The challenges faced by a business which has been the victim of a fraud are numerous. Once a fraud victim recovers from the initial shock, the key questions are generally:
Exactly how much has been stolen?
Can the money be recovered?
Can the person be criminally prosecuted?
This is a very emotional and distressing experience for most victims and getting the right advice and following sound processes is critical, particularly in relation to quantification of the losses, possible recovery and potentially prosecution.
Most commercial frauds are classified as “white collar crimes” and unlike other crimes there is an element of strategy, and even the potential for negotiation with the fraudster. Remembering that often the victim’s first priority is recovery.
In a recent case, having been caught with their “red hands” in the proverbial “cookie jar” the fraudster offered to pay back the money. The victim was open to the proposal believing it was the only chance of recovering any money. Whilst the forensic investigation continued the fraudster got busy selling assets and making regular payments to the victim.
Having discovered you have been the victim of a sophisticated long term fraud that has left you in serious financial difficulty it is hard to imagine how things could get much worse. However, in this case an application was made to the court to wind up the fraudsters company. With only 40% of the stolen funds recovered the victim was concerned as to how the remaining 60% would be repaid.
However, the real issue was the probability that a liquidator may seek to recover the repaid stolen money by deeming the payments as preferential. Before a court will order the recovery of a preferential payment, it must be satisfied that:
(a) a transaction was entered into (this is usually a payment of monies);
(b) it was between the company and a creditor of the company;
(c) it occurred at a time when the company was insolvent;
(d) it occurred within the statutory period before the liquidation commenced;
(e) the transaction gave the creditor an advantage over other creditors; and
(f) the creditor suspected or had reason to suspect that the company was insolvent.
The interesting and somewhat perplexing question is: Does the victim of fraud meet the definition of a creditor? It is worth noting that neither the Corporations Act nor the Bankruptcy Act define “Creditor”. In simple terms, a creditor/debtor relationship normally exists where one party (creditor) has provided property, services or a loan to another party (debtor) on the assumption or agreement of payment. Clearly the victim did not consent to the embezzlement (provision) of cash. However, the victim is someone who has a provable monetary claim against the fraudster and by virtue of that fact is likely to be deemed a creditor.
With regard to knowing or suspecting that the company was insolvent, the fact that money had been embezzled coupled with the inability to repay, indicates the liquidator may be able to argue this point. On this basis it appears likely that the repayments may be subject to a recovery action by classifying the amounts recovered as preferential payments. Whilst there are various arguments that can be made both for and against the possible clawing back of the money recovered by the victim, this is now a case of “watch this space” to see what the courts decide.