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Injunction

Posted on December 1, 2010 | Posted in Collections

What action can a financial institution take when it sees that its debtors have stopped paying it and are dissipating their assets? One remedy is known as a Mareva injunction. The court will grant it if the creditor satisfies the court that specified tests are met. However, are there circumstances in which a court will decline to grant the injunction even if the plaintiff satisfies the specified tests? That question was discussed in Royal Bank of Canada v. Boussoulas, a 2010 decision of the Ontario Superior Court of Justice.

Tests

An injunction is an order of a court that prohibits a defendant from doing something. A Mareva injunction is a specialised injunction that prohibits a debtor from dissipating his assets.

To obtain a Mareva injunction, a creditor must demonstrate facts sufficient to meet the following tests:

1.   Does it have a strong prima facie case against the debtor on the merits (i.e. will it obtain a judgment against the debtor for monies owing)?  

2.   Is there “a real risk that … the defendant is … dissipating or disposing of his assets, in a manner clearly distinct from his usual or ordinary course of business … so as to render the possibility of future tracing of the assets remote, if not impossible in fact or in law”?

3.   Is the balance of convenience such that it would be appropriate to grant the injunction? For example, if an injunction would put the defendant out of business and the harm of not granting the injunction would not be substantial to the creditor, then the balance of convenience test would favour the debtor.

Facts 

The debtors were conducting themselves in an unusually abysmal manner. The judge held:

1.   There was little doubt that the bank was going to obtain a judgment against the debtors. The money was owed and the security documents seemed to be unassailable. Accordingly, there was a strong prima facie case on the merits.

2.   The facts disclosed a history of conduct by the debtors and their companies that was inconsistent with the ordinary course of business. “Transfers of assets from company to company, repeated moves from premises to premises, assignment to and collection of accounts receivable by a sibling’s company (despite a pledge of those receivables to the bank), and refusals to disclose assets or receipts and expenses all signal(ed) … a real risk that these defendants (were) dissipating, disposing of or secreting their assets.”

3. The defendants (i.e. the debtors, their corporations, and the family members) were not currently conducting business. They claimed to have only $500 per week of income (despite owning cars carrying $40,000 per month in financing charges and a recent 3-week trip to Greece by one family member). They claimed that they were living off the kindness of others. They were unwilling to disclose any of their assets, although in a personal net worth statement that one family member provided to the bank, he claimed to own a hotel in Greece worth $5 million. Under these circumstances, the judge could not see why the injunction would be harmful to the defendants. “By contrast, if indeed these defendants do have assets with which they continue to deal, the plaintiff’s interests may be irreparably damaged since the debt will be uncollectible. If indeed these defendants have assets to which they require access – to pay living expenses or legal bills – it is open to them to request an appropriate exemption from the court.”

The judge therefore concluded that the bank met the tests for awarding a Mareva injunction. This, however, did not end the matter.

Discretion 

“A Mareva injunction is a discretionary, equitable remedy, as is an order appointing a receiver, which is granted only where it is ‘just and equitable’. This means that, in deciding whether or not to grant the relief sought, the court is entitled to weigh in the balance the conduct of the party seeking it, and to decline the relief where that conduct is wanting.” Was the bank’s conduct wanting? Better yet, was the conduct of the bank’s lawyers wanting?

Motions to the court are governed by written and unwritten rules. Some are:

1.   Do not overstate your case and make unsupportable allegations in notices of motions, affidavits, and factums.

2.   Act with honour and fairness. Do not mislead the court as to the true facts or conceal facts that ought to be drawn to the court’s attention.

3.   Do not include in affidavits statements of inference or argument.

4.   Do not state facts in affidavits that are really hearsay, without admitting that the statements are hearsay.

5.   Do not allege fraud unless you have a prima facie case to sustain it. It is an abuse of process to allege fraud without foundation. Not only can those allegations result in an adverse costs decision, they can, if made without some foundation, result in the denial of relief altogether.

Wanting 

The judge then reviewed the bank’s conduct (i.e. the conduct of its lawyers) in the litigation and found it wanting. He found:

1.   The bank asserted that the debtors had fraudulently borrowed all the money. There was no evidence, however, that the original loan was fraudulent, only that that the conduct of the debtors four years later may have been fraudulent.

2.   The bank alleged that the debtors obtained a fraudulent appraisal on which the bank relied to advance the funds. However, the bank obtained the appraisal, not the debtors. The fact that the bank realised far less than the appraised value was an issue between it and its appraisers, not the debtors.

3.   The bank made allegations of fact in its affidavits that, under cross-examination, were shown to be either incorrect or made without the personal knowledge of the affiants.

4.   The affidavits contained some irrelevant and highly prejudicial allegations against the debtors, including reference to pending criminal proceedings.

Accordingly, despite finding that he would otherwise have granted the Mareva injunction, the judge dismissed the motion and disallowed the injunction because he felt that the bank’s conduct and the shortcomings of its materials were sufficiently serious to disentitle the bank to the relief it claimed.

Costs 

When we first wrote this newsletter, we wrote: “On one hand, the conduct of the debtors was hardly laudatory. On the other, the bank’s conduct, which was sufficiently bad to disentitle it to relief, could have resulted in substantial indemnity costs against it.” We have now obtained the decision as to costs.

The judge noted the impugned conduct of each of the parties and held that the costs of the motion would be reserved to the trial judge. Accordingly, if the bank is successful against the debtors and shows that there was fraud, then it is likely that it will be awarded the costs of the motion against the debtors. Unfortunately, it may be a pyrrhic victory because there will likely be no assets on which to collect a judgment.

As an aside, the lawyer who argued the costs portion of the motion for the bank was not the same as the lawyers who acted for the bank on the motion.

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