Canada: Mareva Injunctions Can Stop Fraudsters Cold

Edited by Stephen Antle

The powerful "Mareva" injunction (or freezing order) is one of the most devastating weapons in the Canadian commercial litigation arsenal. Such an order prevents a party (usually an apparent fraudster) from removing, spending or dissipating assets during litigation to deprive the claimant of the benefits of a judgment. Claimants are well advised to consider applying for such an order before they become immersed in litigation involving fraud or other dishonest conduct, by which time assets may have already been spirited away. If you are the subject of such an order, or a third-party recipient of one, it is crucial to react swiftly and prudently to ensure compliance with it.

A Mareva injunction freezes some or all of a defendant's assets, usually well before trial. The order may also require the defendant to provide an affidavit detailing information about their assets. Non-compliance with the order, either in terms of the movement of assets or their non-disclosure, will haunt the credibility of the defendant throughout the litigation and may result in contempt of court proceedings. Similarly, a properly-obtained order at the beginning of a lawsuit reverberates beyond the freezing of the assets itself.

Although a party should not seek a freezing order on purely strategic grounds, freezing a defendant's assets has a persuasive effect on settlement negotiations. Secured at the outset of litigation, it offers the possibility of a swift, effective and relatively inexpensive resolution, coupled with real recovery for the victims.

A Rigorous Test

In most Canadian jurisdictions, the traditional for a Mareva injunction test requires that the applicant show a strong prima facie or good arguable case, and a real risk that the defendant will remove or dissipate assets to avoid judgment.

Some jurisdictions, such as British Columbia, take a more flexible approach. British Columbia courts have consistently stated that they are not "prisoners of a formula", and that a freezing order may be granted wherever justice demands it. That being said, British Columbia courts agree that a freezing order should not be granted based merely on speculation that the plaintiff will ultimately succeed in its claim and have difficulty collecting on its judgment if it is not granted.

World-Wide Freezing Orders

As Canadian courts have developed expertise and confidence in issuing freezing orders, they have extended their reach beyond their domestic jurisdictions: courts may and do grant world-wide freezing orders. Such orders effectively freeze the assets of the defendant wherever situated. The courts have this extraterritorial reach when they have jurisdiction over the defendant, most clearly when the defendant has submitted to their jurisdiction in some way.

So as not to offend principles of international comity, the standard worldwide freezing order expressly permits a foreign third-party recipient, such as a bank, to comply with whatever it reasonably believes to be its contractual or other obligations under the laws of its own jurisdiction.

Flexible and Practical Procedure

In most circumstances, the applicant for a Mareva injunction will file materials starting legal proceedings, with affidavit material setting out their claim and evidence that the defendant's assets may be dissipated before trial. In more urgent cases, the application may be heard by live testimony.

To prevent the defendant removing or disposing of their assets before the order is made, these materials are generally not served on the defendant until after the injunction is granted. In most cases, the application is first heard without notice to the defendant. Canadian court registries are usually accommodating in allowing the application to be heard immediately or within hours of filing.

The order is almost always limited in time, with leave granted in advance for the defendant to apply for its release or variance. A claimant obtaining an injunction must expect a return to court to face a furious battery of evidence and arguments microscopically dissecting its earlier submissions. It often happens, however, that the freezing order is the beginning of the end for the defendant: negotiation and settlement avoid the return to court. A Mareva injunction may be granted at any time during the litigation, even after judgment has been given. That being said, if litigation has been ongoing and the defendant has complied with the court's processes, it is more difficult to establish the need for a freezing order.

Historically, typical orders froze all the defendant's assets. Now, courts insist upon more nuanced terms. The defendant is generally allowed to move assets in the ordinary course of their business. They are also permitted reasonable living and legal expenses. The order should not freeze assets in excess of the amount claimed in the litigation.

The order will often place a cap on permitted withdrawals by the defendant in a given period. Another method is to provide for a financial institution holding the defendant's assets to create a separate account with a limited accessible amount.

For practical enforcement, the order is served on the financial institutions and other parties who are known to, or likely, hold the defendant's assets. Ideally, these institutions, with specific account numbers, will be listed in the order. But the typical order also contains a blanket prohibition against dealing with assets, with which even financial institutions that are not listed must comply. The freezing order should also, where possible, be registered against the title of all real estate owned by the defendant.

High Rewards, But High Risks

Applying for a Mareva injunction is a high-stakes exercise, for several reasons.

First, the application is almost always made without notice, to prevent the fraudster defendant from spiriting away their assets before the freezing order is granted. Applicant's counsel is therefore required to make full and frank disclosure of all material facts, and the applicable law, to the court. As there is often very little time to prepare the materials, and as such information is often murky at best in a fraud scenario, it is often a challenge for counsel to uncover sufficient facts to discharge that duty. Even innocent non-disclosure can result in the setting aside of the order. A marked failure in disclosure may well attract judicial castigation, as well as a full-indemnification costs award payable by the applicant.

Second, as with most injunctions, the applicant must provide an undertaking to the court to compensate the defendant for any damage caused by the order, if it is later determined that it should not have been granted. When a party's assets are substantially frozen, there is a real risk of significant damage, for which the applicant could be liable.

Finally, a freezing order that is improperly or sloppily obtained, or one that is drafted too broadly or imprecisely, will cost the party, and its counsel, heavily in terms of credibility with the court. Canadian jurisprudence contains many judicial chastisements of parties seeking freezing orders for an ulterior purpose. A freezing order that is later set aside can hobble the claimant from the outset of litigation, rather than empowering it.

What If You Are Served With A Canadian Freezing Order?

The defendants whose assets are the subject of freezing orders tend to be rogues. Indeed, fraudulent conduct by the defendant is usually the main factor in the court granting the order. It is frequently futile and naïve to expect such a defendant to respect the order. A claimant obtaining a freezing order thus enforces it primarily by serving it on persons and institutions that hold funds for the defendant, most commonly banks, credit unions and other financial institutions. Financial institutions should be prepared to respond to such orders at any time.

A financial institution is often stuck between a rock and a hard place when served with a freezing order. On one hand, it has duties to its client, and may wish to preserve that business relationship. On the other, it faces serious sanctions if it does not comply with the order, even one from outside its jurisdiction. If it has a physical or business presence in the jurisdiction of the issuing court, it could even face contempt proceedings. However, there is good news for financial institutions caught in such a bind. Initially, the courts held that a bank that did not take adequate care to freeze funds as required could be liable to the claimant for damages if the defendant absconded with the funds that ought to have been frozen. Happily for financial institutions, the courts later reversed that decision, and held that a bank will not be liable if it innocently fails to freeze funds. The news is not all rosy, however, the courts have also confirmed that banks and their employees may face contempt of court charges if they do not properly comply with freezing orders.

Freezing orders are often complicated and lengthy. Their scope and requirements are not always clear. Given the international scope of modern finance, and the possible sanctions for failure to comply, financial institutions and other recipients of freezing orders would be wise to seek advice about whether, how and to what extent they must comply with them.

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