Supreme Court of British Columbia grants Mareva injunction in aid of pending foreign civil ‎proceeding

Does a British Columbia court have jurisdiction to grant injunctive relief where no substantive relief is being sought in the province? In the past, it was nearly impossible to obtain a stand-alone Mareva injunction in Canada where the proceedings at issue were pending in a foreign jurisdiction. With the advent of technology which has made the movement of assets globally faster and easier, Canadian courts have had to adjust their approach and become more open to assisting foreign plaintiffs that seek interim remedies in aid of their pending foreign proceedings. Most recently, in United States Securities and Exchange Commission v. Sharp, 2023 BCSC 425, the Supreme Court of British Columbia determined that it did have jurisdiction to issue the Mareva injunction sought by the United States Securities and Exchange Commission (“SEC”), regardless of whether the causes of action pursued by the SEC in its complaint could be adjudicated in British Columbia.

SEC’S complaint

The foundation for the British Columbia proceedings involved a proceeding before the United States District Court in Massachusetts (the “US Proceeding”) in which the SEC alleged that the defendants were involved in a fraudulent scheme to circumvent a number of US securities legislation provisions. The alleged scheme included a “pump and dump” approach, where the defendants acted in concert to inflate the share prices of public companies controlled by their affiliates and then to sell those shares at an inflated value.

In the US Proceeding, the SEC sought disgorgement remedies and civil monetary penalties against the defendants, who were all British Columbia residents. By the time the action was brought in British Columbia, the SEC had obtained a temporary restraining order in the US and preliminary injunction orders against certain defendants. The British Columbia Securities Commission (“BCSC”) had also issued preservation orders against the defendants. However, despite these steps, the SEC argued that it was under-secured and the existing orders did not cover all of the defendants’ assets.

Issue of jurisdiction

The issue of jurisdiction was raised by one of the defendants, Mr. Friesen, who submitted that since no substantive relief was being sought in British Columbia, the courts in British Columbia did not have jurisdiction to grant the injunctive relief. It was undisputed that the Court had jurisdiction in some circumstances to grant a free-standing Mareva injunction in support of a foreign proceeding. However, Mr. Friesen argued that a free-standing Mareva injunction could only be granted in circumstances where the dispute between the parties in the foreign proceeding was justiciable in a British Columbia court, and because the US Proceeding was grounded in alleged breaches of US statutes, the dispute was not justiciable in British Columbia.

After reviewing the jurisprudence on stand-alone Mareva injunctions, the Court concluded that the common law on this issue had developed in more recent years to allow for injunctions that are ancillary to a foreign proceeding. The Court noted that the Supreme Court of Canada’s decision in Brotherhood of Maintenance of Way Employees Canadian Pacific System Federation v. Canadian Pacific Ltd., 1996 CanLII 215 (SCC), among other decisions, had permitted the granting of stand-alone injunctions where there was a justiciable right, regardless of whether or not that court may have jurisdiction over the cause of action. Citing Justice Sharpe’s textbook, Injunctions and Specific Performance (Toronto: Thomson Reuters, 2022), the Court added that “[i]n the modern age of easily transportable assets and international commerce entailing liability in foreign states…the court should be empowered to protect serious claims”, including by favoring injunctive relief in aid of foreign proceedings and expanding their reach beyond prior confines.

The Court concluded that it had jurisdiction to grant the relief sought in aid of a foreign proceeding, even if the issue in dispute in the foreign proceeding was not justiciable before it in British Columbia.

Constitutional issues

Certain of the defendants submitted that the relief sought should be denied on the basis of constitutional issues, including that the injunction would violate the defendants’ US constitutional protections under the Fifth Amendment and the defendants’ rights against self-incrimination under sections 7 and 13 of the Canadian Charter of Rights and Freedoms.

Some of the defendants had invoked the Fifth Amendment in the US Proceeding and had refused to answer questions on financial disclosure. They argued that if a Mareva injunction is granted, the defendants would be required to produce assets lists (a typical step arising from a standard Mareva proceeding), which could be used against them in the US Proceeding, thereby violating their constitutional right to rely on the Fifth Amendment. The Court held that the Fifth Amendment’s protection against self-incrimination is not applicable to civil proceedings in Canada, and the submission was misconceived.

The defendants similarly invoked their rights against self-incrimination protected by sections 7 and 13 of the Charter. The Court held that as with the right against self-incrimination protected by the Fifth Amendment, the right against self-incrimination protected under the Charter does not give rise to a general right to refuse to give evidence in a civil proceeding.

Strong Prima Facie case

With respect to the quality of the evidence tendered by the plaintiff, the Court held that since a Mareva injunction constitutes interlocutory relief, hearsay is not per se inadmissible. The applicable test is whether the plaintiff has a “good arguable case”, such that it is appropriate to freeze the defendants’ assets pending judgment. This calls for a flexible approach, including considerations of proportionality on what the record before the Court should include. The Court held that the evidence tendered was of a sufficient quality to fairly consider and determine the question of whether the plaintiff had established a strong prima facie case.

The Court then proceeded to apply the two-part test for granting a Mareva injunction, which requires the applicant to establish:

(1) the threshold issue of a strong prima facie or good arguable case; and (2) in balancing the interests of the parties, to consider all the relevant factors, including (i) the existence of eligible assets by the defendant both inside and outside the jurisdiction, and (ii) whether there is evidence of a real risk of disposal or dissipation of those assets that would impede the enforcement of any favourable judgment.

With respect to the first branch of the test, the Court noted that expert evidence about the US securities law to be applied in the US Proceeding would have assisted the Court in considering whether a strong prima facie case was made out. Nevertheless, the Court was not satisfied that the absence of expert evidence on foreign law meant a Mareva injunction in aid of a foreign proceeding could not be granted. The Court held that in a case such as this one, where the alleged behavior is manifestly fraudulent, there is no requirement for expert evidence to determine that such behavior violates foreign law: The Plaintiff had a good arguable case.

Regarding the second branch of the test, the Court found that the presence of the defendants’ assets in British Columbia, the plaintiff’s current under-securitization, and the real risk of assets dissipation were particularly important factors in weighing the balance of convenience.

Conclusion

The Court was ultimately satisfied that the SEC had demonstrated a strong prima facie case and that the balance of convenience favoured granting the relief. The recognition by the Court that fundamental changes in the global nature of financial practices necessitate an expansion in the scope of interim reliefs granted in aid of foreign proceedings is a further step in the right direction in order to ensure that judgments and enforcement in foreign jurisdictions are not thwarted by defendants’ efforts to dissipate their Canadian assets.