Freezing a bank account to prevent fraud or embezzlement of funds by a business partner

Business partners and shareholders may often disagree on the issue of money and sharing of profits. However, when partners who have access to the business’s bank account decide to move funds for their own benefit improperly, it may be necessary freeze their bank account to ensure that the funds are not wasted or removed outside the country. If the facts and circumstances of the case are sufficiently serious, a Court may grant a Mareva injunction freezing the account of the accused partner or employee.

Without such a remedy, it may be possible for a partner or even a key employee to wrongfully transfer funds irrecoverably. Common situations where the need to freeze an account may arise include:

(i) Theft or embezzlement of funds by a business partner or an employee with access to the business bank account;

(ii) A partner who moves funds to gain leverage to negotiate without having any valid commercial or contractual reason to move the funds;

(iii) A shareholder or director who wrongfully withdraws dividends without authorization of the Board of Directors.

What is a Mareva Injunction?

A Mareva injunction will generally freeze all bank accounts of the accused which can cause significant damage to their financial affairs and their lives. For example, a Mareva injunction against a person can cause the banks to terminate all business relationships with the accused.

In the event the accused has a mortgage, the bank may terminate the mortgage and demand immediate repayment. Personal loans, business loans where the accused is a partner or director, personal loans to the accused, may also be terminated due to the bank’s refusal to continue relationships with the accused. All of these things can happen even before a Court decides the merits of the case against the accused.

What are the chances a Court with freeze someone’s account?

For the above reasons, Courts are generally reluctant to grant a Mareva injunction unless the facts and circumstances are very seriously against the accused person. Furthermore, in most cases, due to the risks of wastage of the funds, the Court will hear the application without the accused person present and without notice to the accused to avoid giving the accused time to dissipate the funds. As the application is often heard without the accused having an opportunity to defend themselves, Courts will most often refuse to grant the Mareva injunction, unless there are strong evidence of risks of fraud or embezzlement of funds.

However, a Mareva injunction does not require the party to establish a case of fraud or theft. There must be a real risk that assets will be destroyed or transferred out of jurisdiction. For example, if the accused has resources or connections outside Alberta or Canada where he can move the money so that local courts cannot exercise power, a court may be inclined to grant a Mareva injunction.

What factors will the Court consider before freezing someone’s account?

There are five requirements for a Mareva injunction:

(a) the applicant must make full and frank disclosure of all material matters within his or her knowledge;

(b) the applicant must give particulars of the claim against the accused person, stating the grounds of the claim and the amount thereof, and the points that could be fairly made against it by the accused person. In other words, the applicant must advise the Court what the accused might have said if they were here during the hearing;

(c) the applicant must give grounds for believing that the accused person has assets in the jurisdiction;

(d) the applicant must give grounds for believing that there is a real risk of the assets being removed out of the jurisdiction, or disposed of within the jurisdiction or otherwise dealt with so that the applicant will be unable to satisfy a judgment awarded to him or her; and

(e) the applicant must give an undertaking as to damages.

Upon an interim hearing of the Mareva injunction application, if a Court decides that there are strong risks of the accused person dissipating with the funds, the Court may grant the injunction. The Court will also direct the accused person to provide an affidavit with the Court disclosing the reasons for moving them and location of the funds shortly after the accused person is advised of the freezing order. After that, another court date shall be fixed where both parties will be given the opportunity to state their positions on the dispute.

The risks of obtaining a Mareva injunction

If the Court decides that the injunction was obtained inappropriately, the Court may direct the applicant to pay damages to the accused person. For that reason, it is extremely important to disclose all material facts to the Court at the time of the hearing of the application.

For the risks that both sides to the dispute may face in such situations, it is always advisable to speak with a business lawyer to determine if the facts and circumstances are sufficiently serious to justify freezing the bank accounts of a business partner or employee. It is also important to be alive to the fact that freezing someone’s bank account may permanently damage relationships between the parties and settlement of the matter may no longer be a viable option. This can be costly for the business as in such a case, the parties would be engaged in prolonged litigation.

What you can do

A business lawyer can properly advise on whether the facts and circumstances are sufficiently serious to obtain a Mareva injunction. Even if a Mareva injunction is obtainable, a lawyer may be able to advise you on alternatives or potential settlements to avoid litigation, if appropriate.

Our business lawyers at Osuji & Smith have extensive experience in dealing with Mareva injunctions and settlement of such business disputes. If you or your partnership or corporation is experiencing such a situation, please do not hesitate to contact us for a consultation.

Author: Imtiaz Hafiz