Obtaining Marevas During Times of Increased Fraud

Unique circumstances created by COVID-19 have broadened companies’ exposure to employee and counter-party fraud.

Fraud risk has increased due to budgetary constraints, use of new supply chain partners, a compromised ability to deploy traditional compliance and due diligence, reduced oversight of employees in light of work from home, and pressures associated with bringing products to market.

However, our experience during the pandemic has been that courts across Canada remain ready, willing and able to consider urgent fraud-related relief, such as Mareva injunctions. 

Urgent response to fraud during COVID-19

When indications of employee or counter-party fraud arise, rapid investigation and intervention are essential to identify and terminate wrongful conduct and resulting harm, gather and preserve vital evidence, and maintain the chances of meaningful recovery for loss.

Despite the pandemic, it is still possible for companies to respond to fraud urgently and effectively, including by accessing Courts quickly for extraordinary relief in appropriate cases. For instance, in Ontario, the Commercial List has special expertise in Mareva (asset freeze), Norwich (pre-action discovery) and Anton Piller (civil search) orders, making the Commercial List particularly well-suited for time-sensitive fraud-related relief (provided that a case meets the Commercial List’s eligibility criteria). From the beginning of COVID-19, the Commercial List has been hearing and deciding urgent matters. Our experience with a recent fraud case, which started and settled by judgment within four weeks, demonstrates that such matters are being addressed very quickly by the Commercial List, notwithstanding the pandemic.

Companies are well-advised to contact financial institutions believed to have received the proceeds of a fraud as soon as possible. Financial institutions are well-motivated to cooperate in fraud investigation and recovery, but they must be mindful of their duties to customers, including confidentiality. Accordingly, companies that have been defrauded should not only reach out to relevant financial institutions but also move quickly to obtain a court-ordered Mareva.

The Mareva Order

The Mareva injunction is a powerful instrument of fraud recovery, which, like several others, Canada imported from the United Kingdom.[1] On an application for an interim Mareva injunction, a moving party must demonstrate: (1) a strong prima facie case; (2) that the defendant has assets in the jurisdiction; (3) that there is a serious risk that the defendant will remove property or dissipate assets before judgment or thwart tracing; (4) that the plaintiff will suffer irreparable harm if the injunction is not granted; and (5) that the balance of convenience favours granting the injunction. Furthermore, where the motion is brought ex parte, as is customarily the case, there must be full and fair disclosure of all material facts.[2]

The requirement of serious risk of dissipation may be satisfied based on an inference from the deceitfulness involved in the fraud itself.[3]

When a Court is satisfied the test for a Mareva is met, an Order is issued restraining the defendant from dealing with their assets, or certain of their assets, pending the outcome of legal proceedings. Usually the Order also prohibits parties with notice from assisting the defendant in dissipating assets. Ontario courts have granted “worldwide” Mareva injunctions with increasing frequency, recognizing the progressively global nature of the economy.[4]

Often a Mareva is accompanied by Norwich-type relief, again an import from the United Kingdom[5], which compels third parties, such as banks, to disclose information and/or documents required by the plaintiff that could not otherwise be obtained. For example, when bank accounts are frozen pursuant to a Mareva, production of records of activity within the accounts is commonly ordered. Bank records are frequently invaluable both as confirmatory evidence of the fraud, and for tracing proceeds into other accounts that may in turn belong to other parties who should also be considered as potential defendants.

The benefits of presenting a clear and compelling case

When considering a Mareva, it is important to gain comprehensive command of the available evidence relating to the fraud and then carefully develop a clear explanation of the fraud, particularly how it was perpetrated and by whom. This type of diligence upfront serves the goal of satisfying two key facets of the legal test for an ex parte Mareva, namely demonstrating a strong prima facie case and disclosure of all material facts. A failure to meet the full and frank disclosure standard required for ex parte relief can have very negative consequences in terms of the ultimate success of the litigation, as well as harsh adverse costs awards. 

Presenting an overwhelming case at the outset also serves a strategic interest: the defendant is presented with a case it may not wish to defend. The goal of a Mareva application should be to present the Court with the clearest, most convincing evidence of the dishonest conduct as possible. While some of the mechanics of a fraud may be complex and must be fairly disclosed, it is crucial to spell out in simple terms how the fraud took place, who committed the fraud, and where the proceeds appear to have gone. This approach often creates significant pressure on the defendant to seek to settle the litigation at the earliest possible stage.

Where the evidence presented in a Mareva application leaves any doubt as to the perpetrator’s dishonesty, it may fail. Furthermore, even if the application succeeds ex parte, the Order will be vulnerable afterwards when the defendant has an opportunity to respond. The proceedings are likely to be contested, prolonged and diverted into subsidiary issues. Put simply, investing resources at the outset of the case to establish a powerful case allows the applicant a better chance at leveraging an early settlement and consequently achieving a significant reduction in the costs of the overall litigation.

Courts have recently completed the process in as few as 28 days. This matter exemplifies the willingness and capability of the Courts to hear and decide properly suited cases on an urgent basis, notwithstanding the challenges associated with the pandemic. 

Socially distanced preparation and presentation in Court

Fraud investigation and recovery involves ‘finding the lie’ and ‘following the money’. Both of these aspects are usually document-driven: clients will have some written or electronic record of the fraudster’s deceit and at least the beginning of the trail of where the proceeds went. Our experience has been that, notwithstanding the pandemic, fraud can still be quickly and effectively investigated, due to its document-intensive nature. However, successful investigation often depends on expert support in electronic evidence gathering and searching. At McCarthy Tétrault we have the advantage of the expertise of MT>3, our in-house e-discovery team that can deploy cutting edge technology, including AI/machine learning, and a trusted team specialized in searching and reviewing large volumes of data where necessary. MT>3 is able to collect, process, analyze and review large volumes of data – all completed remotely. The systems that were in place pre-COVID-19 to transfer data have successfully allowed MT>3 to seamlessly continue its work. We therefore have the capacity to lead an investigation remotely while following best practices to discover and safeguard vital evidence.

Similarly, the presentation of a case in Court during the pandemic may depend on effective use of technology. Given the difficulties imposed by socially distanced litigation, it is becoming increasingly clear that litigators who are able to leverage technology will place their clients at an advantage in the virtual courtrooms of 2020 and perhaps beyond. Again, the expertise of MT>3 is an asset for McCarthy Tétrault which not only enables the rapid management of complex digital evidence in cases where time is of the essence, but also empowers our litigators by having the best technological support available to ensure that our client’s arguments are presented coherently by counsel on any virtual platform, in any jurisdiction, and in any type of court/tribunal final hearing, motion, or discovery.

We expect the technological innovations and new practices of courts across Canada will become a legacy of the pandemic.[6]

[1]Mareva Compania Naviera SA v. International Bulkcarriers SA, [1975] 2 Lloyd’s Rep. 509 (C.A.).
[2]Aetna Financial Services Ltd.v. Feigelman, [1985] 1 S.C.R. 2, at p. 25 (SCC) and Christian-Philip v. Rajalingam, 2020 ONSC 1925, at paras. 8-9, 36 (SCJ). See also the recent case, itself heard via Zoom, 1839392 Ontario Limited v. 1839392 Ontario Limited v. 1839314 Ontario Inc. et al 2020 ONSC 2244, para. 53 (SCJ).
[3]Sibley & Associates LP v. Ross, 2011 ONSC 2951, at para. 63 (SCJ).
[4]SFC Litigation Trust v. Allen Tak Yuen Chan, 2017 ONSC 1815, at para. 38 (Ont. Div. Ct.) in which the Divisional Court held that there was no requirement, for the assertion of the in personam jurisdiction underlying the injunction, for the defendant to have assets in Ontario in order for the court to issue a “worldwide” Mareva injunction.
[5]Norwich Pharmacal Co. v. Commissioners of Customs and Excise, [1973] UKHL 6 (H.L.). Norwich was first adopted by the Canadian courts in Glaxo Wellcome plc v. Minister of National Revenue, (1998) 228 N.R. 164 (FCA).
[6] See remarks of the Chief Justices of the Quebec Superior Court: https://www.canadianlawyermag.com/practice-areas/litigation/quebec-superior-court-chief-justice-highlights-court-administration-issues-after-covid-19/329888; the Ontario Superior Court: https://www.thelawyersdaily.ca/articles/18576; and the Chief Justice of Nova Scotia: https://www.canadianlawyermag.com/practice-areas/litigation/conducting-all-hearings-remotely-in-the-fall-high-on-nova-scotia-chief-justices-list-of-priorities/330284.

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