How much detail of a taxpayer's financial position can the Commissioner seek when the taxpayer requests the Commissioner to vary the terms of an asset freezing order?
Tom Karas (Karas) and his related companies owed the Deputy Commissioner of Taxation (the Commissioner) a sum exceeding $42m in unpaid tax and penalties. The Commissioner sought to prevent Karas and his companies from disposing or dealing with their property pending the payment of the outstanding amount owed to the Commissioner. Accordingly, the Commissioner made application to the Supreme Court of Victoria in June and July 2011 and orders (freezing orders) were made by that court preventing Karas and his companies from disposing of or dealing with their assets.1
The freezing orders contained an express exception allowing Karas to use his assets for ordinary living expenses, and to allow him and his companies to use their assets for reasonable legal expenses in the ordinary and proper course of business. The orders also made provision for other exceptions to be agreed between the Commissioner and Karas.
In the later part of 2011, Karas sought to enter into a specified loan agreement and mortgage in relation to the property he owned in Napier Street, Fitzroy. He wanted to borrow $250,000 against the property to meet his past and continuing legal expenses.2
He also endeavoured to have one of his companies, Capital One Securities Pty Ltd (Capital One), sell its property at 59 Gore Street, Fitzroy, so as to eliminate the mortgage on that property. The balance of the proceeds of sale, expected to be about $180,000, would be paid into its bank account.3
The first transaction was for the purpose of paying Karas' reasonable legal expenses; the second was a commercial step in the ordinary course of the company's moneylending business.4 However, Karas' bank refused to allow him to operate his facilities in the usual way. The bank feared that the freezing orders might be breached by permitting the proposed transactions, and it adopted a conservative position of not allowing the transactions to take place without an express variation to the orders.4
Karas sought the Commissioner's consent to the transactions. When determining whether to give that consent, the Commissioner required Karas to provide a great deal of information about various transactions which had taken place, both before and after the orders were made. The Commissioner was particularly concerned that Karas might have had access to assets and money which should be utilised before selling or encumbering the property which was the subject of the orders. Some but not all of that information was provided.
The matter came to court because the parties were at loggerheads about what should be done.
Karas and the companies submitted that the Commissioner's requests for further information were unreasonable. It was submitted that all property belonging to Karas and his companies, whether it was land or cash, was the subject of the orders and therefore was the subject of the exceptions. The exceptions allowed the property to be used for reasonable legal expenses and in the ordinary course of business, and the variations sought were for those purposes. As Karas was legally entitled to use his assets for those purposes in any event, it was irrelevant whether Karas had access to other sources of money for those purposes.5
The Commissioner submitted that Karas should not be allowed to defeat the orders (even in part) by drawing on the frozen assets when there might be other sources of funds on which he could draw. That would subvert the purpose of the orders, which was to protect the processes of the court in the Commissioner's taxation recovery proceedings against Karas. It was for this reason that the Commissioner was asking for the further information.6
Bell J found that the purpose of a freezing order was to protect the processes of the court. Thus, a court was always concerned with the scope and the preservation of the assets of the defendant.
On evidence establishing that there were reasonable grounds for thinking a defendant might take steps to dissipate his assets and thus defeat the processes of the court, a defendant may be required to swear an affidavit disclosing all of his worldwide assets. This was to ensure that the court would have full knowledge of what assets might be available for execution of judgment.7
Here, where Karas sought the variation of the freezing order in terms allowing a specific dealing, encumbrance or disposal with respect to the subject property, even for intended permitted purposes, Bell J found that it was relevant to take into account whether he had access to other sources of funds for those purposes.8
Bell J noted that a freezing order puts a plaintiff, in this case the Commissioner, in a certain position of power with respect to the defendants, in this case Karas and his companies. The experience of the court is that banks and other financial institutions often require the approval of the court or the plaintiff before they will allow particular transactions to take place, even for apparently permitted purposes.
Bell J further noted that, as in this case, disputes can arise as to whether that approval should be given. Often questions of the adequacy of the disclosure of information by defendants are raised by plaintiffs. Defendants often complain that plaintiffs require too much and more than they legitimately need.9
He found that it is important that plaintiffs do not abuse their position of power by unreasonably refusing to provide approval for particular transactions for permitted purposes. The purpose of a freezing order was not to place the plaintiff in the de facto position of supervising the conduct of the defendant's personal or family life or business. A freezing order was not an order for the appointment of the plaintiff as the de facto administrator of the defendant's business. It did not of itself place the plaintiff in the position of a mortgagee, chargee or secured creditor. It had a wholly different asset-protective function. Resolution of practical issues which arose from the operation of exceptions to freezing orders must be resolved with that limited function in mind.10
Where there was a reasonable basis for thinking that a defendant might have access to other sources of funds which were within their direct or indirect control, it was perfectly reasonable for a plaintiff to seek information about that subject before deciding whether to grant approval or consent to a particular transaction or variation.
However, this cannot justify seeking what was, in effect, legal discovery of documents or requesting answers to what were, in effect, legal interrogatories. If it were necessary to seek invasive orders of that kind or to seek full or better enforcement of the disclosure requirements of a freezing order, the processes of the court are independently available for that purpose, including the processes for punishing contempt of court.11
Here, Bell J found that the Commissioner's position in relation to Karas' request was set out in affidavits, in correspondence and in written submissions of counsel. He found that the level of detail of the information sought by the Commissioner was "very great" and it seemed that "no stone was left unturned".12
He found that the level of detail in the information sought was disproportionate to the nature of the approvals and variations which were at issue and not justified having regard to the purpose of a freezing order. The matter was effectively conceded by the Commissioner.12
Bell J was invited to focus on two particular issues of significance.
The first issue was the destination of the amounts of $525,000 and $1,388,000 which (before the freezing orders were made) were deposited in the ANZ bank account of Capital One on 15 March 2011 and 1 April 2011, respectively, and later withdrawn.
The second was the destination of the income of that company from its moneylending business (after the freezing orders were made), given the evidence that it had $3-4m out on loan. The company was a short-term moneylender and the interest payable on amounts of that magnitude, whether singly or making up that total, would be expected to be large.13
Bell J found that the unexplained withdrawal or payment of money of $525,000 or $1,388,000 from Karas's company shortly before the freezing orders were made was relevant to whether the court should (by variation of the orders) specifically permit Karas to encumber or deal with the frozen assets for the proposed purposes. Likewise the unexplained absence of any income from Capital One's continued moneylending business was relevant to the exercise of that power. In the absence of an explanation as to these matters, Bell J found it reasonable to think that Karas might have access to funds on which he could draw without having to utilise the assets which would have been frozen. Bell J refused to grant the first variation sought until at least those matters were addressed.14
In connection with the second variation sought, Bell J found that Karas and his company had established, on the evidence, that there were sound commercial reasons for selling the property. Bell J accepted the Commissioner's submission that the property should not be sold until an independent valuation had been obtained. Bell J granted the variation in the terms sought by Karas on the condition that that be done.15
Comment and conclusion
Karas faced the problems commonly faced by many litigants whose assets are subject to "freezing" orders: first, the very conservative approach taken by banks in the interpretation of those orders, and second, the Commissioner making, at least form the defendant's position, unreasonable demands for information before the Commissioner will consent to any variation of the freezing orders.
Bell J makes it abundantly clear that the Commissioner cannot use the process to unreasonably gain information from the defendant, while at the same time agreeing that the Commissioner is entitled to obtain detailed information relating to specific unexplained transactions which could have the effect of providing the defendant with funds with which to provide for his living expenses or legal fees and thus not diminish the defendant's ability to honour a court order.
1 DFCT v Karas and Ors  VSC 673
2 Karas at .
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11 Karas at ; Anglo Eastern Trust Ltd v Kermanshahchi  EWHC 3152.
12 Karas at .
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15 Karas at .
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