Debt recovery and forensic litigation

May 2011

Debt recovery and forensic litigation

bouton-vers-francaisRonald H. Levy
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514 878-3251

The recovery of a debt which results from fraudulent external activity or dishonest employees calls for creative thinking and the use of special recourses. The harm to the company caused by an intentional attack on its assets is often devastating. This damage affects both its asset base and, in many circumstances, those in management who may be held responsible.
Although our best advice is to implement measures that will help avoid being defrauded, the following is a basic overview of the recourses available in Quebec to attempt to recover amounts should the need arise.

When one looks at the avenues available to recover monies, one needs to include civil lawsuits. In all likelihood, a regular civil lawsuit taken to recover monies owed as a result of fraud or misappropriation will result in a judgment "suitable for framing" but not serving any other purpose and certainly will not put back any money into the company's coffers.

We will examine three recourses that can be considered if debt recovery is seriously desired. There are no guarantees that any of these three pillars are available in each and every case associated with fraud or intentional misrepresentations. Their availability is fact driven and each has its own particular application and conditions.

Pillar one: seizure before judgment

Quebec has a very important tool available to creditors which is not, per se, available in most common law jurisdictions. It should be noted though that this recourse has very specific rules and pre-conditions, and its application is limited to specific situations. However, if your facts do justify this recourse, it is extremely helpful in ensuring that when you do obtain a judgment, there will be assets belonging to the debtor that are available to satisfy this debt.

The Quebec Code of Civil Procedure provides:

733. The plaintiff may, with the authorization of a judge, seize before judgment the property of the defendant, when there is reason to fear that without this remedy the recovery of his debt may be put in jeopardy.

The application to a judge for authorization is made ex parte, (without sending any pre-notice to the defendant). It is exceptional that one can appear before a judge without, at least, giving a prior notice to the opposing side. This can be done even after the defendant has appointed a lawyer. This strategy is particularly useful as the debtor will be unaware that you are 'on to his or her trail' and that you have located assets to freeze in order to ensure the recovery of your debt.

It is important to note that the jurisprudence makes an important distinction between fraud as the source of the debt and the behaviour of the debtor which would allow a reasonable person to conclude that, as the article states, "... the recovery of the debt may be put in jeopardy."

The fact that a debt was created by fraudulent activity is not enough to justify a seizure of the Defendant's assets. It requires, in addition, specific behaviour of the Defendant which the court believes demonstrates that the seizure is needed to protect the recovery of the amounts awarded by judgment.

There are strategies that are available to allow you to best fit within the criteria. If you do qualify, however, and if you have been able to trace or identify the assets of the Defendant, this is a very effective tool for stopping the Defendants in their tracks and to freeze their assets before they disappear.

Pillar two: Anton Piller

This procedure was named after the English decision of the Court of Appeal in the case of Anton Piller KG v. Manufacturing Process Limited. Though it is often thought of as useful only in intellectual property and counterfeiting cases, it is actually very useful to secure evidence of employee misbehaviour and misuse of company property. This recourse allows the company to prove that its employee misappropriated customer lists and proprietary pricing and other confidential information to help the employee set up a competing operation.

The criteria for obtaining such an order from the court are, again, very stringent and include a strong prima facie case against the Defendant, serious potential for damage to the Plaintiff by the Defendant's behaviour and strong evidence that the Defendant has relevant documents or other items that there is a strong chance will be destroyed if the order is not issued.

It should be noted that unlike the seizure before judgment, the Anton Piller order does not freeze assets nor target items in the hands of third parties who are not Defendants in the lawsuit. It is an injunction ordering the Defendant to cooperate with the Plaintiff and an independent lawyer appointed to ensure that the order is properly and strictly adhered to, allowing copies to be made of documents, computer hard drives and other items, specifically described in the order. It is a particularity of this recourse that the Plaintiff cannot force the Defendant to give access to its records, but should the Defendant not agree, it exposes itself to being held in Contempt of Court, with its penalties and consequences, including the possibility of incarceration.

In the right circumstances, this is a particularly efficient tool in the Plaintiff's arsenal. Again, the application of the recourse, its limitations and eccentricities are too numerous to cover.

Pillar three: Criminal Code of Canada

Apart from the natural application of the Criminal Code , there are also sections of particular relevance to the company's interest in the actual recovery of the money which it has lost or the damages that it has suffered.

Of course, Criminal prosecution is the jurisdiction of government authorities. However, Section 738 and following of the Criminal Code also allows the Court to issue a restitution order which, once homologated by the civil courts, is as valuable as a judgement which would result from civil proceedings.

There are particular strategies to follow to obtain such an order and this recourse has its own challenges. It also suffers the inconvenience of lack of control of the process, as the entire matter is under the exclusive jurisdiction of the authorities that have brought the case. However, in the right circumstances, this is a powerful tool that can expose the Plaintiff to substantially less legal fees. There is also an important role which your lawyer can and should play in bringing the matter to the attention of the police authorities and ensuring that your claim is given the attention it deserves.

The pre-emptive strike: a word of caution

In a Section of the Code of Civil Procedure introduced in 2009 and entitled "Power to Impose Sanctions for Improper Use of Procedure" the legislature of Quebec recognized that certain lawsuits and procedures are filed for strategic and not substantive, good faith reasons. This could include persons or companies that have defrauded or misappropriated and wish to launch a pre-emptive strike against its victims, as a strategy to forestall proceedings taken against them.

In this circumstance, you should not hesitate to invoke the new protective provisions of Articles 54.1C.C.P. and following.

54.1. A court may, at any time, on request or even on its own initiative after having heard the parties on the point, declare an action or other pleading improper and impose a sanction on the party concerned. 

The procedural impropriety may consist in a claim or pleading that is clearly unfounded, frivolous or dilatory or in conduct that is vexatious or quarrelsome. It may also consist in bad faith, in a use of procedure that is excessive or unreasonable or causes prejudice to another person, or in an attempt to defeat the ends of justice, in particular if it restricts freedom of expression in public debate.

Of particular interest are the orders available to deal with any such improper use of the Courts, including:

  • making the lawsuit subject to specific conditions
  • suspending the lawsuit
  • referring the case for specific judge assignment or case management
  • ordering the offending party to advance the legal fees of the opposing party to defend against the impugned action.

The Courts are more and more open to apply this new recourse in the appropriate circumstances and invoking these articles of the Code of Civil Procedure should be carefully considered in the right cases.

Whereas Quebec boasts a series of recourses available to the victims of fraud and misappropriation, each case needs to be examined on its facts and the appropriateness of each recourse to the circumstances of the claim analyzed.

Note: This article is a condensed version of the original, to be published in 2012 in Commercial debt collection in Canada.

This bulletin provides general comments on recent developments in the law. It does not constitute and should not be viewed as legal advice. No legal action should be taken on the basis of the information contained herein.



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