Smith Mitchell Limited v Bradley

[2019] NZHC 1791

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-1501

[2019] NZHC 1791

BETWEEN

SMITH MITCHELL LIMITED

Applicant

AND

SHARON BRADLEY

Respondent

Hearing:	On the papers
Judgment:	26 July 2019

JUDGMENT OF GORDON J

This judgment was delivered by me on 26 July 2019 at 4.30 pm, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors:           Robertsons, Auckland

SMITH MITCHELL LTD v BRADLEY [2019] NZHC 1791 [26 July 2019]

[1]                 The applicant, Smith Mitchell Ltd (Smith Mitchell), has filed an originating application under r 32.2 of the High Court Rules 2016 for a freezing order on a without notice basis over various bank accounts and property associated with the respondent, Sharon Bradley.

[2]                 The application is supported by an affidavit of Lionel Smith, a director and shareholder of Smith Mitchell, and an undertaking as to damages signed by Mr Smith and Shelley Mitchell as directors of Smith Mitchell.

Background

[3]                 Smith Mitchell is a firm of chartered accountants offering tax and business advice and administration services. For some clients, this includes paying their day- to-day invoices to third party suppliers. Those clients forward on any invoices they have received to Smith Mitchell and then that firm pays the invoices from the client’s bank account on their behalf.

[4]                 In 2012, another accountancy firm amalgamated with (then) Lionel Smith & Associates Ltd (LS&A). The respondent, Mrs Bradley, was a staff member in that other firm, and she began working with LS&A from the time of the amalgamation in 2012. Additionally, some of the clients from the other accountancy practice, including client A, transferred to LS&A.

[5]                 Mrs Bradley was involved in paying the day-to-day invoices received by clients from any third-party supplier. Client A was one of those clients. Mrs Bradley had access to client A’s bank account (Rabobank) and would load invoices into the Rabobank internet banking system for payment.

[6]                 Mrs Bradley resigned on 29 March 2018 to establish her own businesses. She left amicably. Mrs Bradley now runs a quilting/craft workshop business, trading as Waitomo Sewworms (New Zealand). She has also developed a piece of equipment used for attaching appliques to quilts (called a Fusamat). Mrs Bradley has established three companies in connection with this piece of equipment, Fusamat US Ltd, Fusamat NZ Holdings Ltd and Fusamat Trading Co Ltd.

[7]                 Earlier this month, following a telephone call from client A, a check was made in relation to payment of invoices. Mr Smith’s evidence is that those investigations demonstrate that between 27 April 2012 and 8 March 2018, $980,309.53 was paid from client A’s Rabobank account into a Kiwibank account held in the name of Sharon Margaret Bradley. No payments into that account were identified following Mrs Bradley’s departure from Smith Mitchell on 29 March 2018.

[8]                 It appears that when client A sent through invoices for payment, Mrs Bradley would set the invoices up for payment from client A’s account. The legitimate payment to the supplier would then be made. However, it further appears that Mrs Bradley would then reload the same invoice into the system as a future payment; she would keep the payee details the same on the face of the payment but change the bank account for the supplier to the Kiwibank account in her name.

[9]                 The investigations also suggest that some payments made into Mrs Bradley’s Kiwibank account were not a duplicate payment of a legitimate invoice initially paid to the supplier. In relation to these payments, further investigation is required but it seems that these payments were made against a fictitious invoice or possibly without any invoice existing.

[10]              Although the internal procedures required Mrs Bradley to get approval to authorise all payments, the investigations reveal that on many of the payment dates, the person who was required to approve the payments was not in the office.

[11]              Smith Mitchell says that the only logical conclusion is that between 2012 and 2018, Mrs Bradley committed fraud against Smith Mitchell and client A. It is said that even if she was not the person making the fraudulent payment (which is said to be unlikely since she made 90 per cent of all the payments for client A) she was clearly complicit in the offence, not alerting anybody to unexplained sums being paid into her account.

[12]              In addition, a further $53,417.50 was inadvertently paid by Smith Mitchell into Mrs Bradley’s Kiwibank account on 4 July 2019. This sum has not been returned by Mrs Bradley.

[13]              Finally, further suspicious amounts totalling $186,494.03 are still being investigated as the bank account into which these payments were made has not been identified.

Should the application proceed without notice?

[14]              I consider it is proper that the application proceed on a without notice basis. I accept the submission made by Smith Mitchell that an on notice application would alert Mrs Bradley that her alleged fraudulent scheme had been uncovered and it may well prompt her to try and dispose of, or at least, dissipate her assets. This is the very purpose of a freezing order.

Legal principles

[15]              The Court’s jurisdiction to make freezing orders is contained in r 32.2 of the High Court Rules. Essentially, there are three requirements for a freezing order: a good arguable case on the substantive claims; assets to which the order can apply; and a real risk that the respondent will dissipate or dispose of those assets. I deal with each of those requirements in turn.

[16]              First, as to a good arguable case, it is not necessary to establish a prima facie case. But, the applicant must show that the allegations in the proposed claim are capable of tenable argument and are supported by sufficient evidence bearing in mind the early stage at which the application is likely to be brought.1 I consider that the evidence of Mr Smith establishes that there is a good arguable case against Mrs Bradley that she defrauded client A of an amount at least $1,000,000. Additionally, there is a good arguable case that Mrs Bradley acted dishonestly in breach of her employment contract and committed fraud against Smith Mitchell, potentially exposing the practice to a civil liability in the event that the allegedly stolen funds cannot be recovered on behalf of client A.

1      Dotcom v Twentieth Century Fox Film Corp [2014] NZCA 509 at [18] and [31]; Hannay v Mount [2011] NZCA 530 at [20]–[22]; and Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754.

[17]              Turning to the second requirement, which is assets in the jurisdiction to which the order can apply. The application identified various bank accounts. There is also evidence that Mrs Bradley owns a residential property with her husband and a third person, who is a lawyer. That property has a current rateable value of $950,000 as at 2016. The applicant also provides details of Mrs Bradley’s current business I have referred to, namely the quilting/craft workshop.

[18]              Finally, I consider whether there is a real risk of dissipation of the assets. The applicant accepts that there is no tangible evidence of this. However, I take into account that Mrs Bradley was allegedly willing to act dishonestly committing fraud against her employer and a client for over seven years. It can be inferred that there is a risk that Mrs Bradley will attempt to move the assets. I accept that dissipation is intrinsically linked to the nature of the alleged conduct in this case.

[19]              Smith Mitchell accepts that Mrs Bradley is less likely to abscond to avoid her liability because she has three teenage children. However, it says the possibility that she might abscond should not be entirely dismissed. In that regard the evidence is that Mrs Bradley travels overseas regularly and is marketing her product in Australia and the United States. She therefore could decide to leave the country and it would appear she has the means to do so. If she does abscond or dissipate the funds, Smith Mitchell will be unable to recover the funds that have been stolen from its client. I accept, in all the circumstances, there is a real risk of dissipation.

Possible defences

[20]              The applicant properly addresses this issue, given the application is made without notice. It says there is only one conceivable (and unmeritorious) defence to the application. That is that Smith Mitchell does  not  have  an arguable  case that Mrs Bradley was the one who committed the fraud. I accept that the logical explanation, based on the evidence that is available at this point, is that it was Mrs Bradley who was the one carrying out the alleged fraud.

Balance of convenience/overall justice

[21]              Having regard to all of the foregoing, the overall justice favours the freezing order being granted.

Undertaking as to damages

[22]I have noted that Smith Mitchell has provided an undertaking as to damages.

Orders for substituted service

[23]              Finally, Smith Mitchell seeks orders as to substituted service to enable it to serve Mrs Bradley by email and by delivery of the relevant documents to her residential address. It says the order sought is necessary because of Mrs Bradley’s overseas travel that I have referred to. If she is currently overseas, this would frustrate attempts to serve her personally.

[24]              I accept there is a proper basis to make orders for substituted service and I order that the applicant may serve documents by email and delivery of the Court documents to her residential address. Those documents to be served are the originating application for a freezing order dated 26 July 2019; the affidavit of Lionel James Smith in support sworn 24 July 2019; the undertaking as to damages dated 25 July 2019; the memorandum of counsel in support of the application and copy of this judgment.

Orders

[25]	I make	freezing orders over the following:
(a)	Any New Zealand bank accounts held in the name of Sharon Margaret Bradley;
(b)	Any New Zealand bank accounts held in the name of a Trust of which Sharon Margaret Bradley is a beneficiary, to include the JM & SM Family Trust;

(c)Any New Zealand bank accounts held in the name of Waitomo Sewworms (New Zealand);

(d)Any New Zealand bank accounts held in the name of Fusamat US Ltd;

(e)Any New Zealand bank accounts held in the name of Fusamat NZ Holdings Ltd;

(f)Any New Zealand bank accounts held in the name of Fusamat Trading Co Ltd; and

(g)Ms Bradley’s interest in 59 Hanning Road, RD6, Pirongia.

[26]               This application is to be further called before the Duty Judge on 8 August 2019 at 10 am.

[27]Mrs Bradley has leave to apply for any orders on three days’ notice.

Gordon J