Receivers are commonly appointed to realize upon a debtor’s assets and, in many cases, to operate the debtor’s business for the benefit of one or more creditors. By comparison, an investigative receiver is granted powers to gather information about the financial affairs of a debtor to aid a creditor’s debt recovery efforts. In the recent case of Akagi v. Synergy Group (2000) Inc., the Ontario Court of Appeal endorsed the use of an investigative receiver by a judgment creditor, but only if (i) necessary to alleviate a risk to the creditor’s right of recovery, and (ii) the receivers’ powers are subject to appropriate limits.[1]
Factual Background
Synergy Group (2000) Inc (“Synergy”) marketed a program to Mr. Akagi that was supposed to provide him with tax benefits. Mr. Akagi invested money into the program. The program did not operate as promised. Mr. Akagi lost his investment, and the CRA reassessed him, resulting in a significant tax liability. A number of other individuals were in a similar position, at one point the CRA estimated that 3815 individuals had lost money because of their involvement in the program.[2]
Procedural History
Mr. Akagi sued Synergy and four related individuals for fraud. After some procedural wrangling, he received judgment for $182,000 against Synergy, and two of the individual defendants.[3]
After receiving judgment, but before making any efforts to enforce it, Mr. Akagi applied to have a receiver appointed over the assets, property and undertakings of Synergy and a related company, which had not been a party to the lawsuit. The Court granted the application pursuant to section 101 of Ontario’s Courts of Justice Act.[4]
At a number of subsequent applications, the Court expanded the receivers’ powers, and the parties subject to the receivership [the “Subject Parties”]. The subsequent orders:
- Authorized the receiver to collect information about the Subject Parties from their financial institutions.[5]
- Enjoined the Subject Parties from dealing with their assets, located anywhere in the world, and enjoined the Subject Parties’ financial institutions from dealing with any funds in the Subject Parties’ accounts.[6]
- Authorized the receiver to register certificates of lis pendens against property belonging to the Subject Parties.[7]
- Granted the receiver a $500,000 borrowing charge against the frozen assets.[8]
- First expanded the scope of the order to apply to 12 additional individuals and entities, and then subsequently to an additional 43 named individuals and entities, as well as a number of unnamed individuals and entities, who were related to the named parties.[9]
After receiving notice of receivership, some of the Subject Parties applied under the come back clause to have the order set aside.[10] They were unsuccessful at the first instance, and appealed the matter to the Ontario Court of Appeal.
The Ontario Court of Appeal’s Decision & Analysis
The Court of Appeal set aside the initial order appointing the receiver, and the subsequent orders expanding its powers.[11] The Court based its decision on the substantive shortcomings of the receivership order, but indicated it had procedural concerns as well.
Procedural Shortcomings
The Court of Appeal was concerned by the repeated use of ex parte applications (with borderline-insufficient disclosure of material facts), and the “relaxed” approach to normal court processes: a number of the subsequent motions were brought without a notice of motion or application, and in the absence of further evidence, other than the receiver’s reports.[12]
Substantive Shortcomings
The Court of Appeal held that the necessary evidentiary foundation was lacking for an investigative receivership order to be granted, and the scope of the receivership order was too broad.
The Missing Evidentiary Foundation
When a judgment creditor seeks to appoint a receiver in aid of execution, it must establish that the order is “needed to protect [the creditor’s] ability to recover on the debt”, i.e., that otherwise the creditor’s ability to recover would be in “serious jeopardy.”[13] Evidence that would establish such jeopardy could include a large disparity between the amount of the judgment and the value of a debtor’s known assets, or that less intrusive enforcement steps have been unsuccessful.[14] There was no such evidence to show that Mr Akagi’s ability to recover was in jeopardy.[15]
The Problem of Overreach
The Court of Appeal characterized the receivership order as overreaching in three distinct ways:
- Who benefitted. The investigative receivership was primarily undertaken for the benefit of the 3800 alleged victims of the tax program, and not to help the appointing creditor recover on his judgment.[16]
- Who was subject to the order. The receiver was granted powers to investigate the affairs of a large number of people, many of whom where only indirectly related to the defendants in Mr. Akagis’ action.[17]
- What the receiver could do. The receiver was granted powers beyond merely investigating the affairs of the subject parties: the receiver could freeze their assets.[18]
Judgment Creditors Appointing Investigative Receivers in Alberta
The Ontario Court of Appeal cited a number of cases where it had been proper for an investigative receiver to be appointed, including the Alberta case of Romspen Investment Corp. Hargate Properties Inc.[19] In that case the investigative receiver was appointed by a secured creditor. An Alberta judgment creditor could rely on a number of different legislative provisions in an application to appoint an investigative receiver, including section 13(2) of the Judicature Act,[20] section 99 of the Business Corporations Act,[21] and section 85 of the Civil Enforcement Act.[22] When making such an application, a judgment creditor should ensure that it has convincing evidence to show that it needs the receivership order, and that the receivership order is tailored to minimize unnecessary intrusions into the debtor’s affairs.
[1] Akagi v. Synergy Group (2000) Inc., 2015 ONCA 368 [“Akagi”]. The Court of Appeal noted that there was divided authority on whether or not an applicant must demonstrate fraud. Fraud was established in this case, and the Court did not need to consider this question, see FN2 of the decision.
[2] Ibid at para 35.
[3] Ibid at para 22. The judgment comprised ~$116,000 in compensatory damages, $30,000 in punitive damages, and $36,000 in costs. $60,000 of the judgment was satisfied by funds the defendants had paid into court earlier in the litigation.
[4] Courts of Justice Act, RSO 1990, c C-43.
[5] Akagi, supra note 1 at paras 33, 37.
[6] Ibid at para 43.
[7] Ibid at para 43.
[8] Ibid at para 43.
[9] Ibid at para 43.
[10] Ontario uses a template Receivership Order (available here), which includes a come back clause, enabling any interested party to apply to court to vary or amend the Order. Alberta also uses a template Receivership Order, which includes similar language (available here).
[11] Akagi, supra note 1 at para 114.
[12] Ibid at paras 94-99.
[13] Ibid at paras 101, 106.
[14] Ibid at paras 80, 107.
[15] Ibid at paras 80, 107.
[16] Ibid at para 100.
[17] Ibid at para 100.
[18] Ibid at para 100.
[19] Romspen Investment Corp. Hargate Properties Inc., 2011 ABQB 759.
[20] Judicature Act, RSA 2000, c J-2.
[21] Business Corporations Act, RSA 2000, c B-9.
[22] Civil Enforcement Act, RSA 2000, c C-15.
