An asset-freezing injunction can be an important tool in fraud recovery litigation. Because it must be obtained ex parte, that is, without notice to the alleged fraudster, the justice system treads very carefully in balancing the rights of the accused and the accuser. This has led to debate and some inconsistency in Canadian courts.
In April 2018, the Ontario Divisional Court provided clarity on the subject with its decision in 2092280 Ontario Inc. v. Voralto Group Inc. The court confirmed that the risk of asset dissipation — a requirement for Mareva, or asset-freezing, injunctions — may be inferred from evidence of fraud in the circumstances of the case. Some lower courts had previously rejected this principle.
Traditionally, Canadian courts have required fraud victims to meet a high threshold before granting asset-freezing injunctions. The victim must demonstrate a risk of the alleged fraudster’s assets being lost, distributed, or taken from the jurisdiction before any judgment can be satisfied.
The high threshold for obtaining Mareva injunctions was confirmed by the Supreme Court of Canada in Aetna Financial Services Ltd. v. Feigelman. There, the court decided that any type of pre-judgment relief must be approached with extreme caution, considering the potential for infringing on a defendant’s rights by granting execution before judgment. For this reason, the victim must demonstrate exceptional circumstances.
The requirement of proving that an alleged fraudster’s assets were being lost or removed has often proven challenging to victims. They generally are not privy to the alleged fraudster’s private affairs and they must act discretely to avoid revealing their claims. The challenges sparked the ongoing debate about how to evaluate the risk of asset dissipation.
Some Canadian courts interpreted Aetna to mean there could be a “fraud exception” to the test for asset-freezing injunctions. This means the Mareva test’s requirements will be loosened “where there is substantial evidence supporting an allegation that the defendant has defrauded or stolen from the plaintiff.”
For instance, in Lyons v. Creason, the court noted “it is well established that where allegations of fraud are determined to have a reasonable foundation, it is not necessary to specifically prove that actual dissipation of assets has occurred.” Then, in Auction Inc. v. Belland, the court held that evidence of fraud may be enough, without showing a real risk that the defendant’s assets may be lost or disappeared.
This evolution of the proposed “fraud exception” was revisited in Sibley & Associates LP v. Ross. There the court concluded that “in cases of fraud, as in any case,” the risk of asset dissipation “can be established by inference, as opposed to direct evidence.” Further, “that inference can arise from the circumstances of the fraud itself, taken in the context of all the surrounding circumstances.”
Still, Canadian courts occasionally adhered to the strict threshold for asset-freezing injunctions. “There is no ‘fraud exception’ for Mareva injunctions,” the Ontario Superior Court of Justice stated in Promo-Ad & Associates Inc. v. Keller. And debate continued about the place, if any, of a “fraud exception” in the test for a Mareva injunction.
This debate was squarely before the Ontario Divisional Court in Voralto. In this case, the plaintiffs alleged they were defrauded by the defendants through an illegal dumping scheme. The plaintiffs initially moved unsuccessfully for an ex parte Mareva injunction. The motion judge held that the defendants should be notified and that the plaintiffs lacked evidence the defendants were dissipating their assets.
A three-judge panel of Ontario’s Divisional Court overturned the motion judge’s decision. The appellate ruling was significant for two reasons.
First, the Divisional Court permitted the appeal to be heard without notice to the defendants, marking the first appeal to be heard ex parte in Ontario. It also confirms the Divisional Court’s view that the pre-hearing notice requirement “would significantly water-down an important remedy for protecting innocent victims.”
More notably, the Divisional Court held that, in circumstances where plaintiffs advance sufficient evidence of the alleged fraud, the risk of loss can be inferred, satisfying the Mareva injunction test. “A serious risk of dissipation is sufficient and the risk may be inferred in appropriate cases by the surrounding circumstances of the fraud,” the court wrote.
Upholding Sibley, the Divisional Court declined to adopt the “fraud exception” language. Still, the court found that the inference approach allows the court to strike an appropriate balance between “the law’s reluctance to allow prejudgment execution” and the “more important goal of ensuring that the civil justice system provides a just and enforceable remedy against such serious misconduct.”
In Voralto, the Divisional Court supported the crucial ability to proceed without notice in fraud cases. The Divisional Court’s decision reflects its determination that Mareva injunctions remain “a vital arrow in the civil law’s quiver to address serious fraud.”
He thanks Nathan Shaheen for his valuable contribution to this post.