At the commencement of the COVID-19 era, the Courts in Ontario (and elsewhere) declared that they were shutting down other than for the hearing of urgent cases. What constitutes an urgent case with respect to fraud cases was not precisely defined. The Ontario Courts published a policy on how to submit a case for consideration. This blog tells the story of a submission for a Mareva injunction to freeze assets in a fraud case, the process by which the Courts handled it, and the unique resolution of the motion.
The endorsement this story is based on was issued yesterday (March 31, 2020). It was not published by the Court through CanLII – so for the purposes of this blog we will refer to the decision as “Start-Up Corp. v. Doe”. We can be contacted privately if our readers wish to request a copy of the decision. The fraud allegations at issue are the typical employee breach of trust scenario to which many companies fall victim. The reason this case is interesting is that it demonstrates that pre-action motions for freezing assets pending judgment remains an option for companies in the COVID-19 era.
The Facts
In October 2018, Start-Up Corp hired Ms. Doe to manage its business. As often happens with start-up businesses, Start-Up Corp did not formalize its relationship with its staff with written employment contacts. As it applied to Ms. Doe, Start-Up had a hand-shake / oral agreement that Ms. Doe would manage the company and not take a salary in exchange for 40% of its shares to be issued after Start-Up Corp paid off the loan in took out to purchase the company from previous shareholders.
Start-Up Corp’s operating loan to purchase the company was $1M – and with revenues of $1M at the time that Ms. Doe came on board, the horizon when Ms. Doe would receive her shares was projected to be short term. Ms. Doe allegedly favoured this “sweat equity” relationship as she had taxable income from other sources as well, and did not wish to incur further personal tax liability. At the beginning of the relationship, as is the often the case, both Start-Up Corp and Ms. Doe envisioned a win-win scenario.
From October 2018 to September 2019, Ms. Doe managed Start-Up Corp with very little supervision by its director, officer and shareholders. Through phone calls, Ms. Doe provided positive updates to the shareholders. In September 2019, however, Start-Up Corp missed an interest payment on its $1M operating loan. Ms. Doe provided an explanation for the missed payment, which resulted in the shareholders not acting forthwith to investigate the status of Start-Up Corp’s finances.
By January 2020, the shareholders of Start-Up Corp had reviewed its bank statements, and they noticed transfers that did not appear to be related to Start-Up Corp’s operations. Inquiries were made with the corporate accountants for the status of CRA filings. The accountants advised that Ms. Doe had not responded to their requests for financial documentation. As a result, forensic accountants were retained. By mid-February 2020, it was ascertained that several hundred thousand dollars had been transferred out of Start-Up Corp’s bank accounts for purposes that the shareholders of Start-Up Corp alleged had nothing to do with its operations.
In late February 2020, Start-Up Corp, through their forensic accountants, contacted our firm to bring an action and ascertain if Ms. Doe had assets that could be secured pending a judgment. Our investigations revealed Ms. Doe had sold real estate in Ontario which was scheduled to close on April 1, 2020 and, given other dissipation risk indicators, suggested an asset freezing motion was necessary prior the sale closing. We worked with the forensic accountants to create an interim loss report. Affidavits were taken from Start-Up Corp’s shareholders and staff and the forensic accountant. An action was issued but not served. A date with Civil Practice Court (“CPC”) was scheduled for the purposes of seeking an urgent hearing date for an ex parte motion. On the day before the CPC attendance was to take place, the Courts closed due to the COVID-19 issue.
The Mareva Motion Process in the COVID-19 Era
Like many lawyers in Ontario, we were quite skeptical of how Ontario’s new COVID-19 urgent motion process would actually work. We were pleasantly surprised. On March 23, 2020, we emailed the Courts our motion record, factum and book of authorities. We requested an ex parte motion. On March 24, 2020, a judge from the modified CPC responded and advised us that our motion qualified for an urgent hearing. The CPC judge further advised us of the judge assigned hear the motion, and advised us to call the Court the next morning for a hearing.
On March 25, 2020, we phoned in to the number provided by the Court. In the course of our submissions, we advised the judge that given that Ms. Doe may have an explanation for the irregular transactions, and given that charting a path for an injunction to come back before the Court within 10 days as required in ex parte injunction proceedings was unknown, that we were open to serving Ms. Doe with the motion record if the motion could be held forthwith. The hearing judge agreed this was process was preferable, and assigned a hearing date on short notice for March 30, 2020, with a phone number to call for the hearing of the formal motion.
Later on March 25, 2020, our office had the motion documents served on Ms. Doe. On March 26, 2020, Ms. Doe had her own counsel contact us. As bad luck would have it, Ms. Doe’s daughter (who lived with Ms. Doe) had been diagnosed with the coronavirus. We agreed with Ms. Doe’s counsel that we could hold the hearing based on unsworn affidavits that he produced (so that he did not need to meet with his witnesses in person). On Sunday, March 29, 2020, Ms. Doe’s counsel served four unsworn affidavits in her defence, along with a factum.
On Monday, March 30, 2020, the contested Mareva injunction motion was heard by way of conference call. We emailed the Court an oral submission outline to simplify the Court’s notetaking. Submissions by way of conference call went on for an hour and a half. The hearing judge reserved. On Tuesday, March 31, 2020 (yesterday), the hearing judgment released his endorsement. The endorsement, which is a public record, was not published on CanLII. As the Courts are now closed, it is questionable whether the endorsement is a truly a public record at this time – hence our use of pseudonyms.
The Decision – A Modified and Balanced Mareva Injunction Motion Outcome
Surprisingly, Ms. Doe conceded in her affidavit that she was in a fiduciary position with Start-Up Corp. Not surprisingly, Ms. Doe contested the allegations of breach of trust by way of unauthorized transactions made for her personal benefit and the detriment of Start-Up Corp.
The Court noted that Start-Up Corp. took serious issue with the lack of credibility to Ms. Doe’s explanations. Given the various contested facts, the Court held that the prima facie part of the Mareva injunction test was not met at this time, but was sufficient for the Court to permit Start-Up Corp. to file additional evidence to re-but Ms. Doe’s explanations and continue the hearing on this issue.
The Court also took note of Ms. Doe’s submission that there was no evidence of her dissipation risk, based on her affidavit that she had no assets to dissipate. Quite strategically, Ms. Doe offered to transfer $100,000 that was coming due and payable to her on the sale closing on April 1, 2020, on a secondary home that she was on title for. In the course of her dealing with the shareholders of Start-Up Corp, she had given them a promissory note that came due and payable on the sale of this secondary residence. One reason for the Mareva motion was because we were aware of the closing date of the sale of the secondary residence, but we did not know who the closing lawyer was – so a preservation order was not an option that was open to us at the time.
In response to Ms. Doe’s submission that the dissipation test had not be met, the Court formalized the payout of the $100,000 to the shareholder of Start-up Corp with a direction to the real estate lawyer involved (the identity of the real estate lawyer was disclosed in the responding record). The Court further ordered that Ms. Doe provide us an affidavit of her world-wide assets within 14 days, and make herself available for examination by video link or otherwise within 30 days. We view this ruling as a balanced and modified Mareva decision appropriate for the COVID-19 era.
As the focus of our firm is fraud recovery investigations and litigation, as a matter of practice our firm monitors all Mareva injunction decisions as they are published by the Courts. We have not seen a Mareva decision wherein the Court has issued what are often referred to as “ancillary orders” (asset reporting affidavits and pre-pleading examinations) without issuing an actual interim Mareva freezing order itself. This ruling is unique in the realm of Mareva decisions both because it was made in the COVID-19 era and because ancillary orders were made without the Mareva injunction being issued.
We can speculate as to the reason for this outcome. It may be because we took the unusual step of proceeding by way of short notice. This was done to prevent allegations later that there was a failure to disclose all material facts – especially when it may be difficult for Ms. Doe to respond and the effect of a freezing order on her assets could have dramatic negative effects on her ability to fund her family in the COVID-19 era. The short notice may have resulted in the Court not feeling comfortable with declaring a prima facie case, but comfortable that a bona fide case (the Norwich standard) had been presented.
As the Court adjourned its decision on the prima facie case issue, another reason for issuing ancillary orders may have been because the motion would be moot if Ms. Doe’s impecuniosity defence was valid. The reason for the focus on the impecuniosity defence came from an Ontario Divisional Court ruling in January 2020, which we provided the Court to supplement our submissions. In Amphenol Canada Corp v. Sundaram, 2020, ONSC 328, Justice Myers held:
[A] defendant’s ability to pay is very much part of the interlocutory injunction calculus. In the seminal case of American Cyanimid Co. (No. 1) v Ethicon Ltd, at p.4 of his speech, Lord Diplock wrote:
If damages in the measure recoverable at common law would be an adequate remedy, and the defendant would be in a position to pay them [at the time of judgment], no interlocutory injunction should normally be granted however strong the plaintiff’s claim appeared to be at that stage.
Similarly, in 2092280 Ontario Inc. v. Voralto Group Inc., 2018 ONSC 2305, at para 28, this Court wrote:
Judgments for damages cannot reasonably be expected to be affordable or collectable against fraudsters.
In 663309 Ontario Inc. v. Bauman, 2000 CarswellOnt 2479, at para 41, Akbarali J. found that the defendants presented a risk of dissipation of their assets before judgment. In the face of that finding, flowing from the nature of the fraud and the efforts by the defendants to conceal their scheme, further expensive steps in the proceeding do create a significant risk of prejudice and irreparable harm to the plaintiff in unrecoverable costs. It is always open to the defendants to dispel this concern by offering to post cash or cash equivalents for security in place of the assets frozen by the Mareva injunction.
The Bottom Line
In our case, we moved for a Mareva injunction in a quantum commensurate with the forensic accounting findings. In other words, Ms. Doe refused to offer cash or cash equivalent as security in place of an all-encompassing asset freezing Mareva injunction. In response, the Court held that it needed further evidence, and ordered Ms. Doe to produce a sworn statement setting out the nature, value and location of all her assets worldwide, and to make herself available for examination on her sworn declaration within 30 days. The Court remained seized of the motion and provided an email address to schedule the continuation of the motion by conference call.
This decision is useful to fraud victims, whether businesses or individuals. Many individuals and business are cash strapped in the COVID-19 era, and their interests have to put ahead of the interests of rogues where the evidence establishes a bona fide case. In other words, since the Ontario Divisional Court decision in 2092280 Ontario Inc. v. Voralto Group Inc., we are of the view that Mareva injunctions are no a “nuclear weapon”, or even an “exceptional remedy”, but rather reflect the reality that “judgments for damages cannot reasonably be expected to be affordable or collectable against fraudsters” unless the Courts grant pre-action asset tracing and freezing remedies.
Inquiries
At Investigation Counsel PC, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.
Norman Groot
Investigation Counsel PC
www.investigationcounsel.com
March 1, 2020