Freeze orders that arise out of the course of a securities investigation have long been considered controversial for several reasons. This article examines recent cases where freeze orders have come into question.
Investors and others involved in securities transactions should be aware of the broad powers the BC Securities Commission (the “Commission”) has to freeze the assets and properties of individuals and companies under the BC Securities Act (the “Securities Act”). The Commission can and often does issue freeze orders at an early stage in the investigation – even before formal allegations are made. Freeze orders are not determinative of whether the subject of an investigation has committed any wrongdoing or breach of the Securities Act; they are made to preserve property until the facts can be established through an investigation and potentially a hearing before the Commission.
Freeze orders have been described by the BC Court of Appeal as extremely intrusive as they can have serious and far-reaching consequences on a person’s life and business. The property of the individual or corporation of interest is immediately affected, and the property of innocent third parties can also be captured in the freeze.
Freeze orders have been considered controversial for several reasons, including because the Commission has been able to make the orders in a broad range of circumstances and with minimal evidence to support the need for the freeze order. In the last year, B.C. courts have addressed freeze orders in important decisions on high profile cases.
A case of particular importance is Party A v. British Columbia (Securities Commission), 2021 BCCA 358 (“Party A”), in which the BC Court of Appeal clarified that there are limits on the Commission’s powers with respect to freeze orders. The Court also confirmed that the Commission must adhere to certain standards in exercising its discretion to issue, revoke, or vary a freeze order during an investigation or a proposed investigation by the Commission. Even though there have been several changes to the sections of the Securities Act at issue in the decision, the Court’s analysis relating to how the Commission can exercise its powers in relation to freeze orders will continue to apply.
In Party A, there were three separate appeals which were heard together – all of them involved appellants who were subject to various asset freeze orders by the Commission. In the two successful appeals, the Court decided that the Commission’s freeze orders had to be set aside for two reasons:
- in concluding that a freeze order could be maintained even though the Executive Director had not made any allegations that the appellants had breached the Securities Act; and
- in requiring the parties subject to the freeze orders to establish with “certainty” that there would be no possibility of claims against them in the future.
The key takeaways from this case include:
- If the Commission issues a freeze order at the investigation stage, the investigation must be into an alleged contravention of the Securities Act: Before making a s.151(1)(a) order under the Securities Act, an investigation must either be in place or proposed. The Commission is required to conduct a preliminary assessment of the evidence in support of the investigation and asset freeze order on an application for an asset freeze order at the investigatory stage. The threshold question for the Commission is if there is sufficient evidence to raise a “serious question” that the investigation could show breaches of the Securities Act leading to financial consequences against the asset owner. The financial consequences must be monetary claims or penalties under the Securities Act. So, as an example, if the investigation would only result in orders which would prohibit the alleged wrongdoer from certain conduct (i.e., cease trading, engaging in promotional activities, suspending an individual’s registration), the Commission cannot issue an asset freeze order against the alleged wrongdoer.
- The evidentiary threshold for the issuance and maintenance of asset freeze orders at the investigation stage is not high: Even though the evidence must be something more than mere speculation or suspicion, it can be less than evidence required to satisfy a balance of probabilities. The evidence does not have to be in the traditional form and can be by way of hearsay evidence.
- The Commission must also be satisfied that the asset freeze order is in the public interest by considering all the relevant factors: In issuing or maintaining freeze orders at the investigatory stage, the Commission is required to consider not only the protection of the public but also public confidence in the markets. Public confidence will often require the Commission to consider the interests of the asset owners and to recognize that an asset freeze order is extremely intrusive. The Commission may consider other factors such as: the seriousness and scope of the allegations; the stage of the investigation and any urgency; the scope and value of the assets to be frozen in relation to the potential claims or penalties; the potential consequences of the order on the asset owner or other parties; and the strength of the evidence in support of the asset freeze order.
- The Executive Director is not required to show a risk of dissipation of assets: The Executive director is not required to show a risk of dissipation of the assets as a condition of granting an asset freeze order. But, while it is not necessary to have evidence of a risk of dissipation of assets, where there is evidence on this issue or if it can be inferred from the facts, it will be relevant evidence for the Commission to consider.
- On an application to vary or revoke a freeze order, where the freeze order was made without notice to the affected party, the onus lies on the Executive Director: In circumstances where the affected party was not given notice of an application for an asset freeze order, it is not necessary for the affected party to show “new and compelling evidence” or a “significant change in circumstances” to justify revoking or varying the asset freeze orders.
While the Commission’s power to use freeze orders remains broad, the Court’s decision in this case puts important limits on how those powers can be used.
If you are the subject of a freeze order or are concerned that you may become subject to a freeze order, please contact us to discuss your situation.