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Mareva — more than a cigar!

It may be best known as the most popular Cuban cigar size, but the Mareva (aka Petit Corona) is also a form of injunction that may help to ensure a defendant’s assets do not disappear in a puff of smoke when it comes time to collect on a judgment. The Mareva Order is an effective aid to ensure that justice is not thwarted, although it has been has been described, along with the Anton Piller, as "draconian." This common law assistance was first recognized as part of the inherent jurisdiction of the court by Lord Denning in 1975, and takes its name from Mareva Compania Naviera S.A. v. International Bulkcarriers Ltd., [1975] 2 Lloyd’s Rep. 509 (C.A.). In the UK, it has recently been renamed as a "freezing injunction."

Marevas were formally endorsed in Canada in Chitel v. V. Rothbart (1982), 39 O.R. (2d) 513 (C.A.). The Supreme Court of Canada blessed them in Aetna Financial Services Ltd. v. Feigelman, [1985] 1 S.C.R. 2, but cautioned that care should be exercised to avoid having them become a form of "litigious blackmail." Interestingly, the Supreme Court of the United States ruled against recognizing such orders, given that they were not part of the law of equity at the time of US Independence (see the 1998 case, Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308); however, this rejection has been ameliorated in certain states by legislation.

The object of a Mareva injunction is to prevent assets from being dissipated or concealed within the domestic jurisdiction or to prevent their disappearance outside the jurisdiction. Transfers of assets within Canada, even across provincial boundaries, are not likely to warrant such an order absent unusual circumstances (see Feigelman).

Plaintiffs routinely seek a Mareva ex parte; in these cases, it is necessary to provide in the order that the injunction is only valid for a maximum of 10 days unless thereafter extended (Ontario Rules of Civil Procedure, R. 40.02). Because the defendant has no notice of the proceedings, it is important that the plaintiff make full and frank disclosure of all matters of which the plaintiff has knowledge that are material for the court to know. It is therefore important that counsel at such a hearing canvass everything that can be reasonably and objectively determined to possibly have been advanced by the defendant had notice been given. Failure to be forthcoming may expose the plaintiff to being obligated to pay special or full costs (see C.M.S. v. M.R.J.S., 2009 YKSC 49 (CanLII)), and to having the injunction dissolved.

As discussed in my analysis of Anton Piller (AP) orders in Volume 2, Issue 1 of this publication, it would seem to me that one of the AP order requirements is equally applicable to a Mareva:

The normal requirement is for the plaintiff to give an undertaking to pay damages in the event the AP Order turns out to be wrongfully executed or unwarranted, keeping in mind the ex parte requirement of full and frank disclosure includes possible defences, objectives or requirements of the target who is not there in the original hearing to make these points — but that lack of disclosure of immaterial points will not diminish an AP Order on review (see Bell Expressvu Limited Partnership v. Echostar Satellite LLC, 2008 CanLII 12837 (ONSC) relying on Ontario Realty Corp. v. P. Gabriele & Sons Ltd., [2000] O.J. No. 4341).

The order requested should take into account that it should not ordinarily be a full-blanket one that would cause hardship to either an individual with respect to reasonable living expenses or to an enterprise carrying on business in the ordinary and reasonable course (see Silver Standard Resources Inc. v. Joint Stock Co., 1998 CanLII 6468 (BC C.A.)). It is extremely important that valid grounds be established for the granting of a Mareva since even a few days of an improper Mareva being in effect can have an immensely negative effect upon a defendant’s business, with damages consequences for the careless plaintiff (see United States of America v. Yemec (2009), 97 O.R. (3d) 409 (S.C.J.)).

Canadian courts generally emphasize that the plaintiff must show that there is a strong prima facie case on the merits (Chitel and Feigelman). In SLMsoft.Com Inc. v. Rampart Securities Inc. (Bankruptcy), 2004 CanLII 6329 (ONSC), Ground J. equated this to the plaintiff establishing that it is "clearly right" in its allegations against the responding party in the action, or that it is "almost certain to succeed at trial" in respect of those allegations. However, the British Columbia courts appear to have taken a more relaxed position on this, with an indication that the plaintiff have either "a strong prima facie or good arguable case on the merits" (see Insurance Corporation of British Columbia v. Patko, 2008 BCCA 65 and Tracy v. Instaloans Financial Solution Centres (BC) Ltd. (2007), 285 D.L.R. (4th) 413 (B.C.C.A.)). The relaxation of the test in British Columbia is perhaps surprising, given that in an earlier BC case, Future Shop Ltd. v. Northwest-Atlantic (BC) Broker Inc., 2000 BCSC 1797 (CanLII), the chambers judge, Parrett J. observed:

The [Feigelman] decision establishes that where the applicant seeks to significantly restrict the rights of the defendants without a trial, each of the following elements must be established:

  • a "strong prima facie case" and not the lesser English standard of a "good arguable case";
  • that but for the issuance of the injunction, the court’s process would be thwarted by improper dealing by the defendant; and
  • that irreparable harm would be suffered by the plaintiff without the issuance of the injunction.

Finch CJBC in Patko referred to the lower court judge’s correct application of the "flexible approach" in Mooney v Orr, 1994 CanLII 1779 (BCSC), which he called "the leading case for granting a Mareva injunction in British Columbia," adding:

Under the flexible Mooney approach, the fundamental question in each case is whether the granting of an injunction is just and equitable in all the circumstances of the case ... In order to obtain an injunction, the applicant must first establish a strong prima facie or good arguable case on the merits. Second, the interests of the two parties must be balanced, having regard to all the relevant factors, to reach a just and convenient result.

Estey J. in Feigelman stated: "The overriding consideration qualifying the plaintiff to receive such an order as an exception to the Lister rule is that the defendant threatens to so arrange his assets as to defeat his adversary, should that adversary ultimately prevail and obtain judgment, in any attempt to recover from the defendant on that judgment." In R v. Consolidated Fastfrate Transport Inc. (1995), 125 D.L.R. (4th) 1, the Ontario Court of Appeal suggested that the decisive issue is the defendant’s intention, stating that the preferred view is that "it is only if the purpose of the defendant when removing assets from the jurisdiction or the dissipating or disposing of them is for the purpose of avoiding judgment that a Mareva injunction should be issued." However, Patko did reinforce the generally accepted requirement that there be evidence showing a real risk of assets being disposed of or dissipated so as to render nugatory any judgment. In that case, Finch CJBC went on to conclude that the risk that assets will be dissipated may be inferred from evidence of a strong prima facie case of fraud, much like the inference of document destruction or suppression in an AP order situation may be inferred from evidence of fraudulent activity. In Century Services Inc. v. New World Engineering Corporation, 2009 CanLII 44410 (ONSC), one defendant claimed he was the "dupe" of the "mastermind" other defendant, and only "did what he was told, without turning his mind to its propriety." Not surprisingly, this claim did not find favour with the court.

In Beca v. Spork, 2009 CanLII 20700 (ONSC), the Mareva request was dismissed, notwithstanding the fact that the defendants had moved to Iceland together, apparently with the proceeds of the sale of their business to the plaintiff. The plaintiff had not been able to show a strong prima facie case on the basis of the transactional documentation, which indicated a whole agreement clause against oral representations and arrangements for due diligence inspection of the financial records.

However, in 567 Hornby Apartments Ltd. v. Le Capital Le Soleil Hospitality Inc., 2009 BCSC 711 (CanLII), the BC Court granted the Mareva when, during trial, the defendant "demonstrated a persistent pattern of failure to disclose all relevant documents and failure to comply with court orders," and threatened to move to Australia and thereby render himself judgment-proof. Dickson J. was satisfied that the plaintiff’s claim (that the defendant had fabricated documents) had clear prima facie strength.

Finch CJBC also indicated, in Patko, that the onus is substantial and is on the defendant seeking to appeal a Mareva that is a discretionary order in the sense of the judge erring in principle, demonstratively misconceiving the evidence, or resulting in clear injustice to the defendant. In First Majestic Silver Corp. v. Santos, 2009 BCCA 71 (CanLII), the British Columbia Court of Appeal commented in obiter that a defendant may be successful in overturning a Mareva if that order is shown to have been obtained by the plaintiff for ulterior motives (in that case, to prevent the defendant from selling a large block of shares that might depress the stock price, with the court observing that a Mareva is to prevent dissipation of assets, not to give the plaintiff control over the defendant’s assets).

It is important to appreciate that a Mareva injunction operates on an in personam basis; it does not attach to a particular asset on an in rem basis. In this regard, it does not give a charge or any priority to the plaintiff. The plaintiff, if successful in obtaining judgment, will not thereby have any advantage over the defendant’s other creditors.

In dealing with the question of whether a Mareva should issue, it is incumbent on the judge to weigh the balance of convenience between the two sides if granted. This requirement may result in the court granting a more tailored or restricted order than that sought.

Further, a defendant may be permitted to meet bona fide expenses in the ordinary course (including living expenses). The court may also allow the defendant to utilize funds otherwise frozen for the purpose of legal costs in defending the plaintiff’s civil claim, but key to this will be whether these funds should remain frozen if they are derived from or proprietary to the plaintiff. It is therefore important to be precise, but reasonable, in establishing what those exceptions amount to on a periodic (e.g., monthly) schedule. It is worth noting that either side may come back to the court for an adjustment if circumstances warrant. In Bot Construction (Ontario) Ltd. v. Dumoulin (2008), 90 O.R. (3d) 680, Pierce J. commented that "it would be shocking indeed if the litigant could prevent an opponent in a lawsuit from defending himself by foreclosing his ability to retain counsel" in a situation where the assets sought to be utilized to pay counsel were not derived from the plaintiff. Permission as to utilizing certain assets for expenses does not allow the defendant to utilize other assets that are frozen when the permitted assets are exhausted; the proper procedure would be to return to court (see SNC-Lavalin Profac Inc. v. Sankar, 2009 CanLII 12122 (ONSC)). Because the frozen assets were shown to be "proprietary" to the defendant in Sankar, the defendant was directed by the court to seek legal aid for his criminal defence costs.

Frequently, the plaintiff will have some well-founded suspicion that the defendant has some material assets that are not known to the plaintiff. In that situation, the plaintiff would likely request the court to order that the defendant provide particulars of the assets and their location.

Deliberate failure to abide by the terms of a Mareva injunction exposes a defendant to a contempt finding. In Majormaki Holdings LPP v. Wong, 2009 BCCA 349 (CanLII), the appellate court distinguished between civil and criminal contempt. Notwithstanding that the chambers judge found that the contempt committed by the defendant "transcended the interest of the parties and threatened proper administration of justice," the BC Court of Appeal recognized that this was a case of civil contempt. Given that the defendant’s apology was found to be insincere, and that he had a track record of subversive conduct, the 21-day incarceration penalty was not disturbed.

There is a significant value to a plaintiff seeking an appropriate Mareva injunction in the right circumstances to protect the claim from being an empty exercise at trial. Otherwise there is the Cuban saying: "He who has money smokes cigars. But he who has no money smokes paper." And Robert Frost, the American poet, said: "The difference between a man and his valet: they both smoke the same cigars but only one pays for them." It is better to have the celebratory cigar in the right hands, namely those of the successful plaintiff. Then again, notwithstanding having given up cigars years ago, I do recall Freud observing: "Sometimes a cigar is just a cigar."