What is a Mareva injunction?
Is there a way litigants can get a freezing order against the defendant’s assets?
How can you protect yourself against a defendant who may dissipate, transfer or sell its assets to potentially frustrate your ability to execute your judgment against its assets?
In this article, we will discuss the Mareva injunction which is a powerful legal remedy designed to freeze the defendant’s assets during legal proceedings until a final judgment on the merits.
Are you ready?
Let’s get started…
What is a Mareva injunction
A Mareva injunction is a type of injunction designed to freeze the assets of the defendant until a judgment is rendered on the merits of the case.
The Mareva injunction is also known as a Mareva order, freezing order or Mareva regime.
The purpose of the Mareva injunction is to prevent a party from transferring assets out of the court’s jurisdiction frustrating the plaintiff’s ability to execute a judgment against the defendant’s assets should the plaintiff prevail.
When the court grants a Mareva injunction, the court prohibits the defendant from transferring, disposing or alienating their assets until a judgment on the merits of the case is issued.
If the defendant transfers assets in violation of the Mareva order, it will be exposed to contempt of court.
The order is issued against the defendant personally and not against the defendant’s assets.
To be clear, a Mareva injunction is not:
- The granting of title on the defendant’s frozen assets
- A lien on the defendant’s assets
- It’s not a seizure of the defendant’s assets
- It’s not an asset forfeiture of any kind
- Does not grant the plaintiff any priority over other creditors on the targetted assets
- Does not legally restrict the defendant from actually transferring assets
Although the Mareva order is referred to as a “freezing order”, it does not actually freeze the defendant’s assets.
It orders the defendant not to transact in an illegitimate or unusual way to dissipate its assets.
A Mareva order can have a worldwide effect on the defendant’s assets.
History of the Mareva injunction
The Mareva injunction originates from the case Mareva Compania Naviera SA v International Bulkcarriers SA of 1975.
The plaintiff was a shipowner owning a vessel called The Mareva.
The plaintiff had leased the vessel to the defendant under a time charter.
The plaintiff had received two of the three installments but feared the defendant may not pay the final installment and demonstrated a considerable risk.
Considering the defendant’s funds were in a bank account in London under the court’s jurisdiction, the court rendered an injunction prohibiting the defendant from transferring the funds out of the bank account until a judgment on the merits of the case was rendered.
Lord Denning’s judgment became known as the Mareva injunction.
Consequences of Mareva injunction on a defendant
What is the consequence of a Mareva injunction to a defendant?
It’s important to understand the legal consequence of a Mareva injunction to better appreciate its consequences on the defendant.
An injunction not to do something
The Mareva injunction order is a judgment against the defendant prohibiting the defendant from transferring its assets.
An injunction is generally a judgment from the court ordering someone to do something or not to do something.
A Mareva order is a type of injunction ordering a person not to do something.
The defendant’s assets are not seized and no lien or hypothec is registered against the defendant’s assets.
To comply with the order of the court, the defendant’s actions are evaluated to determine if a defendant failed to respect the court’s judgment or not.
The actual transfer of the asset may not qualify in itself as a violation of the order but rather the defendant’s actions and purpose for transferring the asset.
Consequences of disposing of assets
Technically, the defendant has the freedom and power to transfer, sell and alienate the assets even when a Mareva freezing order has been issued.
If the defendant were to violate the Mareva injunction and transfer assets or dispose of them, the plaintiff does not have a recourse to attack the validity of the actual transaction with the third party who may be in good faith.
However, the defendant will be exposed to contempt of court and face severe penalties that can even include imprisonment.
The courts will be quite severe on a defendant violating a Mareva order.
The defendant can be exposed to severe fines and even imprisonment.
A defendant should take good precautions not to violate a Mareva order to avoid such a disastrous outcome.
Assets beyond those in dispute
A freezing order can cover assets even beyond the assets object of the dispute between the parties.
When a court prohibits the defendant from disposing or transferring assets in such a way as to frustrate a plaintiff’s future judgment, the defendant must respect the terms of this judgment with respect to all its assets and not just the assets under dispute or within the court’s jurisdiction.
If the court specifically names the assets subject to the Mareva injunction, then the defendant can freely transact its other assets.
Without such specification, a defendant must be careful in managing its overall business and affairs in such a way that it may not inadvertently violate the Mareva order.
Normal business operations
The Mareva injunction is not meant to prevent the defendant, who may be using the assets in the course of its normal business operations, to run its business.
A defendant looking to legitimately dispose of an asset to acquire another one should be able to do so.
However, a defendant disposing of an asset to hide the asset or to remove the asset from the court’s jurisdiction without a clear or justifiable business reason will violate the Mareva order.
A defendant should ensure full transparency in the manner that it intends to run its business and make sure that it does not do any transaction outside of the norm that may potentially be perceived as a violation of the Mareva injunction order.
Possibility of a forced settlement
Considering the important consequences of a Mareva order against a defendant, the courts will make sure to properly evaluate the merits of granting the order to avoid causing undue prejudice to the defendant.
In some cases, the defendants against who a Mareva order is issued may be forced to settle the case due to the inequitable nature of the injunction.
Conditions to succeed with a Mareva injunction
The Mareva injunction is a powerful tool intended to effectively freeze the defendant’s assets until the plaintiff can potentially execute a future judgment against it.
The courts do not grant this type of remedy easily.
It’s an extraordinary measure.
It’s an exceptional legal remedy and courts may grant it provided the plaintiff can pass the Mareva injunction test.
For the court to award a Mareva injunction, the plaintiff must satisfy the following conditions:
- Have a strong prima facie chance of success on the merits
- The nature, type and assets of the defendant under the court’s jurisdiction
- A real and genuine risk that the defendant may put its assets beyond the plaintiff’s reach by the time a judgment on the merits of the case is issued
Depending on your jurisdiction, the courts may have developed additional guidelines to render a Mareva injunction.
When rendering a Mareva injunction, the court will consider that the defendant’s legitimate business interests are not compromised.
Evolution of the Mareva ordre
Since Lord Denning’s judgment in 1975, the Mareva injunction has evolved.
The worldwide scope of Mareva injunctions
Although the original Mareva order targetted assets directly under the jurisdiction of the court, today, it is a factor but not a necessity.
If you intend on filing a motion for a Mareva injunction, you must present to the court the type, nature and value of the assets under the jurisdiction of the court.
However, considering the Mareva order does not target the actual asset but the defendant, the defendant’s actions on its assets worldwide can have an impact on the court’s judgment.
Canadian courts have rendered Mareva injunctions with a worldwide scope in many cases.
The Canadian courts have reasoned that the law must adapt to new circumstances and extend to assets owned or controlled by the defendant outside of the court’s jurisdiction.
If the defendant has assets that the plaintiff can execute a judgment against and there is a real risk that the defendant may transfer or dispose of them to frustrate the plaintiff, the courts should award the Mareva injunction no matter the location the defendant holds such assets.
Publishing a Mareva injunction on the land register
In Canada, the Quebec Court of Appeal, in the case Desjardins Assurances générale inc. vs. Malo, 2002 QCCA 462, opened up the possibility of publishing a Mareva injunction in the land register.
In this particular case, despite the issuance of a Mareva injunction against the defendant who owned a building, the defendant was nonetheless in the process of selling the building.
Although the Mareva injunction is in personam in nature, targeting the defendant and not the assets, the Quebec Court of Appeal concluded that the Mareva order is not purely personal in nature as it can affect third-parties who are aware of the Mareva order.
The Court of Appeal authorized that the Mareva order be registered against the defendant’s property without prior court approval so it can be enforceable against third parties.
Strong prima facie or good arguable case
Canadian courts have been consistent in the evaluation of the Mareva injunction test.
To obtain a Mareva injunction, the plaintiff must pass the Mareva injunction test:
- It has a good prima facie case on the merits
- The defendant has some assets in the domestic jurisdiction
- There is a real risk that the defendant dissipates its assets within the domestic jurisdiction or transfers it outside of the jurisdiction
What does a strong prima facie case mean?
A strong prima facie case is a case where, at first glance, or based on the factual underpinnings of the case, the plaintiff has a good probability of prevailing in the case.
This concept has been stretched further by Canadian courts in British Columbia.
In the case Insurance Corporation of British Columbia vs. Patko, 2008 BCCA 65, the court ruled that if the plaintiff establishes it has a “good arguable case on the merits” the court may render a Mareva order.
By requiring a “good arguable case”, the British Columbia courts have opened the door to grant Mareva injunction orders in cases where a clear right cannot be established but a good arguable case can be made.
Ex parte Mareva orders
Just like any other injunction, a Mareva injunction can be sought on an ex parte basis.
In other words, a plaintiff can present an interlocutory or interim injunction request in case there is an urgency to act.
In addition to the requirements needed for a Mareva injunction, the plaintiff will also need to successfully meet the criteria for an ex parte motion as well.
On an ex parte basis, the plaintiff will generally need to demonstrate:
- There is a serious issue to be tried
- The plaintiff will suffer an irreparable prejudice if the court does not order the injunction
- The balance of inconvenience favours the plaintiff
Upon successful demonstration of the Mareva order criteria and the interlocutory injunction criteria, a plaintiff may quickly obtain a Mareva injunction to deal with an urgent and immediate threat.
Impact of Mareva injunction on unrelated third-party creditors
The Mareva injunction is an extraordinary legal remedy intended to restrain the defendant from taking steps to put its assets beyond the reach of the plaintiff to thwart the judgment a plaintiff may get.
The freezing order does not give the plaintiff any rights or priority over the defendant’s assets.
In the case of Trade Capital Finance Corp. vs. Cook 2017 ONCA 281, the Ontario Court of Appeal ruled that although a Mareva injunction was issued against the defendant were the object of the dispute related to some specific assets, the Mareva injunction did not shield the asset from a bona fide action from a third party or a creditor.
In other words, a third-party creditor of the defendant who has a legal right to assert a claim against the assets of the defendant can pursue its claim.
The Ontario Court of Appeal further stated that the objective of the Mareva injunction is not to preserve specific assets for the plaintiff to exercise a potential future recourse even if it had a prima facie serious case on the merits.
The Mareva injunction is a powerful tool parties to a lawsuit can use in the context of their legal dispute or litigation.
If a party to a lawsuit considers that it has a strong case and the defendant can potentially transfer its assets to render the execution of a final judgment on merits difficult or ineffective, you have a Mareva injunction case!
When it is established that the plaintiff has a strong prima facie case on the merits, that the defendant has some assets under the court’s jurisdiction and that there is a real and genuine risk that the defendant will take unusual steps to dissipate such assets, the court can render a Mareva freezing order against the defendant.
The Mareva order is an order restricting the defendant’s actions.
In other words, it’s an injunction ordering the defendant not to do something.
The Mareva injunction is not an order issued against the defendant’s assets.
As a result, it does not grant the plaintiff any rights directly on the defendant’s assets per se.
If the defendant fails to respect the Mareva injunction order, the defendant is exposed to contempt findings.
Litigation lawyers should master the concept of Mareva injunction and, if warranted, should not hesitate to use it.
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