Fraud victims often ask us whether they can obtain an immediate Court order to put a freeze a fraudster’s bank account or otherwise prevent him or her from dissipating assets in their control before trial. The answer often depends on a variety of considerations, the most significant of which are (1) how much money is at stake, (2) how strong is the victim’s evidence that a fraud has taken place, (3) whether there are objective reasons to believe the fraudster will dissipate the funds in his or her control if given notice of the case, and (4) can the victim afford the cost of bringing the court applications and the resulting series of responding Court attendances that will result if the fraudster attempts to set aside the freezing order.
In addition to an order to freeze the fraudster’s accounts (commonly referred to as a Mareva injunction), we often seek what are referred to as ancillary orders for affidavits from the fraudster detailing the assets under his or her control, and to examine the fraudster on their affidavit. These orders are sought to give effect to the Mareva injunction, as all third parties such as banks should be put on notice of the Mareva injunction, and because the order should apply to all assets in the control of the fraudster – not just known by the victims at the time the claim is launched. But before explaining the process to get a Mareva injunction, it is worthwhile for fraud victims to understand some basic information about injunctions generally.
Types of Injunctions
There are two types of injunctions: prohibitive and mandatory injunctions. A prohibitive injunction stops an opposing party from engaging in a specified course of conduct – such as to cease disseminating or using confidential information. A mandatory injunction requires an opposing party to engage in a specified course of conduct – such as returning confidential information. The Courts are more comfortable ordering prohibitive injunctions because they require less supervision and the legal test is easier to meet. Mareva injunctions and the ancillary orders often contain both prohibitive and mandatory injunctive relief.
Categories of Pre-Trial Injunctions
There are three categories of pre-trial injunctions: ex parte, interim and interlocutory injunctions. Injunctions that are granted after trial are often referred to as permanent injunctions.
Ex parte injunctions are injunctions sought without notice to the opposing party in cases of extreme urgency and / or in cases when putting the opposing party on notice could render the purpose of the injunction moot. For example, where the purpose of the motion is to freeze funds obtained by fraud in a bank account held in the name of the fraudster, giving the fraudster notice would provide the fraudster the opportunity to move the money outside of the jurisdiction of the Court or otherwise frustrate the purpose of the order. Hence there is a reason to bring the motion without notice, or to use the Latin term: ex parte. Ex parte orders are normally only issued for up to 10 days – that is, time enough to get the bank account frozen (by serving the Court order on the bank) followed by serving the order on the fraudster. At the return date of the ex parte order, the fraud victim can ask the Court for an interim injunction.
Interim injunctions are most frequently ordered by the Courts when a motion for an interlocutory injunction is adjourned to permit the fraudster time to file materials and for cross examinations to be held. As with ex parte injunctions, they are “interim” because they are time limited. When the parties return to Court to argue for the interlocutory injunction, the Court conducts the hearing de novo (the Latin term meaning “new” as if it is hearing it for the first time).
The main difference between ex parte injunction motions and interim injunction motions is that with ex parte injunctions the applicant must provide full and frank disclosure to the Court because the opposing party is not present to advise the Court of the negative facts a Court may otherwise consider. In a motion for an interim injunction, while the full merits of the motion may not be canvassed, at least the opposing party can point out the most serious negative facts to the Court to try to get the injunction set aside. If the applicant fraud victim has a strong evidentiary record, interim injunctions are often ordered on consent or with little resistance.
Interlocutory injunctions govern the conduct of the parties until trial or other resolution of a dispute. They are usually adjudicated on a full evidentiary record consisting of affidavits, documents and cross examination transcripts. Sometimes interlocutory injunctions are ordered on consent because the opposing party recognizes it is futile to resist the order. This often happens in fraud actions where the victim is seeking to freeze funds obtained by the fraudster until trial. But as we will see below, the fraudster can apply to the Court to vary the terms of the interlocutory injunction to allow for access to funds held in an account that he or she controls for the purposes of living and / or legal expenses.
The Legal Test to Get an Injunction Generally
For injunctions generally, the applicant must prove to the Court (1) there is a serious issue to be tried, (2) the applicant would suffer irreparable harm that could not be compensated for by damages awarded at trial, and (3) the harm that would result to the applicant from not granting the order is more serious than the harm that would be caused by making the order against the opposing party. The last test is often referred to as the balance of convenience test.
The Legal Test to Get a Mareva Injunction
Mareva injunctions, or injunctions for bank freezing and ancillary asset reporting orders, have their own further set of legal tests. The applicant must be able to show the Court that (1) it has a strong prima facie (the Latin word for “obvious”) case, (2) the defendant has assets in the jurisdiction, or the defendant has worldwide assets and he or she is within the jurisdiction of the Court, and (3) there is a serious risk that the assets will be dissipated by the opposing party fraudster if the injunction order is not issued. The general test of a serious issued to be tried, irreparable harm and balance of convenience are implicit in this test.
Prima Facie Case & Full and Frank Disclosure
For fraud cases generally, the serious issue to be tried can inferred from the allegations of serious wrong doing such as breach of trust and fraud, as well as from the amount of money at issue. To state the obvious, the greater the amount of money at issue, and the more egregious the breach of trust, the more serious the case is.
The condition of a strong prima facie case requires the applicant fraud victim to obtain detailed affidavits supported by documents. If sought ex parte, the test requires full and frank disclosure, which generally means disclosing all the evidence the fraud victim has at the time the application is made. This includes whatever evidence the applicant has as to location of the fraudster him or herself, and the location of the fraudster’s assets.
Risk of Dissipation of Assets
The test for risk of dissipation of assets is part of the test that irreparable harm would result if the injunction is not granted. The risk of a fraudster dissipating assets before trial is often implied at ex parte hearings for the injunction from the fraudster’s conduct – that of deceit and concealment to perpetrate the fraud. Further evidence to support the risk of dissipating assets and irreparable harm, as well as the balance of convenience, is often a contentious issues at the motions for interim and interlocutory orders. However, as one Canadian Court put it, “draconian measures are required to deal with draconian conduct.”
Undertakings for Damages
An undertaking given by the plaintiff to pay damages is required by the Courts before it will issue any of the three categories of injunctions. This is because injunctions are ordered before a full trial is held. If, at trial, a Court finds that the plaintiff’s claims are not justified, and if the Court finds that the injunction caused the opposing party financial harm, the Court has the power to order the plaintiff to pay the opposing party for such harm forthwith.
Often undertakings to pay damages are ordered without proof of security or payments into Court. However, where the plaintiff does not have assets, or the risk of harm to the defendant is significant, the Courts have made the deposit of security a condition before the Court will issue a Mareva injunction. Fraud victims are sometimes encouraged to post security for the purposes of persuading the Court how serious they are about the injunction relief being sought.
Effects of Injunctions on the Likelihood of Settlement
Once an injunction is in place, the responding parties sometimes seek to resolve the dispute with the plaintiff. This is especially the case where the plaintiff prepares an overwhelming case of fraud to obtain a Mareva injunction ex parte, and then zealously pursues an interim injunction followed by an interlocutory injunction.
While the Courts state that the purpose of issuing injunctions is to ensure that reasonable people who pay for the administration of justice are not offended by the impotence of Court judgments, the reality is that once an injunction is in place and the fraudster is not able to deal freely with assets in their control, they are much more likely to seek a settlement.
Cost of Obtaining and Maintaining Mareva Injunctions
The obvious drawback to fraud victims is the cost they will need to pay their lawyers to seek a Mareva injunction. To state this problem otherwise, the issues a fraud victim must consider are (1) how much will it cost to obtain and maintain a Mareva injunction, (2) how strong is their case and what investigation is required to make their case sufficiently bullet proof, and (3) if an injunction is obtained, how likely is it that fraudster will seek to settle to avoid a judgment and incur legal defence costs.
We recommend that fraud victims seek estimates on each stage of the process from whatever law firm they decide to deal with. It is often difficult for any law firm to provide precise estimates of what the entire process could cost as it is often impossible to predict how the responding fraudster may react to the injunction. However, if a law firm will not commit to estimates for the various stages of the injunction process, fraud victims could end up feeling that pursuing these forms of pre-trial remedies is not worth the cost or risk. For further information on choosing the appropriate law firm, see our blog: “Throwing Good Money After Bad – Considerations in Selecting Your Fraud Lawyer” https://investigationcounsel.com/throwing-good-money-after-bad-considerations-in-selecting-your-fraud-lawyer/ .
The Process to Obtain and Maintain a Mareva Injunction
Before making an application or bringing a motion for a Mareva injunction, counsel for fraud victims should explain to them what the process could entail, and provide them with estimates of what the cost to obtain and maintain the injunction could be. The process we generally describe is as follows:
- intake and investigation; and
- report to client of opinion on strategy for action, including whether or not to proceed with any pre-trial applications for discovery or asset freezing or evidence seizure motions;
Assuming the client wishes to proceed with a motion for a Mareva injunction, the process is:
- turning information into evidence (drafting affidavits);
- drafting and issuing the Statement of Claim, Motion Record and Factums;
- drafting the motion record and factums for an ex parte motion for a Mareva injunction (and potentially other relief);
- attendance on the ex parte motion to seek the Mareva injunction;
- serving the Statement of Claim and the Mareva injunction on banks and defendants;
- attending on the motion return date and seeking an interim injunction;
- obtaining the report on assets of the fraudster and conducting an examination on it;
- attending further return motion(s) to schedule timetables for responding materials and examinations in preparation for a motion for an interlocutory injunction;
- attendance at examinations of the victims and the fraudsters;
- arguing the motion for an interlocutory injunction order; and
- arguing motion(s) for varying the interlocutory order and other issues.
Fully explaining each of these stages and what tactics may be employed is beyond the scope of this blog. Suffice to say, once the Statement of Claim is issued and the Mareva injunction is ordered, there are often unforeseeable consequences. For example, the fraudster may produce evidence that may put at risk the chances of maintaining the order. This underscores the importance of an applicant making full and frank disclosure at the time the order is sought. Or conversely, the report of assets by the fraudster may result in further motions to freeze assets. Further, often fraudsters do not comply with orders, which may result in fraud victims bringing further motions for contempt of court. The point is that the myriad of potential consequences from bringing a Mareva injunction sometimes results in significant legal costs to fraud victims.
Creative Risk Sharing Retainers
Fraud victims should also realize at the outset that it is difficult to stop the process once it is commenced. Fraud victims should further realize that imbedded in this process are the traditional stages of litigation, such as serving and filing of a Statement of Defence by the fraudster defendants, documentary discovery, examination for discovery, and settlement mediations. In other words, once the process starts, it may require significant litigation cost to see the matter through to completion. We recommend to fraud victims that they have a discussion with their lawyers before commencing the process on whether the lawyers will keep the process moving forward should they have difficultly in keeping up with payment of their fees and disbursements.
Carve Outs for Lifestyle and Legal Costs
Fraud victims should also be aware that because injunctions are not intended to force defendants into submission, but rather to protect assets for recovery to give meaning to a judgment, the Courts will often make orders to allow fraudsters access to a draw from the frozen accounts to meet their lifestyle expenses and legal expenses.
Lifestyle expense draws are often contentious as the Courts generally allow the draw to reflect the fraudster access to an amount that reflects their lifestyle before the fraud was discovered. In other words, if a fraudster had a lifestyle burn rate prior to the litigation that was extravagant due to the fact that he or she was spending fraudulently obtained funds, should the draw reflect this spend rate? Most often this process requires the fraudster to prove their lifestyle burn rate, and also provide their income from bona fide sources. Fraudsters should not be granted access to funds for lifestyle that they could never have afforded on their legitimate income.
Legal expense draws are often contentious as well as the Courts generally allow fraudsters to pay for their criminal defence fees from any money that is in their possession, even if the funds can be linked to those which were obtained illicitly. Generally, the Courts will require fraudsters to state all their assets and first expend the assets in their control that are not linked to the fraud. However, if all the legitimate assets of the fraudster have been spent, the Courts are inclined to grant access to funds in their possession under dispute. The argument for defence cost draws for the civil litigation is more difficult – but often made by fraudsters.
As is apparent from the foregoing, there are numerous issues a fraud victim should consider before seeking pre-trial relief such as a Mareva injunction and asset disclosure orders. At this early stage, fraud victims also often inquire about tracing (Norwich) orders, and evidence seizing (Anton Piller) orders. These orders, and the issues discussed above, are the subject of other blogs.
For now, if you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before issuing a claim, contacting police or alerting the fraudster.