A Court may grant a Mareva order (sometimes referred to as a freezing order) when there is a risk that a defendant could move its assets out of the court’s reach, potentially leaving the plaintiff unable to collect damages. In Sherif Gerges Pharmacy Professional Corporation et al. v. Niam Pharmaceuticals Inc., the Ontario Superior Court of Justice declined to do so. The Court did not find enough persuasive evidence of asset dissipation to justify granting the Mareva order despite finding a strong prima facie case of conversion.
Background
The applicant, Mr. Gerges, and the respondent, Mr. Vora, were directors and equal shareholders of Woodbine Downs Healthcare Realty Inc., which owned the three properties in Toronto. The two also co-owned several pharmacies.
The respondent, without the applicant’s knowledge or consent, took the following actions:
- Amended the provincial corporate profile report for Woodbine Downs to remove the applicant as a director.
- Sold the three properties for net proceeds of $2,911,842.79.
- Transferred the remaining funds to a corporation directly and indirectly controlled by the respondent, purportedly for loan repayments, though no documentation was provided.
- Depleted the bank account of Woodbine Downs to $158.90.
The respondent had not fully accounted for the proceeds of the sale of the properties or detailed what happened to the funds after they left Woodbine Downs. He claimed the sale was necessary to keep the pharmacies running due to financial issues and because the applicant was under a non-dissipation order in a family law case, preventing him from selling his shares. The respondent stated that around $1.4 million of the proceeds would be available for distribution after accounting for various uses, agreeing that half (about $700,000) should be held by his counsel pending further Court order.
Legal Standard
To obtain a Mareva injunction in Ontario, the applicant must satisfy several legal requirements. Here are the key elements:
- The applicant must demonstrate a strong case on the merits of their claim.
- The respondent must have assets within the jurisdiction.
- There must be a serious risk that the respondent will remove or dissipate assets before the judgment, intending to avoid the judgment.
The Ontario Superior Court of Justice in Sibley & Associates LP v Ross ruled that “risk of removal or dissipation can be established by inference, as opposed to direct evidence, and that inference can arise from the circumstances of the fraud itself, taken in the context of all the surrounding circumstances.”
Additionally, the applicant must meet the criteria for an interlocutory injunction established in the case of RJR-MacDonald Inc. v. Canada (Attorney General): (i) there must be a serious issue to be tried; (ii) the applicant will suffer irreparable harm if the injunction is not granted; and (iii) the balance of convenience must favour granting the injunction, meaning it will cause less harm to the respondent than the applicant.
Outcome
The Court concluded that the applicant had established a strong prima facie case “at least in conversion”. It was undisputed that the respondent sold the three properties and transferred the proceeds from Woodbine Downs without the applicant’s consent or knowledge, despite the applicant being an equal shareholder and director.
However, the Court found insufficient risk of asset dissipation. Despite the Woodbine Downs assets being depleted, the respondent showed that he still had significant assets in Ontario. The applicant argued that past evidence of the respondents’ dishonest conduct can be used to support a finding of future dissipation of assets relying on R. v. Consolidated Fastfrate Transport Inc. In rejecting this argument, the Court highlighted the statement in Fastfrate by the Court of Appeal that “the real focus should be on the availability of assets to satisfy a judgment which is likely to be obtained.”
The applicant claimed that the respondent had been selling his assets and was involved in transactions that could dissipate his assets. The respondent countered that these transactions were intended to improve his financial position rather than dissipate assets, and that the structure of the transactions prevented any dissipation for six months.
Ultimately, the Court was not persuaded that the enough evidence of dissipation of assets had been shown to grant a Mareva order, emphasizing the extraordinary nature of a Mareva order, the respondent’s agreement to hold certain funds with his counsel, and the respondent’s evidence about his other assets in Ontario. Although the Court dismissed the applicant’s motion, it issued an order that the approximately $700,000 held by the respondents’ counsel shall remain held pending further Court order.
Takeaway
- Mareva orders are extraordinary measures, and this case highlights the high bar that victims to obtain a freezing order and the potential cost consequences of failing to do so. Specifically, victims must demonstrate a risk of asset dissipation to obtain a Mareva order in Ontario. In this case and unlike in typical situations of rogue defendants in Mareva cases, the defendant was a professional that held significant assets in the province.
- The Court also commented on the clean hands’ doctrine. The Court dismissed the respondent’s claim that the applicant had not come to the court with clean hands due to alleged breaches of a family law non-dissipation order. The Court emphasized that the “doctrine of clean hands is not a general moral assessment” and that the misconduct leading to the unclean hands must have secured an advantage in the “very matter at issue”.
** With thanks to Andie Hoang-Lefranc for their assistance with this article.