiff, to pay the costs of the builder and also some legal costs.

34 Before me today, Mr Linden has submitted that, nevertheless, the affidavit sworn by Mr Karas is insufficient, because it still does not produce evidence showing the receipt by Capital One of moneys from clients, both in terms of the $1.8 million which it had disbursed in accordance with Mr Barker's affidavit, and in relation to its current affairs. He also pointed to the fact that, in his present affidavit, Mr Karas has described the business of Capital One, as a broker, as fledgling, whereas in the previous affidavit, Mr Karas had pointed to a more significant business. Thus, Mr Linden submitted that the affidavit, sworn by Mr Karas on today's date, is insufficient to satisfy the court that Capital One, and thus the defendants, do not have income in their own right, from which they could access funds to pay their legal costs.

35 It is, I think, quite evident from what I have just stated, that the affidavit sworn in support of this application is not entirely satisfactory, for the reasons advanced by Mr Linden. However, it is important to keep in mind that the matters, which were agitated before me, must be viewed in light of the principles which I have previously adverted to, and, in particular these matters, must be kept in some form of perspective.

36 The freezing order contained the usual clause entitling the defendants to use their resources to pay reasonable legal fees. It is not in issue in the application before me that the defendants need the funds, which are intended to be lent to them by Mr Meletsis, for legal fees.

37 If I acceded to this application, I would make orders ensuring that all payments paid by Mr Meletsis went to the solicitors for the defendants, and are only expended for legitimate legal expenses. In her affidavit, Ms Attwood has set out a formula which seems to me to be an appropriate formula to be incorporated in such an order.

38 Further, Mr Greenberger made a forceful point when he submitted that, if the defendants had cash in the bank, as distinct from having it tied up in equity in the Napier Street property, then this application would be unnecessary, because, by the force of Davies J's order, they would be entitled to access those funds.

39 As I stated, the matters which have been properly raised by Mr Linden, must be put in some form of perspective. It is not the role of this court to enter into great detail in relation to the affairs of the defendants.

40 On the material before me, I am satisfied that sufficient material has been put forward, for the purposes of this application only, to establish the need by the defendants to raise moneys by way of loan in respect of the Napier Street property. While, as I say, the affidavits are not entirely satisfactory, nonetheless, bearing in mind the principles to which I have earlier referred, I consider that the affidavits are sufficient to justify the making of an order to enable the payment of legal costs, which, it is not contended, are other than necessary.

41 For those reasons, I accede to the application made by the defendants. I will therefore make orders, which I shall leave in the hands of counsel for the appropriate drafting, but, first, that the first defendant be permitted to enter into a loan agreement with Mr Meletsis to borrow $250,000 for the sole purpose of the payment of legal fees and to execute a mortgage in favour of Mr Meletsis to secure that borrowing over the property at 164 Napier Street, Fitzroy.

42 Secondly, I shall make orders to the following effect, that the lender, Mr Meletsis, only issue cheques payable to the solicitors for the defendants.

43 Thirdly, that insofar as any of the loan is to be used to pay outstanding legal fees or work in progress, that such funds only be used upon the provision by the solicitors for the defendants of an appropriate bill of costs identifying those sums.

44 Fourthly, that the balance of the loan funds only be advanced to the defendants' solicitors upon their instruction that a tax invoice for legal fees has been issued.

45 That incorporates the major points stated by Ms Attwood in her affidavit at para.18. It would, I think, be better if counsel were able to draft the appropriate terms, incorporating the effect of what I've just put.

[1] Deputy Commissioner of Taxation v Karas [2011] VSC 673.