Freezing orders under the Securities Act still governed by American Cyanamid test

Ontario Securities Commission v. Sextant Capital Management Inc., 2010 ONCA 228 considers the test to continue directions made by the Commission under s. 126 of the Securities Act, in this case to freeze two offshore funds held in Toronto by a fund-holding agent, Newedge Canada Inc.  The Court found that the general (and existing) test which follows the general rule from American Cyanamid Co v. Ethicon Ltd [2001] 1 WLR 194 is and remains the law.  The Court writes:

 

[32]         The Commission is seeking to displace the three-part test propounded in 2001 in Ontario Securities Commission v. RBC Dominion Securities. I will set out the test again here for ease of reference:

1)                 a strong prima facie case or a serious issue to be tried, as to whether there has been a contravention of the Securities Act;

2)                 a close connection between the alleged misconduct and the frozen assets; and

3)                 evidence of potential dissipation of assets.

[33]         Importantly, the courts that have discussed or applied the test have not insisted on a rigid application of the test but have imported a measure of flexibility. In RBC itself, where Farley J. was faced with interpreting and applying s. 126(5) for the first time, he stated, at para. 13, that the test for a Mareva injunction was a useful guide but "with some adjustments." For example, the strength of the prima facie case of breach of the Act required to continue a freeze of funds may depend on whether the freeze would interfere with the operation of the account in question—if the account could continue to operate, then a lesser case based on circumstantial evidence could suffice.

[34]         The flexibility of the test was remarked on by Pepall J. in Ontario Securities Commission v. von Anhalt, [2005] O.J. No. 247, a cease-trading order case under s. 128(4) of the Act. In rejecting the need for a strong prima facie case for an order under s. 128(4), Pepall J. commented, at para. 16, that the freeze order under s. 126 is a more onerous order than the cease trade order, but that even under s. 126(5), Farley J. in RBC had made it clear that a strong prima facie case of breach of the Act would not be required in every case depending on the circumstances.

[35]         The last case before this one to consider the test under s. 126(5) was Ontario Securities Commission v. De Freitas & Associates, [2008] O.J. No. 2020, another decision of Wilton-Siegel J. In that case, the court noted again that in RBC, Farley J. had anticipated the ability to apply a flexible standard regarding the strength of the prima facie case required.  However, in De Freitas, the court decided that a strong prima facie case of breach was required: De Freitas at paras. 28-31.

[36]         In my view, although the jurisprudence under this section is limited, the RBC test that has been articulated and applied is cogent, fair and effective. It sets out a standard against which a court may test the evidence presented to it and based on which the court is asked to impose a very onerous order that freezes assets of a corporation operating in the financial markets in Ontario.

[37]         Contrary to the submission of the Commission, the court is not being asked to approve the Commission's Offshore Directions or to review them to determine whether it was expedient for the Commission to make them in the first instance. Instead, the court is asked to make an order to continue the temporary Offshore Directions into the future, based on the record before it. Clearly a court needs criteria to apply in order to determine whether to make any order, and the affected parties also need to know the factors that will affect their position. This is quite different from the original directions of the Commission that can be made without notice and served on the affected parties thereafter: s. 126(6).

[38]         In my view, the RBC three-part test provides appropriate criteria for a court to consider when determining whether to continue freeze directions under s. 126(5). I am also of the view that the test is to be applied in a flexible manner with the required strength of proof of each component of the test dependent on the circumstances of the particular case. This would include not only the prima facie case or serious issue to be tried of breach of the Act, but also the link between the wrongdoing and the targeted fund. This is also the approach taken under the British Columbia and Alberta legislation, which provide a different procedure but seek to accomplish the same objective: see, for example, Klytie's Development Inc. (Re), 2006 ABASC 1763; Workum (Re), 2005 ABASC 425.