The Divisional Court’s recent decision in SFC Litigation Trust (Trustee of) v. Chan1 represents a significant development in the law governing Mareva injunctions in Ontario. It clarifies that courts have wide discretion in awarding Mareva injunctions freezing a defendant’s assets in advance of judgment and are not constrained by the guidelines set out by the Court of Appeal for Ontario in the 1982 case of Chitel v. Rothbart.2 In particular, the majority held that the Chitel guideline that the defendant should have assets in Ontario in order for a Mareva injunction to issue is not a strict requirement. A strong dissent from Justice Pattillo underscores the significance of this decision.
Sino-Forest Corporation (SFC) was a large forest product company with assets predominately located in China. It entered into Companies’ Creditors Arrangement Act (CCAA) proceedings that resulted in a plan of compromise and reorganization approved by the court in December 2012. As part of that plan, all the litigation rights of SFC were assigned to the SFC Litigation Trust, and substantially all the assets of SFC were transferred to Emerald Plantation Holdings (Emerald Plantation) located in Hong Kong.
The Trustee of the SFC Litigation Trust (Trustee) commenced an action in Ontario alleging fraud against Mr. Chan, a resident of Hong Kong. The Trustee sought an ex-parte worldwide Mareva injunction against Chan, which was granted. Chan brought a motion to set aside or vary the injunction, on the basis that the test for granting a Mareva injunction set out in Chitel requires that the defendant have assets in Ontario, which Chan did not. The motion was unsuccessful and Chan sought leave to appeal, which was granted.
Chan also challenged the sufficiency of the undertaking as to damages ordered by the motion judge. Under Rule 40.03 of Ontario’s Rules of Civil Procedure3, a party seeking an injunction must undertake to abide by any order concerning damages that the court may make if it ultimately appears that the granting of the order has caused damage to the responding party. While the Trustee gave an undertaking as to damages, it was not clear whether the Trustee had assets in the jurisdiction to satisfy any potential damages award. Chan therefore requested that the Trustee provide proof of assets in Ontario or post security for the undertaking with the court, as well as an order requiring the Trustee to post security for costs. The motion judge denied this request and instead ordered Emerald Plantation, a foreign non-party that also had no assets in the jurisdiction, to provide undertakings as to damages and costs and to notify the Trustee in the event it experienced a material change in its financial position.
1. Mareva injunction
Chan accepted that an Ontario court had jurisdiction to grant an injunction freezing assets worldwide. Therefore, the issue was only whether an Ontario court could grant a Mareva injunction where the defendant has no assets in Ontario (not whether the court had jurisdiction).
The leading case on Mareva injunctions in Ontario is the Court of Appeal’s 1982 decision in Chitel, which was a reference that clarified the jurisprudence as to the availability of Mareva injunctions in Ontario (which, until that point, was a well-developed remedy in England, but not in Ontario). In that case, the Court of Appeal outlined the English jurisprudence and adopted the five guidelines set out by Lord Denning in Third Chandris Shipping Corp. v. Unimarine S.A.; The Pythis.4 While stylized by Lord Denning and the Court of Appeal as guidelines, as noted by the majority in SFC Litigation Trust, Ontario courts have consistently referenced and applied these five factors when considering whether to grant Mareva injunctions. The third guideline, that “the Plaintiff should have some ground for believing that the defendants have assets here,” was squarely at issue in SFC Litigation Trust.
The main point of disagreement between the majority and the dissent in SFC Litigation Trust was whether all the guidelines set out in Chitel are mandatory, such that all must be satisfied to grant the injunction. The majority held that the guidelines are just that (guidelines only), and that because a Mareva injunction is an equitable remedy, it must evolve as facts and circumstances require. In this case, it was not necessary for Chan to have assets in the jurisdiction to grant the Mareva injunction. In the view of the majority, when deciding whether to grant a Mareva injunction, a court ought to consider the guidelines set out in Chitel, but ultimately a court is to grant an interlocutory injunction “where it appears just or equitable to do so,” under section 101 of the Courts of Justice Act.5
To stress the point that the guidelines in Chitel are guidelines, not strict requirements, the majority relied on both Chitel and Justice Weiler’s subsequent discussion of that case in the Court of Appeal’s decision R v. Consolidated Fast Rate Bathurst6, which concerned the ability to grant a Mareva-like remedy in a criminal case. Justice Weiler explained that in Chitel, the Court of Appeal did not mean to foreclose all opportunities in which a Mareva injunction could be granted and only meant to provide guidance.
The majority found further support for its conclusion in the fact that the Mareva injunction had its roots in England, where the courts have now abandoned the strict rule requiring assets in the jurisdiction. The majority also referenced the Supreme Court of Canada’s decision in Aetna Financial Services Ltd. v. Feigelman7, in which the Supreme Court of Canada noted that the “overriding consideration qualifying the plaintiff to receive” a Mareva injunction is “that the defendant threatens to so arrange his assets as to defeat his adversary.”8
In dissent, Justice Pattillo wrote that regardless of whether the Court of Appeal established “guidelines” or a “test” in Chitel, the motion judge erred in exercising his discretion to grant the Mareva injunction. Justice Pattillo commented that Chitel lays out the “judicial principles upon which the court shall exercise its discretion to grant a Mareva injunction.”9 While Justice Pattillo agreed with the majority that Chitel does not foreclose all situations in which the Mareva injunction is available, he stated that if the requirements for the Mareva are to change, the Court of Appeal is to be the one to change them.
The second issue addressed by the court in SFC Litigation Trust is whether the court can accept an undertaking from a foreign party and a foreign corporate non-party, both of which have no assets in the jurisdiction, without requiring security to be posted. The majority held that the sufficiency of the undertaking as to damages is a question of fact, and that because there was no overriding and palpable error in fact or principle, the motion judge’s decision could not be overturned.
The majority accepted the fresh evidence offered by Chan as to the sale of assets of Emerald Plantation which called into question the sufficiency of the undertaking. However, if there was a concern that Emerald Plantation had sold its assets, the proper procedure was to raise the issue with the motion judge, as the order required Emerald Plantation to disclose a material change in its assets.
Justice Pattillo, in a strong dissent, wrote that the motion judge’s decision to permit Emerald Plantation’s undertaking in the absence of evidence as to assets in the jurisdiction was “clearly wrong.”10 Emerald Plantation is not a party to the action, it is a foreign entity, there was no evidence that it had assets and it had not posted security. Justice Pattillo highlighted the potential injustice of the circumstances.
Justice Pattillo did not state that a foreign non-party must always fortify its undertaking, but rather that there was insufficient evidence as to Emerald Plantation’s assets to find that the undertaking did not have to be fortified in this case.
This case is likely to have significant implications for parties who seek Mareva injunctions against international defendants in Ontario proceedings. Given the majority’s emphasis on discretion in determining when a Mareva injunction should issue, it is possible that the decision will be widely used by parties seeking Mareva injunctions to support the position that other factors laid out in Chitel are not prerequisites for the granting of a Mareva injunction.