Court File and Parties

COURT FILE NO.: CV-22-00677859-00CL

DATE: 2022-06-13

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 7572042 CANADA INC., B&R ADVANCED CLOUD COMPUTING INC., BARAKE GLOBAL MANAGEMENT (BGM) INC., BARAKE SOFTWARE DEVELOPMENT SERVICES INC., BARAKE TECHNOLOGY INDUSTRIES INC., BAVARIA SOFTWARE SECURITY INC., BEIMOL INDUSTIRES INC., BERLIN ADVANCED TECHNOLOGIES (BAT) INC., BERLIN COMPUTER SYSTEMS INC., BERLIN FIBER OPTICS SOLUTIONS INC., BERLIN GLOBAL TECHNOLOGIES INC., BERLIN TECHNOLOGY HOLDING INC., HYDRA COMPUTING INC., MASADA INFORMATION SECURITY INC., MUNICH TECHNOLGIES INC., PEGASUS ADVANCED CLOUD COMPUTING INC., and RABIH GEORGE BARAKE, Plaintiffs and Defendants by Counterclaim (Responding Parties)

AND:

THE BANK OF NOVA SCOTIA o/a SCOTIA BANK, Defendant and Plaintiff by Counterclaim (Moving Party)

BEFORE: Justice Cavanagh

COUNSEL: Anthony J. O’Brien and Ian Klaiman, for the Defendant and Plaintiff by Counterclaim (Moving Party)

Talal Chehab, for the Plaintiffs and Defendants by Counterclaim (Responding Parties)

HEARD: June 10, 2022

ENDORSEMENT

Introduction

[1] The defendant and plaintiff by counterclaim, The Bank of Nova Scotia (“BNS”), moves for an interlocutory Mareva injunction against the plaintiffs and defendants by counterclaim.

[2] For the following reasons, BNS’ motion is granted.

Procedural Background

[3] In 2021, BNS made a number of loans to the corporate plaintiffs under programs announced by the Government of Canada for businesses.

[4] On January 24 and 25, 2022, BNS froze bank accounts of the plaintiffs following its review of the plaintiffs and performance of additional due diligence. This review raised significant concerns for BNS with respect to the plaintiffs and the bank accounts. On March 1, 2022, Scotia Capital Inc., a wholly owned subsidiary of BNS, froze the investment accounts of the individual defendant, Rabih George Barake, and two of the corporate plaintiffs.

[5] Following the freezing of accounts, the plaintiffs commenced this action on March 4, 2022 seeking various relief including orders unfreezing the accounts.

[6] In their statement of claim, the plaintiffs claim:

a. an interim, interlocutory and/or final order directing BNS to release accounts which have been frozen by BNS since on or about January 24, 2022

b. an order directing BNS to pay to the plaintiffs the amounts currently on deposit with BNS in the frozen accounts.

c. an interim, interlocutory and/or final order directing BNS to release three Scotiabank iTRADE accounts which it froze on March 1, 2022.

d. an order directing BNS to pay to them the amounts currently on deposit with BNS in the iTRADE accounts.

e. other relief in relation to the freezing of accounts.

[7] BNS delivered a statement of defence and counterclaim dated March 29, 2022.

[8] A scheduling hearing was held on March 30, 2022 before Justice Kimmel. At this hearing, the defendants sought a hearing date for a motion for a Mareva injunction against the plaintiffs. Counsel for the plaintiffs advised that their clients intend to bring a motion to unfreeze accounts with BNS that had been frozen. Justice Kimmel scheduled the two motions to be heard together and set a timetable for delivery of materials. Counsel were seeking an early date for the motions because of urgency. Justice Kimmel set the earliest available date that was then available, July 8, 2022, and, in her endorsement, invited counsel to contact the Commercial List scheduling office to inquire about possible earlier hearing dates in May and June, 2022. An earlier date became available, and the motions were scheduled for hearing on June 10, 2022.

[9] The timetable that was ordered provides for BNS’ motion record to be delivered by April 5, 2022 and for the plaintiffs’ motion record for their motion to unfreeze the accounts, and also in response to BNS’ motion, to be delivered by April 14, 2022.

[10] BNS’ motion record was served in accordance with the timetable. The plaintiff’s did not deliver a responding motion record or a motion record in support of their intended motion for an order unfreezing the BNS accounts. Dates were scheduled for the cross-examination of the individual plaintiff, Mr. Barake, on May 2 and 3, 2022, by video conference. Counsel for BNS attended on that date. Mr. Barake who did not appear, nor did anyone on his behalf. Counsel for BNS put on the record that he had made it clear to counsel for the plaintiffs that he intended to proceed with the cross-examination of Mr. Barake, even if he had not filed motion material. The cross-examination did not proceed.

[11] No motion materials were delivered by the plaintiffs. They did not deliver a factum.

Request for Adjournment

[12] At the hearing on June 10, 2022, counsel of record for the plaintiffs did not appear. New counsel appeared for the plaintiffs who advised that he had just been retained and that the plaintiffs had discharged their former counsel of record. New counsel for the plaintiffs requested an adjournment of BNS’ motion. No affidavit was filed explaining why the plaintiffs had not complied with the timetable or why they had waited until the hearing to request an adjournment.

[13] New counsel for the plaintiffs advised me that Mr. Barake was unhappy with his previous lawyers, for reasons including that they had had not delivered motion materials in accordance with the timetable. The timetable was set with the full knowledge of the plaintiffs and their counsel. If there were reasons why the plaintiffs’ then counsel was unable to meet the court-ordered timetable, this would have been known by the plaintiffs by April 14, 2022. The plaintiffs could then have instructed their counsel to deliver their motion record or, if they so chose, retained new counsel. They could have requested an adjustment to the timetable which would still accommodate the hearing date. They did not do so. The plaintiffs simply allowed time to pass and waited until the hearing date to request an adjournment.

[14] The motion by BNS is for relief that qualifies as urgent and, in my view, BNS would be exposed to a significant risk of prejudice if an adjournment was granted in these circumstances.

[15] In the circumstances, in the absence of evidence to explain why the plaintiffs failed to comply with the timetable ordered for BNS’ motion, which was brought on an urgent basis, I declined to grant the plaintiffs’ request for an adjournment of the hearing of BNS’ motion.

Facts

[16] The evidence filed in support of this motion is principally from Francis Trottier, a Director, Product, Policy & Operational Effectiveness with BNS. This evidence is unchallenged. I accept this evidence.

[17] The evidence shows that the corporate plaintiffs were each dissolved for years, until they were revived in March 2021 through to June 2021, shortly before applying to BNS for loans.

[18] Mr. Barake is the sole listed officer and/or director of each of the corporate plaintiffs.

[19] In January 2021, the Government of Canada announced the HASCAP Program for businesses who have been heavily impacted and have seen their revenues decrease due to COVID-19. Under the HASCAP Program, businesses apply for HASCAP loans directly through their financial institutions, who are responsible for originating, authorizing and managing eligible loans.

[20] Starting in about March 2021 through to and including November 2021, Mr. Barake, on behalf of certain corporate plaintiffs, applied for HASCAP loans from BNS. In support of their applications for HASCAP loans, Mr. Barake, on behalf of the applicable plaintiffs, provided to BNS (i) CRA confirmation evidencing application to the Canadian Emergency Rent Subsidy Program (“CERS”) and account statements from the applicable plaintiffs showing the corresponding deposits of CERS funds; and (ii) the applicable plaintiffs’ financial statements, internal financial statements, tax returns, and notices of assessment (collectively, the “Financial Statements”). The Financial Statements presented the applicable plaintiffs as operating businesses, with significant assets, revenues, and expenses.

[21] Mr. Trottier’s evidence is that BNS, relying on the CERS confirmations and Financial Statements, and the truth and accuracy of the information contained therein, determined that certain corporate plaintiffs were eligible for the HASCAP loans (the “HASCAP Borrowers”).

[22] BNS advanced HASCAP loans to the HASCAP borrowers in the aggregate principal sum of $3,861,000 each bearing interest at the rate of 4% per annum pursued to certain “Credit Agreements for Business”. The credit agreements incorporated by reference certain representations and warranties.

[23] The corporate borrowers represented, warranted and covenanted that (a) the borrower has been negatively impacted by the COVID-19 pandemic or the economic environment created thereby; (b) the borrower was financially viable prior to the impact of the COVID-19 pandemic; (c) the proceeds from the financing will be used only to fund the cash flow needs of operations; (d) the financing coupled with the borrower’s existing liquidity and forecasted operational cash flow and subsidies and credit currently available to the borrower will enable a degree of continuity of the business of the borrower during the current economic environment; (e) the financial statements delivered to the lender for the purposes of the financing are complete and correct in all respects and fairly present the financial condition and results of operation of the borrower and the guarantors as of their stated date; and (f) the borrower’s historical cash flow would have been sufficient to service the financing and based on reasonable assumptions as to the COVID-19 pandemic, the borrower reasonably anticipates that its future cash flow will be sufficient to service the financing.

[24] As part of the credit agreements and as security for their respective indebtedness to BNS, the HASCAP borrowers executed and delivered general security agreements in favour of BNS.

[25] BNS also advanced loans in connection with the Canadian Emergency Business Account Program (the “CEBA” program) to the HASCAP borrowers, the plaintiff Pegasus Advanced Cloud Computing Inc. and Mr. Barake (collectively, the “CEBA Borrowers”) in the aggregate principal sum of $720,000 and each in the principal sum of $60,000. These loans were made pursuant to the Canada Emergency Business Account Credit Agreement Small Business (collectively, the “CEBA Agreements”) executed by Mr. Barake on behalf of the applicable borrowers.

[26] Pursuant to the CEBA Agreements, Mr. Barake, on behalf of the applicable borrowers, certified, among other things, the following:

a. The borrower is an active operating business that was in operation in Canada on March 1, 2020.

b. The funds from the loans under the program shall be used by the borrower to pay (i) Eligible Non-Deferrable Expenses [that is, operating expenses such as wages, rent, insurance, property taxes, independent contractors, licenses etc.] of the borrower.

c. The business of the borrower is facing ongoing financial hardship as a result of the COVID-19 pandemic.

d. The borrower intends to continue to operate its business or resume operations.

e. In response to the COVID-19 pandemic, the borrower has made all reasonable efforts to reduce its costs and to otherwise adapt its business to improve its viability.

f. The borrower will not use any loan received under the program to make any payment or pay any expense other than “Eligible Non-Deferrable Expenses”. Specifically, the borrower will not use any loan received under the program to make prepayment/refinancing of existing indebtedness, any payment of dividends, distributions or increases in management compensation or to increase the compensation of related parties.

g. The borrower acknowledges that the lender will rely upon the accuracy of the attestation given and associated documentation in making loans and advances to the borrower pursuant to the program.

[27] Pursuant to requests by Mr. Barake, the plaintiffs opened various accounts with BNS.

[28] Scotia Capital Inc. is an investment dealer that is wholly-owned by BNS. Scotia iTRADE carries on an order-execution only business and is a division of Scotia Capital Inc.

[29] Pursuant to certain applications and agreements, Mr. Barake, Barake Software Development Services Inc. and Beimol Industries Inc. opened iTRADE accounts with Scotia Capital Inc.

[30] A review was undertaken by BNS of Mr. Barake’s companies. BNS’ evidence is that this review raised several concerns with the borrowers and the loans, including: (i) business registries were reviewed, and it was determined that the businesses were previously dissolved and financial statements were provided for years when the businesses were not operating, (ii) it was discovered that domain names (and some websites) were created for many of the companies concurrent with their respective business revivals in 2021, shortly before application for the loans, in a manner inconsistent with reported business longevity. From the perspective of BNS, this was suspicious considering the purported industry for all these businesses was cyber related, and (iii) BNS determined that funds were removed from the corporation accounts to Mr. Barake’s personal accounts, in a manner inconsistent with the expected business practices.

[31] As a result, on or about January 24 and 25, 2022, BNS froze certain business accounts of the corporate plaintiffs.

[32] A further review by BNS revealed that funds advanced under the HASCAP loans and CEBA loans to the borrowers were improperly diverted into the investment accounts, rather than used to pay expenses. Therefore, on or about March 1, 2022, pursuant to the iTRADE agreements, Scotia Capital Inc. froze the investment accounts.

[33] As of March 17, 2022, the total amount in the frozen accounts (13 in total) was $156,038.81 and the total book value of the investment accounts was $1,306,284.15.

Default and demands

[34] The evidence of BNS is that by March 2022, the borrowers were in default of the credit agreements and the CEBA agreements. BNS, through its lawyers, issued demands declaring the entire amount of the indebtedness of the borrower is to be immediately due and payable and, where applicable, enclosed Notices of Intention to Enforce Security against the borrowers under the Bankruptcy and Insolvency Act.

[35] As at the date of the demands, there was due and owing the aggregate sum of $3,865,007.16 on the HASCAP loans and $720,000 on the CEBA loans, totaling $4,585,007.16.

Mr. Barake’s bankruptcy

[36] Mr. Barake made an assignment in bankruptcy on July 26, 2019 and received an automatic discharge from bankruptcy on April 27, 2020. The trustee received a total of $2,736 to the estate, from voluntary payments by Mr. Barake, and proven claims totaled $463,090.10.

[37] In Mr. Barake’s Statement of Affairs dated July 26, 2019, he lists no realizable assets, except for furniture, personal effects and a 2013 Jetta, which were valued at $8,340 in total. Mr. Barake further indicated that from January 2017 he was self-employed as an Uber driver and earned monthly net income of $2,072.84

[38] In his Statement of Affairs, Mr. Barake listed no shareholding or other interest in the corporate plaintiffs and, in response to the question, “Have you operated a business within the last 5 years?”, Mr. Barake disclose that he operated only three of the corporate plaintiffs, namely, Beimol Industries Inc., Barake Software Developments Services Inc. and 7572042 Canada Inc., and only to the date of their respective dissolutions (which occurred in 2017 and 2018).

Analysis of HASCAP loan advances and account analysis by BNS

[39] BNS provided evidence that a senior investigator in the BNS Corporate Security department conducted a tracing analysis of the proceeds of the HASCAP loans and an analysis all of the corporate plaintiffs’ accounts. This analysis showed:

a. Apart from the circular flow of funds among the accounts, the only deposits are from: (i) proceeds of the HASCAP loans, (ii) proceeds of the CEBA loans, or (iii) payments from the Federal Government on account of CERS. There are no deposits on account of business income or revenue.

b. There do not appear to be any withdrawals from any of the applicable borrowers’ accounts for payment of expenses that one would expect to see from an operating company, such as payment for rent, payroll, insurance or HST;

c. Of the total sum of $3,861,000 that BNS advanced under the HASCAP loans, $3,533,000 was traced into investments as follows:

i. $3,378,000 into the investment accounts, including $2,100,000 into Mr. Barake’s personal investment account; and

ii. $155,000 into accounts held with Questrade.

d. From the investment accounts, there were withdrawals in the aggregate of approximately $639,836.

e. Masada Information Security Inc.’s account was opened with a balance of $100 on June 16, 2021. There were no deposits in September 2021. From that time, including to end including December 2021 (when the investment accounts were declining in value), there were 18 deposits from Mr. Barake’s personal account totaling $103,949.50 which were depleted through a series of 95 cash withdrawals in Quebec, each in the sum of $1,000.

f. There are various payments made to what appeared to be non-arm’s length parties, including, payments from the plaintiff Berlin Computer Systems Inc.’s account to “Jean-Paul Barake” totaling $10,493 and to “Carmel Barake” totaling $11,159.

Inspection of the corporate plaintiffs’ premises

[40] BNS retained Corporate & General Liquidators and Auctioneers Inc. (“C&G”) to attend at the borrowers’ purported business premises to determine whether any of the borrowers were operating.

[41] On March 18, 2022, C&G attended at the premises, and noticed that there was no tenant directory, nor any indication at the entrances of which company operated there. Instead, all of the premises were shared office workspaces, with a receptionist on duty. The receptionist at each of the locations confirmed that Mr. Barake did not have a dedicated office and that the locations were predominantly used as mailing addresses, but Mr. Barake could rent an office for meetings.

Analysis

[42] The guidelines established by the jurisprudence for a court to consider when determining whether a Mareva injunction should be granted are settled. See SFC Litigation Trust (trustee of) v. Chan, 2017 ONSC 1816 (Div. Ct.), at para. 60.

[43] The moving party must establish:

a. a strong prima facie case;

b. the responding party has assets in the jurisdiction;

c. there is a real risk that the responding party will remove his assets from the jurisdiction or dissipate those assets to avoid judgment;

d. the moving party will suffer irreparable harm if the injunction is not granted; and

e. the balance of convenience favours the granting of the injunction; and

[44] The moving party must give an undertaking in damages.

[45] The fundamental question in each case is whether the granting of an injunction is just and equitable in all the circumstances of the case. In Aetna Financial Services Ltd. v. Feigelman, 1985 CanLII 55 (S.C.C.) the Supreme Court of Canada emphasized that “... [t]he overriding consideration qualifying the plaintiff to receive such an order as an exception to the Lister rule is that the defendant threatens to so arrange his assets as to defeat his adversary, should that adversary ultimately prevail and obtain judgment, in any attempt to recover from the defendant on that judgment”.

Strong prima facie case

[46] In its statement of defence and counterclaim:

a. BNS claims that there was due and owing the aggregate sum of $3,865,007.16 on the HASCAP loans and $720,000 on the CEBA loans, totaling $4,585,007.16. BNS claims that the borrowers are liable for these amounts and for interest and costs.

b. BNS claims that Mr. Barake made false representations to BNS and that BNS relied on these misrepresentations in advancing the loans. BNS claims that by relying on Mr. Barake’s misrepresentations, it suffered losses and damages, including the amounts owing under the loans and other amounts.

c. BNS claims that the corporate borrowers misdirected proceeds of the loans into the hands of Mr. Barake and other of the corporate plaintiffs and that the transfers are fraudulent conveyances.

d. BNS claims that Mr. Barake and the corporate plaintiffs orchestrated a fraudulent scheme on BNS to obtain the loans and they misappropriated and misdirected the proceeds of the loans for their own personal use and benefit. BNS claims remedies for oppression.

e. BNS claims that the plaintiffs acted in furtherance of a common design, conspiring to orchestrate a fraudulent scheme on BNS. BNS claims that it suffered damages as a result of such conduct, including amounts owing under the loans.

f. BNS seeks an order tracing all amounts received by the plaintiffs and a declaratory order that it is entitled to a constructive trust.

g. BNS claims punitive damages.

[47] BNS has shown that it has a strong prima facie case that it has liquidated claims against the borrowers for repayment of loans and possession of assets secured by general security agreements, including the loan proceeds deposited or traced into the frozen accounts and the investment accounts, as described in the motion materials.

[48] BNS has demonstrated a strong prima facie case that the plaintiffs conspired to perpetrate a fraudulent scheme to obtain the loans and that BNS suffered damages as a result. I reach this conclusion based on the following evidence:

a. In support of the applications for the loans, Mr. Barake, on behalf of the corporate plaintiffs, executed the representations and warranties incorporated into credit agreements made by the corporate borrowers with BNS. Mr. Barake certified on behalf of the applicable borrowers that each borrower is an active operating business that was in operation in Canada on March 1, 2020. Mr. Barake produced financial statements to BNS which held out the corporate plaintiffs as viable businesses, adversely impacted by the COVID-19 pandemic, and that proceeds of the loans would be used only for qualified operating expenses.

b. BNS relied on these representations in determining eligibility for the HASCAP program and the CEBA program and in advancing the loans.

c. The evidence shows that the representations made by Mr. Barake on behalf of the borrowers when he obtained the loans for them, and the Financial Statements that were provided in support of the applications for loans, were false.

d. In his statement of affairs sworn in his bankruptcy, Mr. Barake listed no shareholding or other interest in the corporate plaintiffs and he disclosed that he operated only three of the corporate plaintiffs, and only to the dates of their dissolutions in 2017 and 2018.

e. BNS’ analysis of the plaintiffs’ accounts reveals that apart from the circular flow of funds among the accounts, the only deposits are either from (i) proceeds of the HASCAP loans, (ii) proceeds of the CEBA loans, or (iii) payments from the Federal Government on account of CERS. There are no deposits on account of business income or revenue. There do not appear to be any withdrawals from any of the applicable borrowers’ accounts for payment of expenses that one would expect to see from an operating company, such as payment for rent, payroll, insurance or HST.

f. Of the total sum of $3,061,000 BNS advanced under the HASCAP loans, which were supposed to be spent on eligible operating expenses, BNS traced $3,533,000 into investment accounts, including $2,100,000 into Mr. Barake’s personal investment account.

g. The borrowers purported business premises are shared office workspaces, with meeting rooms available for rental from time to time. They are not leased premises where the borrowers have been carrying on active operations.

h. Domain names (and some websites) were created for many of the corporate plaintiffs concurrent with their respective business revivals in 2021, shortly before applications for the loans, in a manner inconsistent with purported business longevity.

Assets in the jurisdiction

[49] The plaintiff’s have assets in Ontario including accounts with BNS and the investment accounts.

Risk of dissipation of assets

[50] In cases of fraud, the Mareva requirement that there be risk of removal or dissipation of assets can be established by inference, as opposed to direct evidence, and that inference can arise from the circumstances of the fraud itself, taken in the context of all the surrounding circumstances. See Sibley & Associates LP v. Ross (2011), 2011 ONSC 2951, 106 O.R. (3d) 494, at para. 63.

[51] The following evidence supports an inference that there is a real risk the that the plaintiffs will attempt to dissipate or hide their assets, absent a Mareva injunction:

a. From September 2021 December 20, 2021, at a time when the investment accounts were declining in value, there were 18 deposits from Mr. Barake’s personal account totaling $103,949.50 into the Masada Information Security Inc.’s account, which were depleted through a series of 95 cash withdrawals in Quebec, each in the sum of $1,000.

b. There are various suspicious payments from the plaintiffs’ account made to what appeared to be non-arm’s length parties, as noted.

c. Although the loan advances were to be used for the plaintiffs’ business expenses, the evidence shows that substantial amounts were transferred to Mr. Barake’s personal account, from which there were withdrawals of approximately $640,000.

[52] I am satisfied that BNS has established that if an injunction is not granted, there is a real risk that the plaintiffs will remove assets from the jurisdiction or dissipate those assets to avoid judgment.

Irreparable Harm

[53] I am satisfied that in the absence of any evidence that the plaintiffs have the means to satisfy a judgment if the assets identified by BNS were removed from the jurisdiction or dissipated, BNS has shown that if the injunction is not granted, it will suffer irreparable harm. See Christian-Philip v. Rajalingam, 2020 ONSC 1925, at para. 34.

Balance of convenience

[54] In considering the balance of convenience, the court will consider which party will suffer greater harm from the granting or refusal of the injunction pending a final decision.

[55] When I consider all of the evidence, I am satisfied that the balance of convenience favours BNS.

Undertaking in damages

[56] BNS has provided an undertaking to abide by any order concerning damages the Court may make, if it ultimately appears that the granting of an injunction has caused damage to the plaintiffs for which BNS ought to compensate them.

Disposition

[57] For these reasons, I am satisfied that BNS has shown that a Mareva injunction should be granted.

[58] The amount of the aggregate indebtedness owed to BNS as of March 2022 is $4,585,007.16. In her endorsement dated March 30, 2022, Justice Kimmel made an interim order preserving the trade accounts and all monies frozen by BNS pending the return of the motions. The value of the money in the investment accounts has decreased significantly because of fluctuations in the market. BNS was not authorized to liquidate these accounts and the plaintiffs did not given their authorization to BNS to do so. I take this into account in the Order and I reduce the amount requested for inclusion in paragraphs 3 and 11 of the draft order from $5,731,258.95 to $3,585,000 (calculated based on the principal amount owing less $1 million).

[59] BNS seeks costs on a partial indemnity scale in the amount of $59,496.74 comprised of fees of $47,453, counsel fee for the hearing of $3,000, HST on fees of $6,558.89, and disbursements (including HST) of $2,484.85. I have reviewed BNS’ Costs Outline and, having regard to the factors in rule 57.01, I am satisfied that the amount claimed is reasonable.

[60] Order to issue in form of Order signed by me today.

Cavanagh J.

Date: June 13, 2022