For plaintiffs, getting a winning judgment is the happy ending to a long and arduous legal process. It is vindication of your pleadings and assurance that you are entitled to compensation for your loss. So what happens when the defendants decide to quickly liquidate all their assets and now say they have no money to pay for any damages?
Background In October 2022, Hong Fang Wu was awarded by the BC Supreme Court over $1.2 million in damages after lending money to Zhiyong Ma and his company Superoptionforex Consulting Inc. for investment. Mr. Ma, who did not tell Ms. Wu that he was not licensed to sell or trade securities at all, invested almost all of Ms. Wuās money into one company which went bankrupt.
Mr. Ma took swift action almost immediately after the judgment. Mr. Ma and his wife of 32 years, Ying Wang, quickly filed for divorce. Ms. Wang claimed an unequal division of family property which Mr. Ma did not oppose. They also sold their family property of 22 years before the judgment could be registered against their property. In addition, the couple drew down their joint line of credit to its limit and withdrew hundreds of thousands of dollars from their joint and individual bank accounts.
In December 2022, Ms. Wu commenced a second action against Mr. Ma, Ms. Wang, and others in response to the coupleās divorce and sale of the family property. Ms. Wu alleged that the divorce and sale of the family property was actually conspired to avoid paying Ms. Wu by hiding the money via fraudulent sales and transactions. Two days later, Ms. Wu successfully applied for a Mareva injunction which froze the coupleās assets until a judgment could be made.
It later turned out that the family property was disposed of legitimately. Ms. Wu then shifted her claim towards the coupleās drawn down line of credit and withdrawal of their respective bank accounts. A few months later, Mr. Ma and Ms. Wang individually applied for the Mareva injunction to be set aside. And in August 2023, the judge who initially granted the Mareva injunction set it aside. Ms. Wu then appealed that decision to the BC Court of Appeal.
What is a Mareva injunction? A Mareva injunction is a useful tool that prevents defendants from disposing or removing their assets when doing so may jeopardize your ability to enforce and collect on a potential judgment. Since it is difficult to prove whether a defendant has the necessary cash to pay for a judgment, the usual solution is to find another asset they own, commonly real estate, and register a charge against that property. That way, the defendant will either have to pay the damages outright to discharge the encumbrance against the asset or sell the asset and pay using the proceeds. As a result, some defendants may conspire to quickly liquidate their assets so that they appear penniless and unable to pay the damages. Thus, a Mareva injunction can be used to prevent that from happening.
Because of the severe impacts a Mareva injunction make against the defendant, the courts will determine whether granting a Mareva injunction is just and equitable in all the circumstances of the case. In BC, the courts have set the following two-part test:
The applicant has a strong prima facie case on the merits that the defendant is liquidating the assets in response to a potential judgment. It doesnāt necessarily mean that the applicant is bound to succeed, but the applicantās case needs to be stronger than merely āarguableā. The applicant also must establish that the defendant has enough assets to pay for a potential judgment. When balancing the interest of both the plaintiff and defendant, a just and convenience result favours granting a Mareva injunction. Relevant factors that are considered include: the existence of the defendantās assets inside or outside of BC; a real risk of the disposal or dissipation of assets rendering a judgment nugatory (or useless); evidence of irreparable harm; the strength of the plaintiff's case; the nature and inherent risks of the transaction giving rise to the action; the amount of the claim; and the history of the defendantās conduct. When applying for a Mareva injunction, the burden falls on the applicant to satisfy this test. Nevertheless, the test is not a hard-line test, and the courts have the flexibility to issue of a Mareva injunction at its discretion.
A new wrinkle when issuing a Mareva injunction In this case, the Supreme Court did find that Ms. Wu had a strong prima facie case against Mr. Ma. However, since most of the Mr. Maās bank accounts were withdrawn and there was no evidence of where the money went, there were no assets to be restrained by a Mareva injunction.
The Court of Appeal agreed that it is āantithetical to the core purposeā of a Mareva injunction to utilize it against a defendant who has no assets. The Court also agreed that there was no evidence of where the money went. Ms. Wu did everything she could to establish that Mr. Ma dissipated all his bank accounts, and there is no reasonable way for Ms. Wu to prove where the money went. The only person who could provide evidence on where the money went was Mr. Ma.
Earlier, in the Supreme Court, Mr. Ma did not submit much useful or credible evidenceāsomething the court found suspicious. When Mr. Ma was questioned on where the money went, his answers were vague and questionable. For example, Mr. Ma claimed that he withdrew money to pay back other creditors, but he couldnāt identify the creditors nor the amounts owing; there were also no documents to verify his claims.
The lack of credible evidence allowed the Court of Appeal to make an adverse inference that there was a real risk that Mr. Ma was liquidating his assets to avoid paying the court order. Thus, the balance favoured granting a Mareva injunction. The Court of Appeal allowed the appeal and restored the initial Mareva injunction order.
Key takeaways This case serves as a big assist for plaintiffs who are stuck when sophisticated and/or savvy defendants liquidate their assets before the judgment is enforced. Having a strong prima facie case, demonstrating that you have done everything in your power to trace the flow of money, along with a lack of good evidence from the other side, may now be sufficient to grant a Mareva injunction and keep at least some form of security that you can collect on your judgment.
On the other hand, if you are a respondent caught in a Mareva injunction application or applying to set aside a Mareva order, trying to liquidate all your assets and then refusing to provide evidence on where the money went may backfire on you. Although it is up to the applicant to satisfy the Mareva injunction test, once a strong prima facie case has been established, the court will consider how much evidence you have provided to support your case. If your evidence is lacking and/or skeptical, and the applicant has done everything in their power to trace the flow of money, the courts may make an adverse inference that there is a real risk you are avoiding paying for a potential judgment. Thus, it is essential that you have sufficient documentation and evidence to tip the balance back in your favour and argue that an adverse inference is not applicable or warranted.
Case Wu v. Ma, 2024 BCCA 196 (https://www.canlii.org/en/bc/bcca/doc/2024/2024bcca196/2024bcca196.html)