On 5 March I made consent orders dismissing an application by the plaintiffs for asset preservation orders against the defendants and another respondent. I then heard argument on costs. This judgment sets out my reasons for the orders I made as to the costs of the application.
The first plaintiff, William Zafiropoulos, is a dentist by profession. He is also described by his solicitor as an "accomplished" property investor. The second plaintiff, Zapphire Investments Pty Ltd ("ZIPL"), is a company which he uses for that purpose.
The first defendant, Anastasio Fragogianis, practised, at relevant times, as an accountant. His practice was conducted through the second defendant, Fragogianis & Co Pty Ltd ("FCPL"), a company of which he was a director and the sole shareholder. The practice was conducted under the name "CA Partners". FCPL acted as tax agent for Mr Zafiropoulos and ZIPL from 2018 onwards. It is not clear on the evidence before me when the retainer ceased, but apparently FCPL was still acting as a tax agent in late 2020.
[2]
Background and procedural history
These proceedings result from an investigation carried out for Mr Zafiropoulos by a firm known as Infinity Financial ("Infinity"), which is described in the evidence as a "forensic accounting firm". The investigation concerned tax payment accounts of Mr Zafiropoulos and related parties, including ZIPL, while FCPL was acting as those parties' tax agent.
The evidence does not reveal when Infinity was commissioned to undertake the investigation, or what prompted it. The evidence begins with a letter from Mr Vincent Elias (an associate director at Infinity) to Mr Zafiropoulos dated 29 September last year reporting on the then position.
According to Mr Elias, records showed that tax payments totalling $1.595 million were made by ZIPL to the ATO in January 2019. ATO records showed that these payments were refunded by the ATO about two months later, in March 2019. Shortly before the refund was made, the ATO, presumably on the instructions of FCPL (as ZIPL's tax agent), changed the bank details for refunds in ZIPL's tax payment account. Previously, refunds had gone to a bank account of ZIPL. The new bank account nominated was an account which belonged to FCPL itself. When the refund payment was made a few days later, it was paid into that account.
In his letter, Mr Elias asked whether Mr Zafiropoulos had received the monies from FCPL. He also noted that he had requested an urgent meeting with Mr Zafiropoulos. The request had been made through Levitt Robinson, a law firm then acting for Mr Zafiropoulos. Mr Elias copied his letter to two of the solicitors at that firm.
The solicitor now acting for Mr Zafiropoulos is Mr Nathan Buckley of Optic Lawyers. The evidence on the application does not identify when Mr Buckley took over from Levitt Robinson, whether the meeting took place as requested by Mr Elias, or what the upshot of that meeting was.
Mr Buckley's affidavit in support of the application recorded, however, that, on his instructions from Mr Zafiropoulos, the refund monies appeared not to have been accounted for. Furthermore, by December last year, investigations had identified a further $30,000 in tax refund payments for Mr Zafiropoulos or ZIPL which were similarly unaccounted for.
In his affidavit, Mr Buckley also recorded his instructions from Mr Zafiropoulos that Mr Fragogianis had, in the course of dealing with Mr Zafiropoulos, advised him to adopt "asset protection strategies". According to Mr Buckley's instructions, Mr Fragogianis had stated that he himself used such strategies, which involved putting his and his wife's matrimonial home into his wife's name.
Mr Fragogianis is married to Mrs Anna Fragogianis, and they have two children. Their matrimonial home is a house in The Boulevarde at Sans Souci which is registered in Mrs Fragogianis' name.
According to Mr Buckley's instructions, Mr Zafiropoulos was also told by Mr Fragogianis that he had some "involvement" in constructing a hotel on "the island of Mytilene" in Greece (in fact Mytilene is a town on the island of Lesbos) and that he had "expressed his intention" to relocate there permanently following the project's completion. Mr Buckley's affidavit did not say when, on his instructions, these conversations took place, although it seems that during 2023 Mr Fragogianis spent at least some time overseas (but where is not revealed by the evidence).
On 11 December last year, Mr Buckley sent letters of demand addressed to each of FCPL, Mr Fragogianis and Mrs Fragogianis. Each letter was headed, "Formal Demand for Immediate Repayment Warning Against Disposal of Assets".
The letter to FCPL was addressed to office premises in Bank Lane, Kogarah, which was where the practice was operated from. In the letter, Mr Buckley first complained about "unreasonable delay" in transferring Mr Zafiropoulos' files to his new accountant. He continued:
…
Further, our investigation has revealed a serious breach of professional conduct on your part. Without the knowledge or authorisation of our clients, you have redirected tax refunds from the [ATO] to your bank account by altering the bank details on record. This unauthorised action is a clear violation of trust and potentially constitutes fraud.
As a result, we hereby demand the immediate repayment of $1,625,203.18, representing the total amount misappropriated. Payment is to be transferred to the following trust account within 21 days from the date of this letter:
…
Failure to comply with this demand will force our clients to initiate legal action to recover the owed amount, along with legal fees, interest, and any additional losses. This legal action will undoubtedly increase the financial burden on you due to these unauthorised transactions.
The letter continued:
…
We also note your advice regarding asset protection strategies, specifically concerning assets held in the name of Mrs Anna Fragogianis. We strongly advise against any disposal or encumbrance of the matrimonial property located at [The Boulevarde, Sans Souci], until the full amount is repaid. Failure to adhere to this warning may result in legal actions to freeze assets or seek court orders to safeguard our clients' interests.
The letter to Mr Fragogianis was addressed to him at the Sans Souci property. It enclosed a copy of the letter to FCPL and continued:
…
We wish to make unequivocally clear that our clients hold you directly accountable for the restitution of the misappropriated funds.
We thus reassert our demand for prompt and complete resolution of these matters.
Additionally, we have been informed of your potential relocation to Greece, based on previous discussions with our clients. Given this context, it is imperative to ensure that there will be no disposal or encumbrance of the matrimonial property, registered solely in your wife's name at [The Boulevarde, Sans Souci], until the full repayment of the owed sum of $1,625,203.18 to our clients.
Immediate action in accordance with these demands is not merely anticipated but essential, to avert the initiation of further legal proceedings by our clients.
The letter to Mrs Fragogianis was likewise addressed to her at the Sans Souci property and enclosed a copy of the letter to FCPL. The letter continued:
…
Our records indicate that you are the sole proprietor of the matrimonial property located at [The Boulevarde, Sans Souci]. It has come to our attention through discussions our client has had with your husband that the property is registered in your name for the purposes of asset protection.
We must bring to your attention that a sum of $1,625,203.18 has been improperly transferred from our clients by your husband and Fragogianis & Co Pty Ltd.
In light of conversations between our clients and your husband regarding a possible relocation to Greece with your husband and given that the matrimonial property is effectively held in trust for him, it is imperative that you do not engage in the sale, transfer, or encumbrance of this property until the full repayment of $1,625,203.18 to our clients.
Please be advised that any actions contrary to this will force our clients to seek legal remedies, including but not limited to, the application for freezing orders to protect their financial interests.
Immediate compliance with these requirements is not only expected but necessary to avoid the initiation of further legal actions by our clients.
There was no reply to any of these letters, nor to follow-up letters addressed to FCPL and Mr Fragogianis (but not Mrs Fragogianis) which were sent on 22 January this year.
In his affidavit in support of the application for freezing orders, Mr Buckley produced evidence about Mr Fragogianis' professional standing, or lack thereof. He recorded that in April 2021 Mr Fragogianis ceased to be a member of the Institute of Public Accountants. He also produced a copy of an email received by Mr Zafiropoulos in February this year advising him that both FCPL's and Mr Fragogianis' tax agent registrations had been cancelled by the Tax Practitioners Board. This followed a decision in October 2023. The grounds for the decision were non-compliance with professional standards, including obligations concerning the proper custody and accounting for money held on trust for clients.
The principal proceedings were commenced by way of statement of claim last month (on 5 February). As already mentioned, Mr Zafiropoulos was named as the first plaintiff and ZIPL as the second plaintiff. Mr Fragogianis was named as the first defendant and FCPL as the second defendant.
Judgment was sought against the defendants in the sum of $1.625 million. This, evidently, was a claim in debt, based on a common law claim for restitution ("money had and received"), although the term "debt" was not used (alternatively, judgment was sought for "damages").
The statement of claim also pleaded an equitable claim, namely an allegation of breach of fiduciary duty on the part of the defendants. A claim for "equitable compensation" was made. Alternatively, there was a claim that the defendants account to the plaintiffs for the monies received by them. There was, however, no claim for an inquiry as to what had been done with the funds, and, in particular, whether they had been applied to the acquisition of property which could be the subject of a tracing claim.
Upon filing, the statement of claim was made returnable before the Registrar in Equity for directions on 4 March. Before that date arrived, the application which is the subject of this judgment, was made to the Duty Judge.
Initially the application was brought before Lindsay J, on 22 February. On that occasion the Mr Zafiropoulos and ZIPL filed their notice of motion. The notice of motion named Mr Fragogianis and FCPL as respondents. It also named, as an additional respondent, Mrs Fragogianis, who was not a party to the proceedings. On that occasion, Lindsay J made freezing orders against all three respondents on an ex parte basis. The motion was made returnable on 26 February.
On 26 February, Lindsay J was again sitting as Duty Judge. Without admissions, he continued the orders and adjourned the proceedings to the Duty List on 5 March. I infer that the orders were extended on an interim basis, to the intent that the onus of justifying their continuation on 5 March would rest on the applicants: cf Shun Sheng Pty Ltd v Lei (No 2) [2023] NSWSC 1623 at [25]-[27].
The directions made by Lindsay J on 26 February included a direction that the respondents file any evidence in response to the applicants' application and any submissions by the day before the hearing, 4 March. On that day an affidavit of Mr Fragogianis was sent to the Court and to the applicants' legal representatives (although the affidavit does not appear to have been formally filed).
The affidavit contained details of the Fragogianis' family circumstances. Mr and Mrs Fragogianis married in 2001. Mrs Fragogianis was employed in the CA Partners practice. Their children were born in 2006 and 2009. The children are still at school.
Mr Fragogianis also provided details of the ownership arrangements for the various matrimonial homes which he and Mrs Fragogianis had occupied over the years. The Sans Souci property, where they currently live, was purchased by Mrs Fragogianis in 2015. Before that, they lived in another property in Moss Street Sans Souci and before that, from 2004, at a house in Miranda. The Moss Street property was acquired in 2011. Each of the predecessor properties was owned by Mrs Fragogianis and in each case, when the property was sold the proceeds were applied to the new matrimonial home.
According to Mr Fragogianis, the Kogarah property, from where the CA Partners business was conducted, was also owned by Mrs Fragogianis, who leased it to FCPL. That property had been purchased by Mrs Fragogianis using the equity in the family home.
In his affidavit, Mr Fragogianis also described financial difficulties which he said he and his wife had experienced in recent years. According to Mr Fragogianis, the matrimonial home and the office property had been mortgaged to secure repayment of the loans which had been used to purchase them. Mr Fragogianis had been contributing to the mortgage payments, at least for the matrimonial home. In 2021, Mrs Fragogianis was diagnosed with breast cancer. By July 2022, she and Mr Fragogianis had fallen behind on the mortgage payments. They suffered cashflow difficulties which they tried to alleviate by borrowing from a non-traditional lender. They also borrowed money from family and friends. The office property was sold by Mrs Fragogianis in September 2023 and Mr Fragogianis vacated the premises. He has since worked from home.
Mr Fragogianis stated that the entire sale proceeds from the office property were applied to the repayment of debt. But the Fragogianises remained under financial pressure and decided, in November last year, to sell the matrimonial property. In the meantime, the lender had commenced proceedings in this Court seeking a writ of possession. As at the end of December, the loan account balance was $2 million. Judgment had been obtained in October 2023 and on 13 December a writ of possession had been issued. Thereafter the Fragogianises negotiated an arrangement to stay their eviction to allow for the sale of the property to take place.
Mr Fragogianis stated that the Sans Souci property went to auction on 10 February. The sale price was $2.07 million. The price was "well below expectations" but there had been little choice but to accept the highest bid. Settlement was scheduled for 8 April.
In his affidavit, Mr Fragogianis also addressed the applicants' allegations in the statement of claim. The explanation for transferring the refunds into an account in the name of CA Partners was that Mr Zafiropoulos had asked him to hold the benefits of the money in trust. According to Mr Fragogianis, this had something to do with some legal proceedings in which Mr Zafiropoulos was involved. Mr Fragogianis stated that he had later applied the monies for the benefit of Mr Zafiropoulos or his associated entities, or in payment of his fees. Mr Fragogianis stated that he had surrendered his Institute of Public Accountants membership voluntarily. He did not say anything about the cancellation of his and FCPL's tax agent registrations.
Mr Fragogianis did accept that he had given advice to Mr Zafiropoulos about using asset protection strategies. He did not directly address the suggestion that he himself had used such strategies, but the thrust of his evidence was that this was a normal and accepted approach for professionals. He also said that his wife had made her own independent contributions to the purchase of the properties and the paying off of the mortgage. In fact, according to him, her earnings at times had been greater than his.
Mr Fragogianis denied that he was involved in a hotel venture in the Greek islands and denied that he had any intention of leaving Australia. On his evidence, he has extensive connections here which he has no intentions of severing. In addition to his children still being at school, both his parents and Mrs Fragogianis' parents live in Sydney and his relationship with them is close.
Accompanying Mr Fragogianis' affidavit were written submissions from counsel for the respondent to the application. The submissions argued forcefully that the application, both against Mr Fragogianis and FCPL as defendants, and, a fortiori, against Mrs Fragogianis as an additional respondent, were unsustainable and should be dismissed.
The application was listed before me in the duty list at 10am on 5 March. When the matter was called on, I was informed that earlier that morning (shortly before 8am), the applicants had intimated that the application would not be pressed. Later in the day I heard argument on the question of costs.
[3]
Incidence of costs
Notwithstanding the withdrawal of the application, counsel for the applicants submitted that the respondents should pay the applicants' costs. Alternatively, at best from the respondents' point of view, there should be no order as to costs. Counsel contended that the bringing of the application had been reasonable and that the explanatory evidence which had resulted in the application being withdrawn had only come forward at the last minute.
In his submissions, counsel fastened particularly on the respondents' failure to respond to Mr Buckley's 11 December letters of demand. The thrust of counsel's submissions was that, if only the respondents had given full disclosure of their personal and financial circumstances in response to these letters, the application would never have been brought.
Counsel for the respondents took the opposite position. Counsel contended that the applicants should pay the respondents' costs. In her submission, the applicants had acted unreasonably in mounting the application. Counsel argued that most, if not all, of the circumstances disclosed in Mr Fragogianis' affidavit could have been discovered, or at least inferred, by the applicants in advance of the hearing.
In particular, counsel pointed out that the applicants' legal representatives could readily have found out from a Land Registry Services ("LRS") search that the Sans Souci property had been purchased in 2015, well before the misappropriations alleged by the applicants. A search would also have revealed the encumbrances. Indeed, a search of the Supreme Court Registry would, according to counsel, have revealed the fact that a possession order had been made against the Sans Souci property. There was force in these submissions.
I thought there was even more force in counsel's submissions so far as the application for asset preservation orders against Mrs Fragogianis is concerned. An asset preservation order is an extraordinary remedy, and should not be granted except to the minimum extent necessary to protect the Court's enforcement processes from being improperly defeated. Even more is that so where such an order is sought against a third party to the proceedings, such as Mrs Fragogianis: Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [50]-[51]. An order is available against a person who collaborates with a defendant so as to defeat the enforcement, or potential enforcement of court orders against that defendant. But such cases are rare, and usually involve collaborator in some other form of actionable conduct such as conspiracy, in which case they can and should be joined as a defendant: Cardile at [53], [57].
In the present case it was indeed clear from the chronology, which could have been determined by means of an LRS search, that the monies allegedly misappropriated from the applicants could not have been used for the purpose of purchasing the Sans Souci property. It was of course theoretically possible that monies could have been used to pay down the mortgage (Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; Heperu Pty Ltd v Belle [2011] NSWSC 115). If so, that might have justified a claim against Mrs Fragogianis. But this was never more than speculation and there was nothing in the evidence assembled by Mr Buckley in support of the application which suggested it had actually happened.
In these circumstances, it is difficult to see how the application, at least so far as it concerned Mrs Fragogianis, could ever have been reasonably justified. But it is not necessary to reach any conclusion on this issue.
The applicants always had to establish, not only a prima facie case, but a reasonable possibility that assets would be removed from the forum or dissipated within the forum. An applicant is not confined to direct evidence of such a threat of dissipation: in a proper case, it can be inferred by the Court from the circumstances. But the inference is not automatic and, in my view, not every allegation, even of fraudulent conduct, will necessarily give rise to it: cf Shun Sheng Pty Ltd v Lei (No 3) [2024] NSWSC 72 at [36], [51]-[52].
The application in the present case was mounted on behalf of the applicants without the benefit of any direct evidence of dissipation. It was based on suppositions which, ultimately, the applicants were not prepared to put to the test. I see nothing unfair or unreasonable about a party in the applicant's position being required to pay the costs of such an exercise.
There is, I think, a simpler way to the same conclusion. This was not a case where the application was superseded by later extraneous events: cf. Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. Rather, the application was abandoned on the day of the hearing. The applicable rule is that costs follow the event: Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), rule 42.1.
[4]
Lump sum costs order
In the event that I decided to make an order for costs in favour of the respondents (as I did), counsel for the respondents sought the making of a lump sum costs order under s 98(4) of the Civil Procedure Act 2005 (NSW) ("CPA"). The application was supported by an affidavit from the respondents' solicitor itemising their expenditure on the application. The figures sought represented 100% of counsel's fees and 70% of solicitor's fees. The total amount was $26,000.
Making a lump sum costs order is a departure from the usual rules under which costs orders are quantified by means of assessment. Making such an order on an interlocutory basis is also a departure from the usual rule concerning the timing of an assessment. The relevant rule is UCPR rule 42.7, which provides:
Interlocutory applications and reserved costs
(1) Unless the court orders otherwise, the costs of any application or other step in any proceedings, including -
(a) costs that are reserved, and
(b) costs in respect of any such application or step in respect of which no order as to costs is made, are to be paid and otherwise dealt with in the same way as the general costs of the proceedings.
(2) Unless the court orders otherwise, costs referred to in subrule (1) do not become payable until the conclusion of the proceedings.
One consequence of using the alternative procedure is that the Court should not award, by way of lump sum, any more than would be awarded in an assessment. For practical purposes, that means that the Court must aim for a figure which will be less than that recoverable on assessment: Hancock v Rinehart (Lump sum costs) [2015] NSWSC 1640 at [56]. The result is that any client who obtains such an order will be "leaving money on the table".
I asked counsel why the application was being made. Counsel responded that, on her instructions, the respondents' financial position was such that a lump sum paid now was more useful to them then the recovery of a larger sum at a later point. But while that was understandable, it did not seem to me to be an adequate justification for requiring the Court to undertake the task of making a lump sum assessment.
There was, however, an alternative type of lump sum costs order available. In a number of previous cases, where I have made an interlocutory costs order and the circumstances would justify ordering that the costs be assessable and payable forthwith under UCPR 42.7, I have instead ordered the party against whom costs are ordered to pay a lump sum on account of that costs liability.
Such an order differs from a lump sum costs order pursuant to s 98(4) of the CPA, in that it does not represent a final determination of the amount of costs in question under the order. If, on assessment, the amount paid is less than the costs which are awarded, the balance can be recovered. If it is more, a credit or refund will have to be given. The order has the advantage of avoiding a separate assessment which is likely to be costly and distracting. and may ultimately not be necessary. See Omutta Pty Ltd v Wilson (No 2) [2019] NSWSC 401, at [13]. When I raised this possibility with counsel for the respondents, he adopted it.
A potential complication in the present case was that one of the respondents, Mrs Fragogianis, was not a party to the principal proceedings. In theory, there might have been a question about whether, so far as she is concerned, the costs order was interlocutory at all. But she was commonly represented with Mr Fragogianis and FCPL, who were parties, and costs incurred by them on the application were undoubtedly covered by r 42.7. In the end, no point was taken about this.
The first question, therefore, was whether this would have been a proper case to make an order for immediate payment and taxation of the respondents' costs under r 42.7. While the categories of case in which such an order may be made are not closed, a number of factors which generally favour the making of an order were identified by Barrett J in Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1 at 4-5 [11]-[13].
Counsel for the applicants did not accept that any of the Morningstar criteria were satisfied. I did not agree. I thought that this application was a discrete aspect of the proceedings (particularly as it involved Mrs Fragogianis who was not a party). Furthermore, the determination of the plaintiffs' substantive claims is clearly some distance away. These are two of the relevant factors identified in Morningstar and, in my view, were sufficient to justify the making of an order. It is not necessary for present proposes to consider whether the respondents' financial circumstances are an additional matter which the Court might have taken into account (cf Morningstar, at 5 [14]-[18]).
Counsel for the applicants did not make any submissions about the quantum of the costs claimed by the respondents. I decided to make an order for payment of a lump sum on account of the respondents' costs in the amount of $26,000.
[5]
Orders
The orders made by the Court on 5 March 2024 were:
1. Order that the Notice of Motion filed 22 February 2024 be dismissed.
2. Order that the applicants pay the respondents' costs of the motion.
3. Order that the applicants pay to the respondents within 28 days, the sum of $26,000 on account of the cost liability under order 2.
4. The freezing orders made by the Court on 22 February 2024, as varied by order of the Court on 26 February 2024, be discharged.
[6]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 26 March 2024