Civil Recovery Actions for Misappropriated Funds & Asset Recovery Process

Introduction

Fraud presents a serious threat to the mission and reputation of any charity, often resulting in misappropriated funds and the erosion of public trust. When such financial abuse occurs, the legal obligation to protect the charity’s assets and take decisive action rests squarely on its Responsible People.

This guide details the civil asset recovery process, explaining the duties of Responsible People to investigate fraud and recover stolen funds in compliance with Australian Charities and Not-for-profits Commission (ACNC) governance standards. It provides an overview of the legal toolkit available for pursuing civil action and underscores the necessity of engaging a not-for-profit lawyer for their expertise throughout the procedure.

The Duty of Responsible People to Recover Stolen Assets

Understanding ACNC Governance Standard 5 & Financial Protection

ACNC Governance Standard 5 establishes the legal duties that Responsible People owe to their charity. The purpose of this standard is to ensure that a charity is managed well and that its leaders act in its best interests, thereby maintaining public trust and confidence.

These duties require Responsible People to act with integrity and common sense, always placing the charity’s interests above their own. Under Governance Standard 5, Responsible People have a clear obligation to ensure the charity’s financial affairs are managed responsibly. This fiduciary duty involves several key responsibilities, including:

Duty	Description
Act with reasonable care and diligence	Stay informed and make considered decisions to protect the charity’s assets.
Act honestly and fairly	Ensure that all actions are in the best interests of the charity and align with its charitable purposes.
Not misuse position or information	Refrain from using the role or information gained for personal benefit.
Disclose conflicts of interest	Declare any potential or actual conflicts to maintain transparency and fairness.
Ensure responsible financial management	Safeguard the organisation’s funds and assets from fraud and misuse.
Not allow the charity to operate while insolvent	Make sure the charity can meet its financial obligations.

Taking Reasonable Steps to Protect Your Charity from Financial Abuse

Responsible People must take “reasonable steps” to protect their charity from financial abuse, which includes theft, fraud, and corruption. This duty involves both proactive prevention and decisive action when an incident occurs.

Good governance, including strengthening internal controls, requires establishing procedures and systems that reduce the likelihood and consequences of financial misconduct. When fraud is suspected, the duty of Responsible People extends to managing the consequences and taking appropriate action, such as:

Action When Fraud is Suspected	Description
Investigate the Matter	Conduct a thorough investigation to determine the extent of the issue.
Notify Authorities	Report any serious criminal activity to the police and the ACNC.
Recover Stolen Assets	Take active steps to recover misappropriated funds, demonstrating responsible financial management and compliance with governance standards.

The process of investigating fraud and recovering assets, which often requires formal NFP and charity dispute investigations, can be complex. To fully understand their legal obligations and navigate the recovery process effectively, Responsible People should consider seeking specialist advice. Consulting a not-for-profit lawyer can provide the necessary expertise to guide the charity through the appropriate legal steps and ensure all actions taken are in the charity’s best interests.

First Steps to Investigate Fraud & Preserve Evidence

Engaging Forensic Accountants to Identify the Flow of Funds

When fraud is discovered within a charity, one of the immediate priorities for Responsible People is to understand the extent of the financial loss. Engaging forensic accountants is a critical step in this process, as they possess the specialised expertise to investigate and trace misappropriated assets. This is often done in consultation with a not-for-profit lawyer who can provide strategic advice on the recovery process.

Forensic accountants “follow the money” to locate assets that have been improperly moved. They use a sophisticated set of tools and resources to analyse various documents and reconstruct the charity’s financial records.

This analysis helps to identify exactly where the money has gone, which is essential for any subsequent recovery efforts. The investigation may involve examining:

• Financial records and statements
• Bank statements
• Relevant documents and emails

Preserving Evidence Without Tipping Off the Fraudster

While forensic accountants begin their investigation, it is vital to gather and preserve all available evidence without alerting the person suspected of fraud. Tipping off the fraudster could cause them to dissipate or hide the stolen assets, making it much more difficult or even impossible to recover them.

This covert preservation of evidence is a crucial preliminary step before taking formal legal action. The evidence gathered during this initial phase is essential for supporting legal proceedings, such as an urgent application for a freezing order to prevent the disposal of assets.

Responsible People, guided by legal counsel, should work to secure key documents that can establish the fraud. Important evidence to preserve includes:

• Emails and other communications
• Bank statements and transaction records
• Financial reports and invoices
• Purchase orders and other relevant documents

The Legal Toolkit & Freezing Orders for Your Charity

Securing Assets Before They Disappear via Urgent Applications

When a charity discovers fraud, immediate action is necessary to prevent the misappropriated assets from being moved or hidden. In such situations, a freezing order—also known as a Mareva injunction—serves as a powerful legal tool. This interlocutory order restrains a party from disposing of or dealing with their assets, with the primary purpose being to preserve those assets so that a future court judgment can be enforced.

To secure a freezing order, the charity must make an urgent application to a court, such as the NSW Supreme Court or the Federal Court. These applications are typically made ex parte, which means the person accused of fraud is not notified of the hearing. This secrecy is critical, as it prevents the accused from moving assets before the court can issue the order.

Due to the complexity and urgency of this procedure, it is vital to engage a not-for-profit lawyer with expertise in civil recovery actions to manage the application effectively.

A freezing order can cover a wide range of assets, including:

• Bank accounts
• Real property
• Shares
• Personal valuables

These orders can apply to assets held within Australia and overseas. They can also bind third parties, such as banks, preventing them from releasing funds held on behalf of the respondent.

Criteria for Granting a Mareva Injunction in the NSW Supreme Court

Courts in NSW do not grant freezing orders lightly, as they are considered exceptional and intrusive remedies. A charity must satisfy several strict criteria to persuade the court that such an order is necessary and just. The applicant must provide clear and reliable evidence to support their case.

The court will assess the application against the following requirements:

Criterion	Requirement
A good arguable case	The charity must demonstrate that its substantive claim has a plausible and serious argument, as clarified in Lambros v Urbanlux Homes Pty Ltd (in liq) [2021].
A real risk of asset dissipation	There must be credible evidence showing a real danger that the respondent will dispose of, hide, or deal with assets to frustrate a future judgment.
Danger that a judgment will be unenforceable	The court must be satisfied that without the order, a judgment would likely be unsatisfied because assets would be unavailable.
Balance of convenience and interests of justice	The court weighs if the benefit of preserving assets for the charity outweighs the prejudice to the respondent, requiring an “undertaking as to damages.”
A jurisdictional nexus	There must be a sufficient connection between the respondent or their assets and the jurisdiction of the NSW Supreme Court.

Because these applications are often made ex parte, the charity has a strict duty of “full and frank disclosure.” This means it must present all relevant facts to the court, including those that may be unfavourable to its own case.

Civil Lawsuits & Tracing Funds in the NSW Supreme Court

Suing the Fraudster for Breach of Duty & Knowing Assistance

When fraud occurs, a charity can initiate a civil lawsuit to recover the misappropriated funds, a process that falls under the practice area of commercial litigation. If the fraudster was a Responsible Person or employee who owed a duty to the charity, the legal action can be based on a breach of their fiduciary duty. This is a purely equitable obligation, and the primary remedy sought is often equitable compensation, which aims to restore the charity to the financial position it was in before the breach occurred.

In addition to pursuing the primary wrongdoer, a charity may also take legal action against any third parties who were involved in the fraud. If a person or entity knowingly participates in a fiduciary’s “dishonest and fraudulent design,” they can be held liable for “knowing assistance.” This form of liability is imposed directly on the assistant and is separate from the liability of the fiduciary who committed the initial breach.

The liability for knowing assistance is described as “accessorial” because it depends on proving that a breach of fiduciary duty occurred. However, the assistant’s wrongdoing is their own culpable conduct in interfering with the fiduciary relationship.

Consequently, a charity can sue a knowing assistant even if the original fraudster is not part of the lawsuit. This provides an additional and often crucial avenue for the recovery of stolen assets.

Using Equitable Remedies to Trace Misappropriated Assets

Beyond personal claims for compensation, charities can use the powerful equitable remedy of tracing to follow and recover misappropriated assets. Tracing is not a claim or remedy in itself but rather an evidential process. As described in Heperu Pty Ltd v Belle (2009) 76 NSWLR 230, it is the process by which a claimant demonstrates what has happened to its property, identifies its proceeds, and the persons who have handled or received them.

This process is often carried out by forensic accountants who “follow the money” by analysing financial records, bank statements, and other documents to reconstruct the flow of funds. The goal is to identify where the charity’s money has gone, even if it has been converted into another form.

A successful tracing exercise allows a charity to establish a proprietary link between its original funds and any substitute assets. Tracing enables a charity to follow its money into various assets, including:

• Property or shares purchased with the stolen funds
• Bank accounts where the funds have been deposited, even if mixed with other money
• Assets held by third parties who received the funds with knowledge of the fraud

Once the misappropriated assets are identified through tracing, the charity can then make a proprietary claim to recover them. This is particularly valuable when the fraudster is insolvent, as it allows the charity to claim the specific asset rather than just being an unsecured creditor.

Reporting Obligations to the ACNC & Other Authorities

Notifying the ACNC & NSW Police of Criminal Activity

When fraud is suspected, Responsible People have a clear obligation to report the matter to the appropriate authorities. This duty is a critical part of responsible governance and helps protect the charity from further harm.

Any suspected criminal activity, such as theft or serious fraud, should be reported to the NSW Police as soon as possible. In addition to notifying the police, charities must also report significant breaches of the Australian Charities and Not-for-profits Commission Act 2012 (Cth) or Governance Standards to the ACNC, an action that can trigger ACNC compliance review & investigations.

This notification should be made using Form 3C as soon as practicable, and no later than 28 days after the charity becomes aware of the breach. The ACNC expects that instances of high-value fraud or those attracting public interest will be reported immediately.

While the police take the lead in investigating criminal offences, the ACNC focuses on the regulatory aspects of the incident. The ACNC will investigate to ensure that:

• The charity is complying with its obligations,
• Its assets are protected, and
• Its Responsible People are meeting their legal duties.

Informing Your Insurer & Other Regulators

Reporting obligations often extend beyond the police and the ACNC. Depending on the nature of the fraud, other bodies may need to be notified to mitigate the damage and ensure compliance.

If the fraud involves the charity’s bank accounts, cheques, or credit cards, the financial institution must be contacted immediately. This allows the bank to take swift action, such as stopping access to accounts to prevent further financial loss.

Other regulators may also need to be informed, particularly in cases of external fraud. These include:

Regulator / Body	When to Report
SCAMwatch	Report scams, such as the creation of a fake website in the charity’s name, to this body run by the ACCC.
State or territory regulators	Report fraudulent behaviour to the relevant consumer affairs or fair trading regulator in your state or territory.

The Importance of Expertise & Consulting a Lawyer

Hiring a NFP Lawyer for Civil Recovery Actions

When fraud is discovered, recovering stolen assets becomes a complex process that requires a deep understanding of a charity’s specific legal obligations. Responsible People should consult a not-for-profit lawyer to receive strategic advice on their duties and the recovery options available.

This expertise is crucial for ensuring that every action taken:

• Aligns with the charity’s best interests
• Complies with ACNC governance standards

A lawyer with experience in the not-for-profit sector can guide the charity through the entire asset recovery procedure. They provide essential support by helping Responsible People:

• Understand their legal obligations
• Manage the consequences of the fraud

As a result, the investigation and subsequent legal actions are handled correctly from the start.

Accessing Specialist Advice for Complex Legal Proceedings

Civil recovery actions often involve highly technical legal procedures that demand specialist expertise. For example, obtaining a freezing order is an exceptional and intrusive remedy that courts do not grant lightly. The success of such an application depends on:

• Precise drafting
• Meeting strict evidentiary requirements

Engaging a lawyer with specialist knowledge is vital for managing these complex proceedings. Their expertise is necessary for several critical tasks, including:

• Preparing urgent ex parte applications for freezing orders
• Ensuring full and frank disclosure of all relevant facts to the court
• Navigating complex equitable claims to trace and recover misappropriated assets

Conclusion

When fraud compromises a charity’s assets, Responsible People have a clear duty under ACNC governance standards to investigate and pursue the civil recovery process. This procedure involves using a legal toolkit that includes freezing orders and tracing remedies to recover funds, alongside fulfilling reporting obligations to relevant authorities.

Given the complexities of the asset recovery procedure, obtaining specialist legal advice is essential for fulfilling your obligations and protecting your charity. Contact the experienced not-for-profit lawyers at LawBridge today for trusted expertise to help secure your charity’s assets and its future.

Frequently Asked Questions