An extract from The Asset Tracing and Recovery Review, 8th Edition

Seizure and evidence

i Securing assets and proceedsThe Mareva injunction

The Mareva injunction is an extraordinary remedy created by the courts of England to address the fact that the general rule prohibiting execution before judgment meant assets could be unavailable to satisfy any eventual judgment. Dubbed one of 'the law's two nuclear weapons', it was confirmed to form part of the common law of Canada in a 1985 decision of the Supreme Court of Canada, Aetna Financial Services v. Feigelman. However, Aetna did not establish a rigid test for the new remedy. Rather, it established certain broad parameters, without imposing an inflexible prescription. The Court summarised the 'gist of the Mareva action' as follows: the right to freeze exigible assets within the jurisdiction, regardless of where the defendant resides; there must be a cause of action between the plaintiff and defendant, which is justiciable before the courts of that jurisdiction; and there is a genuine risk of disappearance of assets, either inside or outside the jurisdiction.

In recent years, as Mareva injunctions have been sought in more varied scenarios, many involving fraud, the requirements for a Mareva injunction have been relaxed somewhat. The Ontario Superior Court in Sibley & Associates LP v. Ross held that the risk of dissipation can be inferred in cases where the inference arises from circumstances of the alleged fraud, taken in the context of all of the surrounding circumstances. Such circumstances include evidence suggestive of a defendant's fraudulent criminal activity or a pattern of prior fraudulent conduct. However, the requirement to have evidence of dissipation would not be automatically addressed simply because the plaintiff established a strong prima facie case in fraud, and the inference would also be available when a strong prima facie case is established for other causes of action.

Sibley was written by Justice George Strathy (as he then was), a highly respected jurist who was, soon after deciding Sibley, elevated to the Ontario Court of Appeal and who now serves as the Chief Justice of Ontario. His thorough reasoning and pragmatic recognition of the need to infer a risk of dissipation of assets was a welcome clarification of the state of the Mareva remedy. However, a potential tension in this aspect of the Ontario Mareva jurisprudence resurfaced in a recent Ontario Superior Court decision involving real estate fraud. In HZC Capital Inc. v. Lee, the plaintiff's motion for a Mareva injunction against the defendants was dismissed, despite having established a strong prima facie case of fraud. Justice Laurence Pattillo stated: 'I do not disagree with Strathy J.'s analysis or his conclusion that the court may infer dissipation of assets where fraud is established based on all of the circumstances'; however, he then went on to conclude there was no serious risk of dissipation, despite his finding of a strong prima facie case of fraud. This decision stands in contrast to other cases in which the dishonesty inherent in the fraud is itself referenced when considering the risk of dissipation. Nonetheless, the plaintiff in HZC was found to have failed to provide evidence of a real risk of the defendants' assets being removed from or disposed of in the jurisdiction, based in part on factors such as the defendants' longstanding ties to the jurisdiction, their commencement of litigation in the jurisdiction, and the passage of time between when the plaintiff had learned of the fraud and had pursued the injunction. This decision serves as a reminder that establishing a strong prima facie case of fraud, in the absence of contextual evidence that allows for an inference of a serious risk of dissipation, can still result in Ontario courts refusing to grant this extraordinary remedy.

The Supreme Court in Aetna seemed to favour the 'strong prima facie case' requirement adopted by the Ontario Court of Appeal a few years prior, while also noting that the Ontario approach was 'somewhat narrower' than the 'good arguable case' standard from the UK jurisprudence. The balance of convenience must also favour the issuance of the order. This branch of the analysis involves a detailed consideration by the court of the competing interests at play: principally, the plaintiff's interest in avoiding a dry judgment and the defendant's interest in not having assets detained prior to judgment. Of course, the variables cannot be viewed as watertight compartments: if a plaintiff has an extremely strong case on the merits, the risk that the defendant will have its assets detained unnecessarily is correspondingly diminished; hence, the balance of convenience is more likely to favour the plaintiff.

In British Columbia, courts have adopted a flexible approach, employing a two-step test for a Mareva injunction, so as to not render the judge 'a prisoner of a formula', but to allow courts to do justice as between the parties in any given case. The British Columbia Court of Appeal has also recognised that almost every Mareva injunction is likely to inconvenience another party in some way, and has emphasised that 'the overarching consideration in each case is the balance of justice and convenience'.

One aspect of the test that remains constant, and is of vital importance, is the requirement to provide an undertaking to indemnify the respondent and any third party who might be adversely affected by an order for any damages suffered as a result of an injunction. Depending upon the party seeking the injunction and its assets, or lack thereof, in the jurisdiction, it might be necessary to fortify the undertaking by way of posting security.

Mareva injunctions are typically, but not always, sought on an ex parte basis. As with any ex parte relief, it is crucial that full, frank and fair disclosure be made to the ex parte judge of all material facts, particularly those that would tend to support the position of the party against whom the injunction is sought. Such disclosure should include sufficient detail to allow the ex parte judge to determine the correct value of the underlying claim and, accordingly, of the assets to be frozen.

Model Mareva orders have been developed in particular jurisdictions, serving as a guide when determining the appropriate parameters for this extraordinary relief. In some provinces, such as Ontario, the ex parte order has a specific shelf life (10 days) within which it must be renewed on an inter partes basis. Mareva injunctions can be framed so as to freeze assets solely in a particular jurisdiction within Canada or on a broader, even worldwide, basis. In Ontario, a decision provided for a worldwide Mareva injunction where the defendant had no assets in the jurisdiction. A compelling factor in granting the injunction was evidence based on information from Hong Kong lawyers that the Canadian order would assist in securing a freezing order in Hong Kong.

Finally, while Mareva injunctions are typically sought pre-judgment, there is authority for granting a post-judgment Mareva, which can be useful in securing assets in circumstances where a judgment debtor may seek to deplete, move or otherwise deal with assets, pending the outcome of an appeal.

Other remedies

There are other remedies that can be of assistance in securing assets and proceeds prior to judgment in a fraud claim in addition to the Mareva injunction. These include certificates of pending litigation (designed to provide notice of a claim against real property to prevent its sale or encumbrance) and orders under specific provincial rules of civil procedure (e.g., Ontario's Rule 44 for the preservation of personal property and Rule 45 for the preservation of a specific fund). However, none provide as broad, flexible and potent a remedy as the Mareva injunction.

ii Obtaining evidenceAnton Piller orders

The other of 'the law's two nuclear weapons' is the Anton Piller order (the AP order). While Mareva injunctions are aimed at preserving assets that might otherwise be placed beyond the reach of a plaintiff or the court, AP orders are aimed at preserving evidence that might otherwise be removed or destroyed. The AP order allows a plaintiff or his or her solicitors 'to enter the defendant's premises so as to inspect papers, provided the defendant gives permission'. Since the defendant is ordered to give this permission, and the AP order is obtained on an ex parte basis, it has long been considered that the remedy 'may seem to be a search warrant in disguise'.

The Supreme Court of Canada has established a four-part test for granting an AP order:

  1. the plaintiff must demonstrate a strong prima facie case;
  2. the damage to the plaintiff of the defendant's alleged misconduct, potential or actual, must be very serious;
  3. there must be convincing evidence that the defendant has in its possession incriminating documents or things; and
  4. it must be shown that there is a real possibility that the defendant may destroy the material before the discovery process can do its work.

AP orders can be a powerful anti-fraud tool, sometimes used in conjunction with Mareva injunctions to halt fraudsters in their tracks. However, with the great power of these remedies comes both great responsibility and a certain fragility. Judicial discomfort with the draconian nature of AP orders continues in modern Canadian jurisprudence. Given the scope for potential unfairness to parties against whom AP orders are made, particularly regarding the seizure of privileged or otherwise confidential material, the remedy for abuse of the power can be the dissolution of the order, damages and, in some cases, the disqualification of counsel for the party who obtained the order.

Norwich Pharmacal orders

In some cases in which a fraud is suspected but key evidence that may confirm or bolster such a cause of action lies with one or more third parties, Canadian courts can make a Norwich Pharmacal order requiring the third party to produce information, after considering five factors:

  1. whether the applicant has provided sufficient evidence to raise a valid, bona fide or reasonable claim;
  2. whether the applicant has established a relationship with the third party from whom the information is sought such that it establishes that the third party is somehow involved in the acts complained of;
  3. whether the third party is the only practicable source of the information available;
  4. whether the third party can be indemnified for costs to which the third party may be exposed because of the disclosure; and
  5. whether the interests of justice favour obtaining of the disclosure.

Norwich Pharmacal orders are typically served on financial institutions and internet service providers, and can serve to assist in both proving a fraud was committed and in recovering assets obtained by fraud, including by determining the location of a defendant or a defendant's assets (or both). The Supreme Court of Canada recently allowed a telecommunication company's appeal of a lower court decision that in complying with a Norwich Pharmacal order, the telecommunication company was limited to recovering costs incurred in the act of disclosure, and not the costs of all steps necessary to comply with the order. The Supreme Court determined that internet service providers are permitted to recover reasonable costs that arise from complying with Norwich Pharmacal orders. However, an internet service provider cannot recover the cost of carrying out any of the obligations that will have arisen under the legislative regime that allows for disclosure requests, even if the obligations are only fulfilled after having been served with a Norwich Pharmacal order. Therefore, costs related to steps taken by internet service providers to comply with statutory obligations that overlap with steps taken to comply with obligations under a Norwich Pharmacal order are not recoverable.