CITATION: Borelli v. Chan, 2016 ONSC 3226

DIVISIONAL COURT FILE NO.: 59/16

DATE: 20160525

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Cosimo Borelli, in his capacity as trustee of the SFC Litigation Trust, Plaintiff

AND:

Allen Tak Yuen Chan, Defendant

BEFORE: L. A. Pattillo J.

COUNSEL: Robert Staley, Derek J. Bell and Jonathan Bell, for the Plaintiff

Robert Rueter, Sara J. Erskine and Malik Martin, for the Defendant

HEARD: In Writing

ENDORSEMENT

Introduction

[1] The defendant, Allen Tak Yuen Chan (“Chan”), seeks leave to appeal from the order of Hainey J. (the “Motion Judge”) dated January 21, 2016 (the “Order”). The Order dismissed Chan’s motion to vary, set aside, or discharge the worldwide Mareva injunction granted ex parte by the Motion Judge on August 28, 2014; dismissed Chan’s motion for fortification of the plaintiff’s undertaking as to damages, accepting in its place the undertaking of Emerald Plantation Holdings Limited (“Emerald Plantation”), a non-party to the action, to provide an undertaking as to damages; and dismissed Chan’s motion for security for costs of the action.

Background

[2] The plaintiff is Cosimo Borelli, in his capacity as trustee (the “Trustee”) of the SFC Litigation Trust (the “SFC Litigation Trust”).

[3] The Order arises in the aftermath and as a result of the dramatic rise and fall of Sino-Forrest Corporation (“SFC”), an integrated forest plantation operator and forest products company with assets stated to be primarily in the People’s Republic of China. SFC is a CBCA corporation. At all relevant times its head office was in Mississauga, Ontario and its executive office was in Hong Kong. Chan, who is a resident of Hong Kong, was the Chairman and Chief Executive Officer of SFC from August 3, 2001 to August 28, 2011.

[4] Between 2005 and December 31, 2010, SFC experienced remarkable growth. It raised in excess of $2.1 billion and $800 million in Canada’s debt and capital markets. As of December 31, 2010, it had a market capitalization of $5.723 billion. In June 2011, serious allegations were made of fraud, corruption and illegal activity at SFC. Although the Board of SFC instituted an investigation, they were unable to obtain adequate and/or verifiable plausible explanations for many of the issues raised.

[5] In March 2012, SFC filed for protection in Ontario under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”). On December 10, 2012, the Superior Court of Justice (Commercial List) sanctioned a Plan of Compromise and Reorganization dated December 3, 2012 (the “CCAA Plan”) which provided, among other things, that all of SFC’s assets were transferred to Emerald Plantation. Further, the Plan contemplated the creation of the SFC Litigation Trust and the transfer of all Litigation Trust Claims, which included any cause of action that may be asserted by SFC against third parties, to the SFC Litigation Trust.

[6] The SFC Litigation Trust was formed pursuant to a Litigation Trust Agreement dated January 30, 2013 and the Trustee was appointed the same day.

[7] On January 31, 2013, Emerald Plantation assumed the SFC Group’s assets and business operations.

[8] Subsequent to the implementation of the CCAA Plan, SFC’s creditors have determined that the reported assets of SFC and its affiliates simply did not exist resulting in net assets being written down by 89% or almost $3 billion.

[9] This action was commenced by notice of action dated March 31, 2014. The statement of claim is dated April 30, 2014.

[10] On August 28, 2014, the Trustee brought an ex parte motion for a world-wide Mareva injunction against Chan. In support of the motion the Trustee filed a four-volume motion record.

[11] In the Mareva motion, the Trustee alleged that Chan and certain other members of the senior management of SFC under Chan’s direction were responsible for SFC’s demise. In particular the affidavit of the Trustee, filed in support of the Mareva injunction, stated that Chan and some of the senior management of SFC acting on his instructions:

1. had operational and de facto control over a number of allegedly arm’s length purchasers of SFC’s timber known as “authorized intermediaries” and the suppliers of that timber, which control had not been disclosed to SFC, its auditors or directors;

2. caused SFC to significantly overpay for assets sold by companies secretly controlled by Chan;

3. withheld and/or hid information from SFC’s auditors;

4. prepared, certified and/or published false or materially misleading financial statements (including interim financial statements) and public disclosure documents of SFC;

5. concealed their unlawful activities from SFC through the use of personal (non-company) emails;

6. entered into a number of transactions that were suspicious/or outright fraudulent; and

7. caused monies to be paid out by SFC and/or the subsidiaries for no meaningful commercial purpose.

[12] In granting the ex parte world-wide Mareva injunction against Chan, the Motion Judge found:

a) Based on a review of the evidentiary record, there was a very strong prima facie case of fraud on the part of Chan;

b) The circumstances of the case and the nature of the alleged fraud carried on by Chan raised a very strong inference that he will dissipate his assets to put them out of reach of his creditors and the Trustee;

c) The Trustee will be irreparably harmed if Chan’s assets are not available to satisfy any judgment obtained against him;

d) The balance of convenience clearly favours the granting of a worldwide Mareva injunction; and

e) There is good reason to believe that Mr. Chan has considerable assets outside Canada, which he may dissipate.

[13] Subsequently, Chan brought the motion to set aside, vary or dismiss the Mareva injunction and to require the Trustee to provide a proper undertaking for damages, to post security for the undertaking and to pay into court security for costs of the proceedings. In support of the motion, Chan and others filed affidavits. In addition to the initial motion record, the Trustee filed additional materials further particularizing what he alleged was the fraud Chan perpetrated on SFC. In total, the motion record comprised 11 volumes containing nearly 6,000 pages of evidence as well as transcripts from the cross-examinations of five witnesses taken over eight days in Hong Kong. The hearing of the motion took three full days.

[14] In dismissing Chan’s motion, the Motion Judge held that a worldwide Mareva injunction may be granted by an Ontario court whether or not a defendant has assets within the jurisdiction on the strength of the court’s in personam jurisdiction. He further held that the Trustee had made full and frank disclosure in respect of five issues raised by Chan. He rejected Chan’s responding evidence as not being credible and confirmed that the record establishes a strong prima facie case of fraud. He further found, based on the evidence, that there was a real risk that Chan would conceal or dissipate his assets if a Mareva injunction was not granted. In addition to requiring an undertaking as to damages from the Trustee, the Motion Judge also required Emerald Plantation to provide an undertaking as to damages and, dismissed Chan’s motion for security for costs.

Test for Leave to Appeal

[15] The test for granting leave to appeal under rule 62.02(4) is well-settled. It is recognized that leave should not be easily granted and the test to be met is a very strict one. There are two possible branches upon which leave may be granted. Both branches involve a two-part test and, in each case, both aspects of the two-part test must be met before leave may be granted.

[16] Under rule 62.02(4)(a), the moving party must establish that there is a conflicting decision of another judge or court in Ontario or elsewhere (but not a lower level court) and that it is, in the opinion of the judge hearing the motion, “desirable that leave to appeal be granted.” A “conflicting decision” must be with respect to a matter of principle, not merely a situation in which a different result was reached in respect of particular facts: Comtrade Petroleum Inc. v. 490300 Ontario Ltd. (1992), 7 O.R. (3d) 542 (Div. Ct.).

[17] Under rule 62.02(4)(b), the moving party must establish that there is reason to doubt the correctness of the order in question and that the proposed appeal involves matters of such importance that leave to appeal should be granted. It is not necessary that the judge granting leave be satisfied that the decision in question was actually wrong – that aspect of the test is satisfied if the judge granting leave finds that the correctness of the order is open to “very serious debate”: Nazari v. OTIP/RAEO Insurance Co., [2003] O.J. No. 3442 (S.C.J.); Ash v. Lloyd’s Corp. (1992), 8 O.R. (3d) 282 (Gen. Div.). In addition, the moving party must demonstrate matters of importance that go beyond the interests of the immediate parties and involve questions of general or public importance relevant to the development of the law and administration of justice: Rankin v. McLeod, Young, Weir Ltd. (1986), 57 O.R. (2d) 569 (H.C.J.); Greslik v. Ontario Legal Aid Plan (1988), 65 O.R. (2d) 110 (Div. Ct.).

Analysis

[18] Chan submits that in dismissing his motion to set aside, or discharge the worldwide Mareva injunction granted against him, the Motion Judge made a number of errors, including:

1. Failing to apply the correct test for a Mareva order as set out in Chitel v. Rothbart (1982), 32 O.R. (2d) 513 (C.A.);

2. Failing to find that the Trustee had not made full, true and plain disclosure of all material facts;

3. Holding that the Trustee had established prima facie evidence of fraud and failing to provide adequate reasons for that finding;

4. Holding that the Trustee had established that there was a very strong inference that Chan would dissipate his assets;

5. In the application of the legal principles concerning the required undertaking for damages and Chan’s motion for security for costs.

[19] In my view, leave ought not to be granted in respect of the issues set out in subparagraphs 2, 3, and 4 above. The Motion Judge’s decision in respect of those issues was based on the extensive evidentiary record before him. As the issues are primarily fact driven, there are no conflicting cases.

[20] Further, and based on the reasons for decision of the Motion Judge, there is no reason, in my view, to doubt the correctness of the Motion Judge’s decision in respect of those issues. He correctly set out the principles in respect of the duty of full and frank disclosure and then specifically addressed Chan’s five allegations of non-disclosure of material facts and dismissed each one. Further, Chan’s submissions that the Trustee had not established a strong prima facie case of fraud were based on Chan’s evidence which the Motion Judge rejected as not being credible in the face of other evidence which he accepted. In the absence of Chan’s evidence, there was extensive evidence in the record to support the Motion Judge’s conclusion that there was “a very strong prima facie case of fraud”, both in respect of SFC’s grossly inflated financial position and secret profits made through nominee companies. Nor do I consider that the Motion Judge’s reasons were insufficient. They addressed the main issues raised by Chan and the conclusions were discernable. There is no requirement to address each and every point raised.

[21] With respect to the allegation the Motion Judge erred in holding the Trustee had established a very strong inference that Chan will dissipate his assets in the absence of the Order, again, there was evidence in the record of Chan’s behaviour after he left SFC which could support such inference.

[22] I take a different view, however, both in respect of the test for a Mareva injunction applied by the Motion Judge and the sufficiency of the undertaking as to damages he required.

The Test for a Mareva Injunction

[23] The jurisdiction of Ontario Courts to grant Mareva injunctions was confirmed by the Court of Appeal in Chitel v. Rothbart. The court referred to and adopted Lord Denning’s “guidelines” for granting Mareva injunctions set out in Third Chandris Shipping Corp. v. Unimarine S.A.; The Pythis, [1979] Q.B. 645 (C.A.). They are:

i. The plaintiff should make full and frank disclosure of all matters in his knowledge which are material for the judge to know.

ii. The plaintiff should give particulars of his claim against the defendant, stating the ground of his claim and the amount thereof, and fairly stating the points made against it by the defendant.

iii. The plaintiff should give some grounds for believing that the defendants have assets in the jurisdiction.

iv. The plaintiff should give some grounds for believing that there is a risk of the assets being removed before the judgment or award is satisfied.

v. The plaintiff must give an undertaking as to damages.

[24] The Trustee’s motion material indicated that Chan was a resident of Hong Kong and, as far as the Trustee was aware, did not have assets in Ontario. It went on to say that in light of the legal issues facing him in Ontario, Chan had no intention of returning to Ontario.

[25] In his brief endorsement granting the Trustee’s ex parte motion, the Motion Judge stated the test for a Mareva injunction was: a strong prima facie case of fraud; a real and genuine risk that the defendant will put his assets beyond his creditors for the purpose of avoiding judgment; the moving party will suffer irreparable hardship; and the balance of convenience favours the moving party.

[26] On the motion to set aside or vary the Mareva injunction, Chan argued that the Trustee had misled the Motion Judge as to the proper test for a Mareva injunction and in the absence of any grounds for believing that he had assets in Ontario, the Mareva injunction should be set aside. In rejecting Chan’s submissions, the Motion Judge first noted that the Trustee had provided the proper test as set out in Chitel v. Rothbart and that he accepted the Trustee’s submission that the court had the jurisdiction to grant a worldwide Mareva even where the defendant had no assets in the jurisdiction.

[27] The Motion Judge held that a worldwide Mareva injunction may be granted by an Ontario court whether or not a defendant has assets within the jurisdiction on the strength of the court’s in personam jurisdiction over the defendant. In reaching that decision, the Motion Judge relied on two British Columbia Supreme Court decisions, Mooney v. Orr, [1994] B.C.J. No. 2322 (B.C.S.C.) and Cussions v. Slobbe, [1996] B.C. J. No. 3028 (B.C.S.C.), as well as an excerpt from the text Injunctions and Specific Performance, by Justice Robert Sharpe noting that the strict rule requiring assets in the jurisdiction has now been abandoned in England and that “orders of this kind have also been made by Canadian courts.”

[28] Although the five factors required to obtain a Mareva injunction set out in Chitel v. Rothbart were referred to in that decision as “guidelines” it is clear from subsequent cases in Ontario that those factors are considered the test that must be met to obtain a Mareva injunction. See for example: Stans Energy Corp. v. Kyrgyz Republic, 2014 ONSC 6195 (S.C.J.) at para.22; Sibley & Associates LP v. Ross, 2011 ONSC 2951 (S.C.J.) at para. 11; Luong (Litigation Guardian of) v. Trinh, 2014 ONSC 693 (S.C.J.) at para. 13. To the extent, therefore, that the Motion Judge effectively held that it was not necessary for the Trustee to establish some grounds for believing Chan has assets in Ontario, his decision conflicts with Chitel v. Rothbart.

[29] In Chitel v. Rothbart, the court, agreed at para. 43 that the original purpose and point of a Mareva injunction was that the plaintiff proceeded by stealth so as to pre-empt any action by the defendant to remove his assets from the jurisdiction. Whether the court should expand its jurisdiction to issue a world-wide Mareva injunction where the defendant is a non-resident and has no assets in Ontario is an important question which should be considered by a higher court. It is therefore desirable that leave to appeal be granted in respect of that issue.

Sufficiency of the Undertaking as to Damages and Security for Costs

[30] In the original motion material, the Trustee deposed that he was prepared to provide an undertaking on behalf of the SFC Litigation Trust, “if it is required.” In his brief endorsement on August 28, 2014, the Motion Judge stated that the Trustee had given an undertaking as to damages. In his reasons dismissing Chan’s motion, the Motion Judge stated at para. 64:

64 When I granted the Mareva injunction I expected Mr. Borelli to provide his personal undertaking as to damages. I am of the view that he must do so. In addition, since it is not clear on the evidence before me that Mr. Borelli has sufficient assets within the jurisdiction to satisfy Chan’s potential damages arising from the Mareva injunction, Emerald Plantation must also provide an undertaking as to damages as suggested by the plaintiff in para. 223 of its factum. The undertaking as to damages to be provided by Emerald Plantation should be on essentially the same terms as the draft undertaking as to damages attached as Appendix D to the plaintiff’s factum.

[31] An undertaking as to damages is an essential element of an injunction. This is particularly so in respect of a Mareva injunction given the severe consequences of such an order. In addition, it is important that the undertaking be one of substance. An undertaking with no substance is essentially meaningless.

[32] Chan submits that the Motion Judge erred in permitting the Trustee initially to fail or refuse to provide his personal undertaking as to damages for a year after the ex parte Mareva was granted and then to give an undertaking that is supported only by an indemnification and undertaking from Emerald Plantation which is a non-resident corporation, has no assets in the jurisdiction and is not a party to the proceedings.

[33] In my view, based on the evidence or lack thereof before the Motion Judge, there is reason to doubt the correctness of the Motion Judge’s Order in regards to the sufficiency of the undertaking that he required. It is not clear from evidence whether the Trustee or the SFC Litigation Trust has assets in the jurisdiction. While Emerald Plantation holds what remains of SFC’s assets, it has no assets in the jurisdiction and there is uncertainty as to what may happen to those assets given Emerald Plantation’s mandate. Further, Emerald Plantation is not a party to the litigation.

[34] In addition, I consider that the issue of sufficiency of the undertaking required for a Mareva injunction to be a matter of importance that goes beyond the interests of the parties.

[35] In dismissing Chan’s motion for security for costs, the Motion Judge acknowledged that Chan was entitled to be protected in respect of the costs of the proceeding but held that Emerald Plantation’s undertaking as to damages was sufficient to protect Chan in that regard. Because I have concerns about the sufficiency of that undertaking, I consider that there is also reason to doubt the correctness of that portion of the Order dealing with security for costs.

Conclusion

[36] Leave to appeal from the Order of the Motion Judge is therefore granted in respect of the following questions only:

1. Did the Motion Judge err in law in holding that an Ontario court may grant a Mareva injunction where the defendant has no assets in the jurisdiction?

2. Did the Motion Judge err in holding that the Trustee’s proposed undertaking as to damages along with an undertaking from Emerald Plantation was sufficient?

3. Did the Motion Judge err in law in concluding that Emerald Plantation’s undertaking as to damages was sufficient to protect Chan’s costs in the action?

[37] Having regard to the cost submissions filed by both parties, total costs of this motion fixed at $7,500 on a partial indemnity basis. Disposition of the costs is left to the discretion of the panel hearing the appeal.

L. A. Pattillo J.

Date of Release: May 25, 2016