Section 437(2) of the Bank Act requires a bank to put a hold on funds deposited in an account if two conditions are satisfied: (i) the funds are claimed by a third party in an action or proceeding; and (ii) the bank is a party to the action or proceeding. This section has become an often used tool by litigators seeking a shortcut to a de facto injunction. In the past, a plaintiff would simply add a defendant’s bank as a party to an action, request the bank to freeze funds on deposit in the defendant’s account and section 437(2) required the bank to freeze the defendant’s accounts, without the strength of the plaintiff’s claim being considered by any court. This shortcut has been used in many cases where there was a concern that a debtor would attempt to hide assets from a lender or move assets rapidly.
However, this practice came under scrutiny from the Ontario Court of Appeal in the recent case of Royal Bank of Canada v. Rastogi. In this case, the plaintiff, Royal Bank of Canada (“RBC”), brought an action against Ankur Rastogi, a former employee, who operated an arbitrage currency trading system using his access to a preferred exchange rate for employees, in breach of his obligations to RBC. RBC claimed that, as a result of this scheme, Mr. Rastogi gained $700,000 in net profit, and RBC suffered the equivalent loss.
In addition to freezing Mr. Rastogi’s three RBC accounts, RBC also asked its affiliate, RBC Direct, to freeze two accounts Rastogi held at that institution. Then, by naming The Toronto- Dominion Bank (“TD”) as a defendant in the action, RBC effectively froze Mr. Rastogi’s account at TD by virtue of section 437(2) of the Bank Act. Mr. Rastogi initiated a crossclaim and brought a motion for summary judgment demanding that the funds in his RBC Direct and TD accounts be released to him immediately.
The Ontario Court of Appeal upheld the Ontario Superior Court of Justice’s decision and required RBC Direct and TD to release the funds in Mr. Rastogi’s accounts. In its decision, the Ontario Court of Appeal made a comparison between the facts of this case and one in which the funds at issue had already been withdrawn to purchase a motor vehicle. There is no question that RBC would not be permitted to deprive Mr. Rastogi of the right to use his car, just because it has an arguable restitutionary claim against him. The fact that the proceeds in question happened to be held in a bank account did not eliminate the need to satisfy the test for an injunction before depriving the defendant of his property or use thereof.
In agreeing with the Superior Court, the Court of Appeal also made a distinction between funds held in bank accounts at RBC, as opposed to accounts at other institutions. RBC could claim set-off of the funds in Mr. Rastogi’s RBC account against any debt owed by Rastogi to RBC, so RBC was justified in refusing to release those funds. In contrast, neither RBC Direct nor TD claimed that Mr. Rastogi owed them any debt. Accordingly, no set-off claim could justify either RBC Direct’s or TD’s refusal to release the funds.
The Court’s decision in this case provides that section 437(2) is not a substitute for obtaining an injunction by meeting the tripartite test for an injunction (that there is an arguable case, that there is irreparable harm and that the balance of convenience favours an injunction). Although section 437(2) may require a bank to immediately freeze a defendant’s assets, this case confirms that this procedure does not grant the plaintiff any legal rights in the property being held. Accordingly, it is open to a court to order the bank to release the funds in question upon application by the defendant. Plaintiffs should be aware that freezing accounts under section 437(2) may not, in certain circumstances, stand up to scrutiny by a court unless appropriate steps have been taken to demonstrate that such action meets the tripartite test for an injunction.