In Akagi v Synergy Group (2000) Inc.1, the Ontario Court of Appeal clarified the limits of the duties of receivers appointed by the court to enforce judgment debts, the scope of "investigative receiverships" and the jurisdiction of the Superior Court to encumber the assets of non-parties. The decision also strongly criticizes the cavalier manner in which serious ex parte orders were obtained by the plaintiff.
The case arose from a tax reduction program that had been promoted and sold by Synergy Group (2000) Inc. ("Synergy") to Mr. Akagi and others. The program was a sham and Mr. Akagi was reassessed by the Canada Revenue Agency. He sued Synergy and certain individuals associated with it for fraud. After a number of motions, including a motion for summary judgment, he obtained default judgment in the amount of $137,000. Subsequently, Mr. Akagi applied for and obtained, on an ex parte basis, an order appointing a receiver over all of the assets, undertakings and property of Synergy and an additional company, Integrated Business Concepts Inc. ("IBC").
The primary evidence in support of the ex parte application for a receiver was a three page affidavit from Mr. Akagi to which were attached three affidavits from representatives of the CRA, which had been used in other proceedings. The CRA affidavits outlined the details of a CRA investigation into the tax loss allocation program and indicated that in addition to Mr. Akagi, there may have been as many as 3,800 other investors who were defrauded. Mr. Akagi did not disclose that the CRA investigation had been terminated four months before he brought his motion. Mr. Akagi also did not state in this affidavit that he believed the contents of the three affidavits to be true.
Subsequently, the receiver obtained further orders from the application judge expanding its powers. The receivership order morphed into a wide ranging "investigative receivership" freezing the assets of 43 additional individuals and entities and registering certificates of pending litigation against their properties. None of these additional targets had been a party to the original receivership proceeding. Only three of the targets had a connection to the underlying action brought by Mr. Akagi and only two were judgment debtors.
The receiver brought the subsequent applications without a notice of motion, notice of application or a factum. The receiver simply filed reports with the application judge (on occasion an order would issue without a report). The application judge issued brief endorsements, sometimes by email. Many of the appointments with the application judge were not on a court docket. The appellants only learned of the date of the attendances from the disclosure by counsel for the receiver's dockets.
The receiver obtained an order that was breathtakingly broad in that it (1) extended the receiver's powers to include and apply to a list of 43 individuals and entities; (2) contained sweeping injunctive provisions operating on a worldwide scale; (3) authorized the receiver to register certificates of pending litigation against the property of not only the judgment debtors and IBC, but 41 additional persons against whom no action or application had been commenced seeking such relief and who had not been given any notice; (4) granted the receiver a $500,000 borrowing charge against the frozen funds to fund the receiver's activities.
Only after that sweeping order was granted, the parties affected by the order were notified, and brought an application to set aside the orders granted. The application judge dismissed the application.
The Court of Appeal in its decision set aside all of the orders and in its reasons provided guidance for the appointment of investigative receiverships.
The Court begins by stating that there is much to be said in favour of an investigative receivership when it is utilized in appropriate circumstances and with appropriate restraints. The language in section 101 of the Courts of Justice Act, which grants the court the authority to appoint a receiver "where it appears... just or convenient to do so" is undoubtedly broad but must be shaped by the circumstances of each case. The appointment of a receiver is an extraordinary and intrusive remedy and one that should be granted only after careful balancing of the effect of such an order on all of the parties and others who may be affected by the order. In the case of a receivership in aid of execution, the appointment requires evidence that the creditor's right to recovery is in serious jeopardy.
From a review of the case law on investigative receiverships, the Court of Appeal formulated this summary:
- The appointment of an investigative receiver must be necessary to alleviate the risk posed to the plaintiff's right to recovery;
- The primary objective of investigative receiverships is to gather information and "ascertain the true state of affairs" concerning the financial dealings and assets of a debtor or a debtor and a related network of individuals or corporations;
- The investigative receiver does not control the debtor's assets or operate its business, leaving the debtors to continue to carry on their business in a manner consistent with the preservation of their business and property; and
- The investigative receivership must be carefully tailored to what is required to assist in the recovery of the claimant's judgment while at the same time protecting the defendant's interests and to go no further than necessary to achieve these ends.
In terms of the process by which these orders were obtained, the Court of Appeal cautions that the expediency provided by the Commercial List should be tempered with procedural safeguards to protect the interests of the parties. As stated by the Court, "[h]ad the normally salutory processes of the Commercial List – carefully designed to permit the parties to get to the merits of a dispute and resolve them in "real time" without trampling their procedural rights – not been permitted to become overly causal, as they did, the galloping nature of the receivership may well have been reined in." The Court reiterated that applicants in ex parte proceedings are under "high obligations of candor and disclosure". Clearly, those obligations were not met in this case.
Fundamentally, the Court of Appeal reprimanded the receiver for proceeding on a flawed premise to carry out a broad, stand alone, investigative inquiry – "the civil equivalent of a criminal proceeding or public inquiry" – for the purpose of determining whether wrongs were suffered by unidentified non-parties who were not represented in the proceedings. This flawed premise was compounded by the overarching nature of the orders granted, including orders to tie up and freeze assets and property of targets who had never been parties to the proceeding and who had been named in the orders on the flimsiest of pretexts.
Take Aways:
- In order for a judgment debtor to
obtain a receivership under section 101 of the Courts of
Justice Act, the debtor must demonstrate that that a
receivership order freezing and otherwise interfering with the
debtor's assets is needed to protect his ability to recover the
debt.
- The debtor must file evidence of attempts to collect on the judgment in other ways and that those failed;
- There must be a serious risk that without the appointment of a receiver, the debtor's recovery could be seriously jeopardized.
- The receivership must be carefully tailored and not do more than is necessary to assist in the recovery of the claimant's judgment.
- Although not expressly addressed in the reasons of the Court of Appeal, the manner in which this case was conducted is likely to expose the receiver to claims for damages by those persons whose assets were improperly frozen. Should that occur, a claim by the receiver against his legal advisors may follow. Stay tuned.
Footnote
1. 2015 ONCA 368
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