Court File and Parties
COURT FILE NO.: CV-15-542738 DATE: 20170727 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Jiaxing Economic Co-operation Co. Ltd. and Jiaxing Shunxing Textile Chemicals Co. Ltd., Plaintiffs AND: 2438866 Ontario Inc., Bo Shao and Yue Gu, Defendants
BEFORE: Pollak J.
COUNSEL: Colin Holland, for the Plaintiffs Rebecca Huang, for the Defendants
HEARD: May 23, 2017
Endorsement
[1] The Plaintiffs, Jiaxing Economic Co-operation Co. Ltd. (“Jiaxing Economic”) and Jiaxing Shunxing Textile Chemicals Co. Ltd. (“Jiaxing Shunxing”), are Chinese companies that have no assets, and do not conduct business, in Canada. They have commenced this action in Ontario against the Defendants 2438866 Ontario Inc., Bo Shao, and Yue Gu for allegedly committing fraud by stripping the assets and misappropriating funds from two non-party Chinese companies, Zhangjiagang Free Trade Zone Zhongtian Hongye International Trading Co. Ltd. (“ZFT”) and Jiangsu Zhongtian Hongye Importing & Exporting Co. Ltd. (“JZH”).
[2] There are three motions before this Court that have been ordered to be heard together:
(i) a master's motion brought by the Defendants to set aside the “ex parte” Certificate of Pending Litigation (“CPL”) obtained by the Plaintiff;
(ii) the Plaintiffs’ master’s motion for a CPL on another property owned by the Defendants; and
(iii) the Plaintiffs’ motion for a Mareva injunction.
[3] In Toronto, the Consolidated Practice Direction for Civil Actions, Applications, Motions and Procedural Matters in the Toronto Region (effective July 1, 2015) gives direction regarding the hearing of masters’ motions by a judge. Specifically, paragraph 11 of Section B of Part 1 states:
A master has jurisdiction to hear any motion in a civil proceeding except those specified [in] rule 37.02(2). Masters’ motions must be made to a master. Unless the relief requested in the motion is within the exclusive jurisdiction of a judge, a motion returnable by attendance or in writing must be made to “the Court” and heard by a master. Judges may refuse to hear any motion that is within the jurisdiction of a master. [Emphasis added.]
[4] Justice McEwen ordered that the CPL masters’ motions be heard by a master and that the motion for a Mareva injunction be heard by a judge. There were several court appearances wherein the parties disagreed on the order in which these motions should be heard. At a chambers appointment, Justice Lederer ordered that these three motions be heard by a judge.
[5] These CPL masters’ motions are being heard with this motion for a Mareva injunction as a result of the order of Justice Lederer.
[6] The personal Defendants are the sole shareholders of ZFT and JZH, the non-party companies. The Plaintiffs allege that, before the personal Defendants left China in 2013 to emigrate to Canada, they stripped the assets of ZFT and JZH which made these non-party Chinese companies unable to satisfy default judgments obtained in China in favour of the Plaintiffs. The default judgments were in relation to contractual disputes between the two non-party companies and the Plaintiffs in this action. As mentioned above, the Plaintiffs allege in the current Ontario litigation that the Defendants committed fraud by stripping the assets of, and misappropriating funds from, the non-party companies.
[7] The Defendants submit that there are no material facts pleaded in the Ontario claim upon which to base the Plaintiffs’ allegations of fraud. The Plaintiffs submit that they cannot produce proper documentation because they do not have access to the relevant banking documents. The Defendants have refused the Plaintiffs’ request to produce such banking documents. The Plaintiffs have not taken any legal steps in this action to request production of such documents.
The Mareva Injunction
Test
[8] The Mareva injunction is an extraordinary remedy which is subject to strict requirements.
[9] The parties agree on the test to be applied by the Court when deciding whether the Plaintiffs are entitled to a Mareva injunction. As stated in the Defendants’ factum, a Plaintiff must prove that:
(a) It has a strong prima facie case against the defendant;
(b) It has made…full and frank disclosure of all material matters within his or her knowledge, and it has given particulars of the claim against the defendant, stating the grounds of the claim and the amount thereof, and fairly stating the points made against the defendant;
(c) It has given some grounds for believing that the defendant has assets in the jurisdiction, and that there are some grounds for believing that there is a risk of the assets being removed out of the jurisdiction, or disposed of within the jurisdiction or otherwise dealt with so that the plaintiff will be unable to satisfy a judgment awarded to it;
(d) It will suffer irreparable harm if the injunction is not granted;
(e) The balance of convenience favours the granting of the injunction; and
(f) It has given an undertaking as to damages.
[Emphasis added.]
[10] It is important to note that for a Mareva injunction, the Plaintiffs must satisfy the Court that the defendants are “removing or there is a real risk that … [they will] remove… [their] assets from the jurisdiction to avoid the possibility of a judgment” (*Chitel et al. v. Rothbart et al.* (1983), 39 O.R. (2d) 513 (C.A.), at p. 532 [Chitel]).
[11] At pp. 529-530 of Chitel, the Court of Appeal also reviewed the purpose of the Mareva injunction remedy as set out in Barclay-Johnson v. Yuill, [1980] 3 All E.R. 190 (U.K. Chancery Division):
It seems to me that the heart and core of the Mareva injunction is the risk of the defendant removing his assets from the jurisdiction and so stultifying any judgement given by the courts in the action. If there is no real risk of this, such an injunction should be refused; if there is a real risk, then if the other requirements are satisfied the injunction ought to be granted. If the assets are likely to remain in the jurisdiction, then the plaintiff, like all others with claims against the defendant, must run the risk common to all, that the defendant may dissipate his assets, or consume them in discharging other liabilities, and so leave nothing with which to satisfy any judgement. On the other hand, if there is a real risk of the assets being removed from the jurisdiction, a Mareva injunction will prevent their removal. It is not enough for such an injunction merely to forbid the defendant to remove them from the jurisdiction, for otherwise he might transfer them to some collaborator who would then remove them; accordingly, the injunction will restrain the defendant from disposing of them even within the jurisdiction.
[12] The Defendants provided the Court with a chronology of the factual events in this matter. The chronology, summarized, includes the following events:
2008 The personal Defendants apply for Canadian permanent resident status.
2014 October JECL makes a complaint of fraud against the personal Defendant Yue Gu in China.
2015 January Chinese police dismiss the fraud complaints against Yue Gu.
2015 May The Toronto property that is owned by the corporate Defendant is put up for sale.
2015 August 28 JECL’s Chinese action against JZH commences.
2015 October 16 The corporate Defendant purchases a second property in Ontario. This second property is the subject of the new CPL request in the current set of motions.
2015 December 22 After an ex parte motion, the Plaintiffs obtain a CPL on the Toronto property that was put up for sale in May 2015 as mentioned above.
2015 December 23 JECL obtains a default judgment against JZH and the personal Defendant Yue Gu in China.
2015 December 28 The Plaintiffs serve the motion record for a Mareva injunction.
[13] There is no evidence that the personal Defendants have removed money from ZFT or JZH for the purposes of defeating their creditors. As well there is no evidence that any money disappeared from China.
[14] The Plaintiffs rely on hearsay affidavit evidence given by an agent of the Plaintiff who has no personal knowledge of the matters to which he deposes. The Plaintiffs also rely on banking records they allege show a transfer of money from ZFT and JZH to the personal Defendants.
[15] The parties rely on 24 volumes of materials, including six lengthy Facta, which were in excess of the volume permitted for in the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (“Rules”). The Plaintiffs advised the court that such voluminous material was necessary as a result of the “complexity of these motions”.
[16] Notwithstanding the voluminous evidence and materials, I find that the Plaintiffs have not met their burden of proving any of the required elements to justify granting the Mareva injunction. For example, the Plaintiffs have failed to provide a proper undertaking for damages, as required by Rule 40.03, as of the date of this hearing, despite notification of this deficiency by the Defendants. Instead, the Plaintiffs have provided a “promise” in their answers to undertakings and advised the Court that they are prepared to comply with any undertaking required by the Court. Since the Plaintiffs have not provided the proper undertaking in their materials, the Defendants have not had an opportunity to cross-examine on the required undertaking. The requirement for this undertaking is basic, well-established and set out very clearly in the Rules.
[17] The Plaintiffs have not provided a reason for their failure to include the undertaking on this motion for the extraordinary relief of the Mareva injunction. There is no reason in this case to absolve the Plaintiffs of the requirement for the undertaking. As I have already noted, it must be emphasized that a Mareva injunction is a “drastic and extraordinary remedy” which has very specific requirements (*United States of America v. Yemec*, 2005 ONSCDC 8709, 75 O.R. (3d) 52 (Div. Ct.), at para. 11).
[18] I also agree with the Defendants that, on the basis of the evidence before this Court, the Plaintiffs cannot establish that they have a strong prima facie case against the Defendants. The pleadings do not contain the material facts required to support the cause of action. The serious allegations of fraud in the statement of claim must be supported by material facts. This requirement is addressed in the Rules and has not been met by the Plaintiffs. The legal basis for this claim is also not properly set out in the pleading. It is not clear from the pleading whether the Plaintiffs rely on Chinese law to establish that the fraud happened in China or whether the Plaintiffs are claiming that there is personal shareholder liability for the non-party corporate breaches in China.
[19] The Defendants emphasize that there were no allegations of fraud in the Chinese litigation and no findings of fraud. The only civil allegation of fraud against the Defendants was made on December 15, 2015 in the Ontario litigation. The Chinese litigation commenced on August 28, 2015.
[20] Furthermore, the Plaintiffs have admitted that they will not suffer irreparable harm if the injunction is not granted. There is also no evidence before the Court that the Defendants are attempting to remove assets from this jurisdiction. To the contrary, the evidence is that the Defendants have increased their assets in this jurisdiction. As I have discussed above, the Plaintiffs have not satisfied this Court that they have a prima facie case against the Defendants. I find that I cannot infer that the Defendants, as a result of their alleged fraudulent behaviour, are likely to attempt to remove their assets from the jurisdiction.
[21] Finally, the Court finds that, on the evidence before it, the balance of convenience does not favour granting the injunction.
[22] For all of these reasons the Mareva injunction cannot be granted.
[23] I therefore dismiss the Plaintiffs’ motion for a Mareva injunction.
The CPL Motions
[24] The vast majority of submissions and materials in these motions were related to the Defendants’ motion to set aside the existing ex parte CPL and the Plaintiffs’ motion for a CPL on another property owned by the Defendants. The test for granting the CPL is well set out by Master Muir in the case of *Roseglen Village for Seniors v. Doble*, 2010 ONSC 3239 at para. 10 and agreed to by the parties:
(i) The test on a motion for leave to issue a CPL made on notice to the defendants is the same as the test on a motion to discharge a CPL (Homebuilder Inc. v. Man-Sonic Industries Inc., 1987 CarswellOnt 499 (S.C. – Mast.) (“Homebuilder”) at para. 1);
(ii) The threshold in respect of the “interest in land” issue in a motion respecting a CPL (as that factor is set out at section 103(6) of the Courts of Justice Act, R.S.O. 1990, c.C.43) is whether there is a triable issue as to such interest, not whether the plaintiff will likely succeed (1152939 Ontario Ltd. v. 2055835 Ontario Ltd., 2007 CarswellOnt 756 (S.C.J.), as per van Rensburg J., citing Transmaris Farms Ltd. v. Sieber, [1999] O.J. No. 300 (Gen.Div. – Comm. List) at para. 62);
(iii) The onus is on the party opposing the CPL to demonstrate that there is no triable issue in respect to whether the party seeking the CPL has “a reasonable claim to the interest in the land claimed” (*G.P.I. Greenfield Pioneer Inc. v. Moore*, 2002 ONCA 6832, 2002 CarswellOnt 219 (C.A.) at para. 20);
(iv) Factors the court can consider on a motion to discharge a CPL include (i) whether the plaintiff is a shell corporation, (ii) whether the land is unique, (iii) the intent of the parties in acquiring the land, (iv) whether there is an alternative claim for damages, (v) the ease or difficulty in calculating damages, (vi) whether damages would be a satisfactory remedy, (vii) the presence or absence of a willing purchaser, and (viii) the harm to each party if the CPL is or is not removed with or without security (572383 Ontario Inc. v. Dhunna, 1987 CarswellOnt 551 (S.C. – Mast.) at paras. 10-18); and
(v) The governing test is that the court must exercise its discretion in equity and look at all relevant matters between the parties in determining whether a CPL should be granted or vacated (931473 Ontario Ltd. v. Coldwell Banker Canada Inc., 1991 CarswellOnt 460 (Gen. Div.); *Clock Investments Ltd. v. Hardwood Estates Ltd.*, 1977 ONSC 1414, 1977 CarswellOnt 1026 (Div. Ct.) at para. 9).
[Emphasis added.]
[25] The Defendants submit that the ex parte CPL should be set aside for several reasons, including the Plaintiffs’ nondisclosure on the ex parte motion. In their factum, the Defendants submit that:
In ex parte proceedings, the ordinary checks and balances of the adversarial system are absent. The court does not have the benefit of the moving party’s facts and narratives being tested or challenged by the opposite party. Thus, the moving party and its counsel carry a high onus of disclosure. They must disclose facts and highlight exhibits relevant to the opposite party’s position.
The breach of this duty is in and of itself sufficient to lead the court to set aside an ex parte order under Rule 39.01(6), which reads:
Where a motion or application is made without notice, the moving party or applicant shall make full and fair disclosure of all material facts, and failure to do so is in itself sufficient ground for setting aside any order obtained on a motion or application.” [Emphasis added].
In *Sparkle Ventures Inc. v. At My Accounting Department Inc.*, 2011 ONSC 1972 at para. 19 Justice Brown cited with approval Master Egan’s summary of the relevant principles. The court expects the moving party to include facts that may explain the defendants’ position, and cannot discharge the duty of disclosure by simply appending a document as exhibits without highlighting the important facts in the body of the affidavit.
In Chitel et al. v. Rothbart, the Court of Appeal elaborated on the principles. The court will assess the disclosure in the original application to decide whether there was material non-disclosure. If there was, the court will not exercise its discretion to continue the ex parte order. The court stated:
There is no necessity for citation of any authority to state the obvious that the plaintiff must, in securing ex parte interim injunction, make full and frank disclosure of the relevant facts, including facts which may explain the defendant’s position if known to the plaintiff. If there is less than this full and accurate disclosure in a material way or if there is a misleading of the court on material facts in the original application, the court will not exercise its discretion in favour of the plaintiff and continue the injunction. [Emphasis added.]
While Chitel et al v. Rothbart was an ex parte interim injunction case, the principles apply equally to ex parte CPL motions.
More seriously, the cross-examinations show that the Plaintiffs put false and misleading evidence before Master Wiebe. The extent and materiality of the misrepresentations in the original ex parte motion record is a compelling reason for this Court to discharge the CPL will full indemnity costs, to show disapproval of and deter such misconduct.
[26] The Plaintiffs admit that there were errors made in the hearsay affidavit evidence relied on at the ex parte Motion. They argue that the errors made were not material. I disagree. When I consider the hearsay evidence provided to the Master on the ex-parte motion, and in particular, the omissions that were made in that evidence, I find that the Court was misled with respect to the strength of the Plaintiffs’ submissions that there was a “reasonable interest in land on the basis of constructive trust”. In particular, I note the lack of disclosure that the Chinese police had dismissed the fraud complaints against the Defendants, as well as the lack of any fraud allegations having been made in the Chinese litigation.
[27] In considering the requirements set out by Master Muir, I find that the Defendants have met their burden of proving that: there is no triable issue in respect to whether the Plaintiff has a reasonable claim to the interest in the land claimed. There is not enough evidence before this Court to support the finding of a triable issue of the Plaintiffs’ claims. For these reasons, the Court finds that it is proper to set aside the ex parte CPL.
[28] The Court requested the parties make submissions on the effect of Rule 42.01(2), if any, on these motions. As a result of the findings I have made, it is not necessary for the Court to consider those submissions.
[29] With respect to the Plaintiffs’ motion for a new CPL, I find that there is not enough evidence to support the Plaintiffs’ submission that there is a triable issue on whether the Plaintiffs have a reasonable claim to the interest in the land claimed. I make this finding for the same reasons I have set out above where I consider the strength of the Plaintiffs’ claim. I find that the evidence before this Court is not sufficient to meet the test for the required elements as set out above by Master Muir.
[30] For these reasons, I dismiss the Plaintiffs’ motion for a Mareva injunction and the Plaintiffs’ motion for another CPL on the property belonging to the Defendants. I grant the Defendants’ motion to set aside the existing CPL.
Costs
[31] Both parties made submissions with respect to the costs of these motions. The Defendants were entirely successful on all of these motions and are entitled to have their costs paid by the Plaintiffs.
[32] The Defendants requested costs on a partial indemnity basis as follows:
(i) $39,209.50 on the motion to set aside the Noting in Default and vacate the existing CPL;
(ii) $34,971.18 on the motion for a Mareva injunction and new CPL on the second property.
[33] In comparison, the Plaintiffs requested costs as follows:
(i) $41,470.62
(ii) $5,301.
[34] The Plaintiffs submit that the costs requested by the Defendants are excessive. In light of the complexity of this matter which was addressed by the Plaintiffs at the hearing of this motion and the seriousness of the relief requested by the Plaintiffs, I disagree. I find that the costs requested by the Defendants are reasonable. Notwithstanding the fact that the Plaintiffs’ costs were significantly less than those submitted by the Defendants, I find that the Defendants were forced to incur these legal costs because of the serious nature of the action taken by the Plaintiffs in this litigation.
[35] I therefore order the Plaintiffs to pay costs of $74,180.68, on a partial indemnity basis to the Defendants within 30 days of the date of this decision.
Pollak J. Date: July 27, 2017