Legal Blog

Mareva

Posted on February 9, 2018 | Posted in Collections

A debtor is about to sell his only known asset and move halfway around the world. The creditor knows about the impending sale, but has not filed a writ of seizure and sale and, indeed, does not even have a judgment. Can the creditor do anything? The answer is yes. The creditor can seek a Mareva injunction. Even if the creditor obtains a Mareva injunction, does that give the creditor a priority over other creditors who have filed writs of seizure and sale? This question was answered in Trade Capital Finance Corp. v. Cook, a 2017 decision of the Ontario Superior Court of Justice.

What Is It

A Mareva injunction, named after one of the parties in an English case, is an exceptional form of interlocutory relief (i.e. before the action has been determined on the merits) designed to freeze the assets of a defendant pending determination of the plaintiff’s claim. This is in contrast to execution, allowing a successful plaintiff to enforce a judgment after a court has declared that the debtor owes money to the creditor.

Unlike the enforcement of a judgment, a plaintiff obtaining a Mareva injunction is required to give an undertaking to pay damages if the plaintiff is unsuccessful on the merits and the defendant suffers damages from his inability to deal with the property in the interim.

A Mareva injunction does not give the plaintiff any property rights or a lien on the defendant’s property. It merely restrains the defendant from disposing of his assets because disposing of assets in the face of the injunction would constitute contempt of court. However, the injunction technically does not affect the defendant’s power to dispose of his assets.

In a Mareva injunction application, a plaintiff must demonstrate that (i) it has a strong prima facie case against the defendant on the merits, (ii) an award of damages will not suffice, and (iii) the balance of convenience favours the plaintiff. In addition, the plaintiff must show that the defendant has (i) perpetrated a fraud on the plaintiff or (ii) is taking steps to put his assets out of the reach of creditors, either by removing them from the jurisdiction of the court or by dissipating or disposing of them other than in the normal course of business or living.

Facts

A creditor obtained a judgment and filed writs of seizure and sale against the assets of a debtor. A plaintiff in another action claimed that the debtor, and numerous other defendants, entered into a fraudulent scheme and defrauded the plaintiff of over $6.5 million. The plaintiff obtained an injunction restraining all defendants from disposing of their assets. Further, the injunction ordered that various financial institutions immediately freeze, and prevent any removal or transfer of, the defendants’ money or assets. The injunction referenced all accounts, including some that were specifically listed.

The creditor, who was owed $120,000, wanted to enforce its writ of seizure and sale against a particular bank account of the debtor at one of the financial institutions named in the injunction. The plaintiff, however, asserted that the account was one of many accounts that contained funds stolen from it through the debtor’s fraud and, therefore, the plaintiff had priority to those funds. The creditor took the position that a Mareva injunction is not proprietary in nature and that, accordingly, the plaintiff had to yield to other legal processes that made those funds ultimately payable to the creditor.

Comparison

“It is important at the outset to distinguish between the proprietary injunction and the Mareva injunction. A proprietary injunction is granted to preserve an asset in the possession of a defendant, which the plaintiff says belongs to the plaintiff, or is subject to a trust in favour of the plaintiff. It is typically sought in cases of alleged theft, conversion or fraud where the defendant, by some wrongdoing, comes into the possession of the plaintiff’s property. The purpose of the injunction is to preserve the disputed property until trial so that the property will be returned to the plaintiff if successful at trial, rather than used by the defendant for his own purposes.”

Conversely, a Mareva injunction does not require the plaintiff to show any ownership interest in the property that is subject to the injunction and does not require the plaintiff to establish a case of fraud or theft.

“The purpose of the Mareva injunction is a limited one. It is meant to restrain a defendant from taking unusual steps to put his assets beyond the reach of the plaintiff in order to thwart any judgment the plaintiff might eventually obtain. It is not meant to give the plaintiff any priority over other creditors of the defendant, nor to prevent the defendant from carrying on business in the usual course and paying other creditors. The nature of the Mareva is such that it is typically sought and granted, in the first instance, without notice to the defendant, but then is subject to a motion by the defendant to vary the injunction to permit payments in the usual course of business or living.”

The judge confirmed that “The Mareva injunction is not a remedy that operates as a charge or an instrument granting security against the assets of the defendant. It is an order inhibiting the defendant and any other party bound by the order from disposing of the assets by the transfer or removal of those assets from the jurisdiction. The injunction is not something that prefers the rights of the plaintiff as an otherwise unsecured creditor over the rights of all other creditors in the debt collection process”

Interpretation

The interpretation of the injunction was crucial to the determination of the priority dispute. Was the injunction a classic Mareva injunction or was it a proprietary injunction?

The judge noted that the language in the injunction only prevented non-parties from permitting the removal or transfer of the debtors’ funds or assets. It contained no reference to any proprietary claim or presumption of ownership through a trust; it did not recognise a proprietary interest or legal claim to a particular account or specific fund.

Further, the judge noted that the plaintiff provided no evidence on its motion that the funds held in the impugned account came directly or indirectly from any fraud committed against it. Merely because the plaintiff harboured a concern that insufficient funds would be available for it to collect fully on any judgment it obtained in the future did not give the plaintiff priority over other unsecured creditors to which the debtor was indebted. It was not sufficient for the plaintiff merely to make allegations in the statement of claim of a legal right to specific funds.

The judge noted that the plaintiff could have moved for an order, upon proper evidence, for a proprietary injunction to preserve a proprietary claim. It would have had to trace the stolen funds to the money in the bank account. It did not move for this order, probably, as the judge put it, because there was no basis to do so either in fact or in law.

Amend

This matter came before the court by way of a motion that the creditor brought to amend the injunction’s scope so that the creditor could continue with its seizure. It knew full well that the financial institution in which the impugned account was held would not have allowed the funds to be removed in contravention of an order freezing all accounts.

To be successful, the creditor had to prove that (i) there were no other assets available to satisfy the debt other than those that the injunction froze; (ii) the seizure would normally have resulted in funds being paid to the creditor and (iii) the seizure did not defeat the purpose of the injunction.

The judge held that the creditor satisfied all of the requirements. He varied the injunction and authorised the seizure to continue in the normal course. The plaintiff appealed the decision to the Ontario Court of Appeal. In a brief 2018 decision, the Court dismissed the appeal.

 

Image courtesy of kolobsek.

Jonathan Speigel

 

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

 

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