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Going nuclear: Freezing assets with a Mareva injunction

The abridged version of this article was originally published on November 18, 2019 by The Lawyer’s Daily, part of Lexis Nexis Canada Inc.

Introduction

Courts are generally loath to permit “execution before judgment”. The simple reason is that a plaintiff has not yet proven their case against the defendant. Tying up a defendant’s assets pending a trial that may be a couple years away may cause an inequitable result if the defendant is ultimately successful in showing that a plaintiff’s claim is unmeritorious. The freezing order could also make the defendant unable to defend itself or result in a “forced” settlement on terms that the defendant would not have otherwise agreed to.

Conversely, if a freezing order is not granted, an unscrupulous defendant may use the inherent delays in the civil trial process to dissipate their assets effectively or practically rendering themselves “judgment-proof”. This is a significant concern in fraud cases where a defendant may transfer assets offshore or otherwise beyond the reach of the plaintiff in an effort to defeat a future judgment creditor.

This is where the Mareva injunction comes in. Referred to by one leading jurist as one of the “nuclear weapons” in a judge’s arsenal,1 Mareva injunctions can stop a defendant from dissipating assets pending trial.

Mareva Injunctions

Mareva injunctions, like many powerful remedies, originate in equity.2 Their purpose is to freeze and preserve the assets of a defendant to ensure that the assets are available for execution in satisfaction of any future judgment obtained. The Mareva injunction is a limited exception to the general rule that a party to a proceeding may not obtain execution before judgment.3 They are typically brought pre-action or at the very start of the action and on an ex-parte basis (without notice to the alleged wrongdoer).4

Authority for Mareva injunctions, sometimes called freezing orders, can be traced back to several English cases, principally Mareva Compania Naviera SA v. International Bulkcarriers SA,5 a shipping case decided by the English Court of Appeal in 1975, from which the remedy derives its name. In that case, the plaintiffs were shipowners who owned the vessel The Mareva, which they leased to the defendants under a time charter for a return voyage from Rotterdam to India, which in turn was sub-chartered to the President of India, who paid 90% of the freight into a bank account in London. Out of those funds, the charterers paid the first two installments to the shipowners but failed to pay the rest. By that time, the ship was on the high seas, having just rounded Cape Town on its voyage to India, and there was considerable risk that the funds controlled by the charterers in the London bank account would disappear without the court’s urgent intervention. In those circumstances Lord Denning MR held that the funds should be frozen to prevent the charterers from dissipating them.6

Mareva injunctions are extraordinary remedies and are difficult to obtain. In order to get a Mareva injunction, a plaintiff must generally show four things:

  1. A strong prima facie case. While Mareva injunctions are generally granted in the context of fraud, proof of fraud is not a prerequisite for obtaining a Mareva injunction. A Mareva injunction may be granted where there is a strong prima facie case of another cause of action predicated on dishonesty, and all of the other elements of the test for obtaining a Mareva injunction have been satisfied.7
  2. A real and genuine risk that the defendant will put his or her assets beyond the reach of his creditors for the purpose of avoiding judgment. For example, by transferring them offshore. This can be established by direct evidence or by inference. The circumstances of the fraud itself may lead to a reasonable inference that a defendant is likely to dissipate their assets.8
  3. The plaintiff will suffer irreparable harm if the defendant’s assets are not frozen.
  4. That the balance of convenience favours the plaintiff.9

In addition to the test set out above, English jurisprudence has developed other guidelines to be considered on a motion for a Mareva injunction, especially when the motion is brought without notice to the defendant:

  1. The plaintiff must make full and frank disclosure of all matters in his or her knowledge that are material for the court to know. This is important because a court will likely set aside the injunction if full and frank disclosure is not made;
  2. The plaintiff should give particulars of the claim against the defendant, stating the grounds and amount of the claim, and fairly raise the points that a defendant would be anticipated to make against the claim if he or she was put on notice of it. For example, the potential application of a limitation period;
  3. The plaintiff should give some grounds for believing that there is a risk of the assets being removed or dissipated before the judgment is satisfied, or why a Mareva injunction is necessary to prevent a fraud on the court. Evidence of this sort could be obtained through a Norwich order against the defendant’s bankers.;
  4. The plaintiff generally must give an undertaking as to damages (unless the court orders otherwise).10 If a Mareva injunction is set aside, damages can be substantial.11

While having “assets in the jurisdiction” is a factor for the court to consider, worldwide Mareva injunctions may also be granted in respect of assets ex juris (outside the jurisdiction). Worldwide Mareva injunctions are granted on the basis that the court asserts unlimited in personam (personal) jurisdiction against any person who is properly made a party to proceedings in the jurisdiction.12 Under conflicts of law principles, this may be established by domicile, attornment, or because the cause of action asserted has a real and substantial connection with the jurisdiction.

Canadian courts have ordered worldwide Mareva injunctions in numerous  cases. In the British Columbia case of Mooney v. Orr,13 the court explained the rationale for worldwide Mareva injunctions as follows:

The reason for extending Mareva injunctions to apply to foreign assets are valid in British Columbia no less than in England and Australia – the notion that a court should not permit a defendant to take action designed to frustrate existing or subsequent orders of the court, and the practical consideration that in this day of instant communication and paperless cross-border transfers, the courts must, in order to preserve the effectiveness of their judgment, adapt to new circumstances. Such adaptability has always been, and continues to be, the genius of the common law…Where an applicant seeks to enjoin the transfer of assets worldwide, one grafts onto these conditions the further requirement that there exist assets ex juris, the disposition or concealment of which would be likely to frustrate any judgment obtained against the defendant.

Although that case was decided 15 years ago, the rationale for worldwide Mareva injunctions is even greater today.

Ontario courts have granted worldwide Mareva injunctions in numerous cases.14 Although it is not strictly necessary to show that a defendant has no assets in the jurisdiction, the extent of those assets is certainly a relevant consideration in determining whether a Mareva injunction should be granted with worldwide effect.15 As globalization continues to increase, the need for worldwide Mareva injunctions will too.

As set out above, a Mareva injunction is a powerful and useful remedy to protect plaintiffs, but it is not granted routinely and can be difficult to obtain. Pursuing such an order requires counsel to move very quickly and to meet the stringent test and accompanying considerations required by the court. But in certain circumstances, it is imperative to pursue such relief or else the subsequent litigation could result in a judgment that cannot be enforced.

Footnotes
  1.   United States of America v. Yemec (2009), 97 O.R. (3d) 409 (S.C.J.)
     
  2.   The jurisdiction of Ontario courts to grant equitable relief is grounded in s. 96(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43: “Courts shall administer concurrently all rules of equity and the common law.”
     
  3.   Chitel v. Rothbart (1982), 39 O.R. (2d) 513 (C.A.)
     
  4.   Rule 40.01 of the Rules of Civil Procedure provides that an interlocutory injunction under s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, may be obtained on a motion to a judge by a party to a proceeding or an intended proceeding.
     
  5.   Mareva Compania Naviera SA v. International Bulkcarriers SA, (1980) 1 All ER 213 (C.A.). See also: Nippon Yusen Kaisha v. Karageorgis, (1975) 1 W.L.R. 1093 (C.A.), (1975) 3 All E.R. 282.
     
  6.   Lord Denning wrote: “In my opinion that principle applies to a creditor who has a right to be paid the debt owing to him, even before he has established his right by getting judgment for it. If it appears that the debt is due and owing, and there is a danger that the debtor may dispose of his assets so as to defeat it before judgment, the court has jurisdiction in a proper case to grant an interlocutory judgment so as to prevent him disposing of those assets. It seems to me that this is a proper case for the exercise of this jurisdiction. There is money in a bank in London which stands in the name of these charterers. The charterers have control of it. They may at any time dispose of it or remove it out of this country. If they do so, the shipowners may never get their charter hire. The ship is now on the high seas. It has passed Cape Town on its way to India. It will complete the voyage and the cargo will be discharged. And the shipowners may not get their charter hire at all. In face of this danger, I think this court ought to grant an injunction to restrain the charterers from disposing of these moneys now in the bank in London until the trial or judgment in this action. If the charterers have any grievance about it when they hear of it, they can apply to discharge it. But meanwhile the shipowners should be protected. It is only just and right that this court should grant an injunction. I would therefore continue the injunction.”
     
  7.   Lambrou v. Voudouris, 2015 ONSC 998 at para. 5
     
  8.   Sibley & Associates LP v. Ross, 2011 ONSC 2951 at paras. 62-67
     
  9.   Jajj v. 100337 Canada Limited, 2014 ONSC 557 at para. 131, citing Chitel v. Rothbart (1982), 39 O.R. (2d) 513 (C.A.), and Aetna Financial Services Ltd. v. Feigelman, (1985) 1 S.C.R. 2
     
  10.   Chitel v. Rothbart (1982), 39 O.R. (2d) 513 (C.A.)
     
  11.   United States of America v. Yemec, 2013 ONSC 50
     
  12.   SFC Litigation Trust (Trustee of) v. Chan, 2017 ONSC 1815 (Div. Ct.) at paras. 27-45
     
  13.   Mooney v. Orr (1994), 98 B.C.L.R. (2d) 318
     
  14.   Innovative Marketing Inc. v. D’Souza, 2007 CanLII 5529 (ON SC); SFC Litigation Trust (Trustee of) v. Chan, 2017 ONSC 1815 (Div. Ct.); Asselin-Kowalsky v. Kowalsky, 2019 ONSC 1767
     
  15.   Mooney v. Orr (1994), 98 B.C.L.R. (2d) 318
     

Matthew Stroh

Matthew is a senior member of the estate and litigation groups. He maintains a broad civil, commercial, insurance and securities litigation practice.

This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice. Every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. Nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.
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