In Sibley & Associates LP v. Ross, 2011 ONSC 2951 (S.C.J.), Justice Strathy of the Superior Court of Justice has clarified inconsistent jurisprudence on the ‘fraud exception’ in ex parte applications for Mareva injunctions: he found that evidence of a real risk that the assets in question may be dissipated or transferred out of the jurisdiction is required, and the idea that evidence of fraud alone was an accepted basis was wrong. Rather than relying on a so called ‘fraud exception’, Justice Strathy held that in cases of fraud, evidence of a real risk of dissipation or transfer of assets can be established by inference from the surrounding circumstances, including fraudulent conduct, rather than through direct evidence.

The plaintiff sought a Mareva injunction to freeze the bank accounts of the defendants, a former employee and his mother. The defendant had been employed in the plaintiff’s accounting department but resigned abruptly when he was informed of a pending audit of the company’s financial records. During the audit, it was discovered that payments in excess of $310,000.00 had been made to the employee’s mother without authorization. Those payments had been made on a regular basis from the time the employee began working for the plaintiff and stopped after he resigned. Documentary evidence of the cheque stubs used to make the payments had also disappeared.

At issue before the Court was the five-part test for Mareva relief, as set out by the Court of Appeal in Chitel v. Rothbart, (1982), 39 O.R. (2d) 513 (C.A.):

  1. the plaintiff must make full and frank disclosure of all material matters within his or her knowledge;
  2. the plaintiff must give particulars of the claim against the defendant, stating the grounds of the claim and the amount thereof, and the points that could be fairly made against it by the defendant;
  3. the plaintiff must give grounds for believing that the defendant has assets in the jurisdiction;
  4. the plaintiff must give grounds for believing that there is a real risk of the assets being removed out of the jurisdiction, or disposed of within the jurisdiction or otherwise dealt with so that the plaintiff will be unable to satisfy a judgment awarded to him or her; and
  5. the plaintiff must give an undertaking as to damages.

Proof of a strong prima facie case is a condition precedent to the five-part test (see Aetna Financial Services Ltd. v. Feigelman, [1985] 1 S.C.R. 2).

Justice Strathy held that the plaintiff had established a very strong prima facie case, and had satisfied all parts of the test for a Mareva, with the exception that there was no direct evidence of the defendants’ financial means nor any attempt or intention to dissipate or remove assets from the jurisdiction.

Plaintiff’s counsel submitted that the plaintiff’s case fell within the ‘fraud exception’ to the rule against execution before judgment. The fraud exception in Ontario was traced to the judgment of Justice Galligan in Mills v. Petrovic (1980), 30 O.R. (2d) 238 at 239 (H.C.J.):

“…equity demands that there be an exception to that principle [against execution before judgment] where there is substantial evidence supporting an allegation that the defendant has defrauded or stolen from the plaintiff…”

Justice Strathy then conducted an extensive review of Ontario law dealing with Mareva injunctions and the ‘fraud exception’, some of which cast doubt on the decision in Mills v. Petrovic. Citing from the leading Ontario Mareva case, Chitel v. Rothbart, Justice Strathy stated:

“The judge of first instance in the case said; “I can see no reason why the plaintiff with a cause of action for fraud should be given assurance of recovery under such a judgment and not if the judgment stemmed from some other cause” … I agree with this view and I have sought to point out the conditions that must be satisfied before a Mareva injunction can be granted. [Emphasis added.]”

Justice Strathy noted that the Mills v. Petrovic decision had been revisited and criticized by Justice Cullity in 663309 Ontario Inc. v. Bauman, [2000] O.J. No. 2674 (S.C.J.), aff’d [2001] O.J. No. 1213 (Div. Ct.). Justice Strathy also noted that in 663309 Ontario Inc., Justice Cullity had concluded that where no fraudulent disposition is proved, there was no fraud exception to the requirement for a Mareva injunction:

“On the present state of the authorities [proof of a real risk that assets will be removed or disposed of] is a requirement for Mareva orders and I believe I must follow what appears to me to be implicit in the reasons of the Court of Appeal in Chitel - the only decision cited to me in which the status of the decision in Mills and the relationship between "the fraud exception" and the requirements for Mareva orders were directly in issue - and proceed on the footing that Mills does not widen "the fraud exception" beyond its historical foundations in the Fraudulent Conveyances Act to the extent that it would cover any proceedings where fraud is alleged and nothing more than a strong prima facie case is shown. This means that, where no allegedly fraudulent disposition has occurred and it is sought to restrain the defendant from disposing of assets, the requirements for a Mareva order must be satisfied even where the plaintiff's cause of action is based on fraud. [Emphasis added.]”

Justice Strathy went on to review the divergent jurisprudence and academic authorities that established that Ontario courts had not settled on either of the opposing views from Mills or 663309 Ontario Inc.

Justice Strathy concluded:

“From Chitel v. Rothbart to the present day, the law has sought to draw a fair balance between leaving the plaintiff with a “paper judgment” and the entitlement of the defendant to deal with his or her property until judgment has issued after a trial. In my respectful view, a plaintiff with a strong prima facie case of fraud should be in no more favoured position than, say, a plaintiff with a claim for libel, battery or spousal support. On the other hand, there may be circumstances of a particular fraud that give rise to a reasonable inference that the perpetrator will attempt to perfect the deception by making it impossible for the plaintiff to trace or recover the embezzled property. To this extent, it seems to me that cases of fraud may merit the special treatment they have received in the case law.

Rather than carve out an “exception” for fraud, however, it seems to me that in cases of fraud, as in any case, the Mareva requirement that there be risk of removal or dissipation can be established by inference, as opposed to direct evidence, and that inference can arise from the circumstances of the fraud itself, taken in the context of all the surrounding circumstances. It is not necessary to show that the defendant has bought an air ticket to Switzerland, has sold his house and has cleared out his bank accounts. It should be sufficient to show that all the circumstances, including the circumstances of the fraud itself, demonstrate a serious risk that the defendant will attempt to dissipate assets or put them beyond the reach of the plaintiff. [Emphasis added.]”

Justice Strathy therefore concluded that the surrounding circumstances contributed to a strong inference that there was a real risk that the defendants would attempt to dissipate assets or remove them from the jurisdiction. Accordingly, Justice Strathy granted a Mareva injunction with respect to the employee’s bank account and the mother’s account at the same institution, and ordered the institution to disclose particulars of the transactions between those accounts to the plaintiff.