Insolvency practice embraces acting for a variety of stakeholders in bankruptcy, receivership, or similar court-supervised insolvency proceedings or private enforcement remedies. Financial restructuring involves advising stakeholders in planning, negotiating, and implementing corporate financial restructurings whether in circumstances of insolvency or otherwise, and in the context of informal workouts or proceedings under insolvency or corporate legislation.
In its first pronouncement on “investigative receiverships,” the Ontario Court of Appeal sounded a cautionary note about the informality of procedural and substantive practices on Toronto’s celebrated Commercial List by reminding receivers that they have to play by the substantive and procedural rules even when they suspect that something is wrong somewhere.
“The appointment of a receiver in a civil proceeding is not tantamount to a criminal investigation or a public inquiry,” wrote Justice Robert Blair. “Regrettably, those responsible for obtaining the appointment in this case thought that it was. As a result, the receivership proceeded on an entirely misguided course.”
Akagi v. Synergy Group arose after Trent Akagi contributed funds to a tax program promoted by Synergy Group. The program did not produce the expected tax loss. Akagi sued Synergy for fraud and obtained default judgment for about C$137,000.
In June 2013, Akagi obtained an ex parte order from Commercial List Justice Colin Campbell. The order appointed a receiver over all Synergy’s assets. The main evidence in support was a three-page affidavit from Akagi and three affidavits from the Canada Revenue Agency (CRA). The CRA affidavits indicated that there may have been as many as 3,800 investors who were defrauded. What it did not reveal was that the CRA terminated its investigation in February 2013, some four months before Akagi’s ex parte application.
Between June and September 2013, Akagi brought four further ex parte applications which, according to Blair, “morphed into a wide-ranging ‘investigative receivership,’” which affected the assets of 43 other individuals and entities. “None of the additional targets was a party to the receivership proceeding, only three had any connection to the underlying Akagi action, and only two were actually judgment debtors,” Blair noted.
In September 2013, those affected by the orders brought a motion to set aside the receivership orders, but their applications were dismissed. On appeal, however, the OCA set aside the orders.
All the receivership orders, Blair observed, were obtained under s. 101 of the Courts of Justice Act, which gives the court broad powers to make such orders where it was “just or convenient to do so.” Despite the expansive wording of s. 101, however, the orders had gone too far in this case. Appointing a receiver to investigate the affairs of a debtor was an “extraordinary and intrusive remedy” to be granted only after carefully balancing the interest of all those affected.
Here, Agaki was simply an unsecured judgment creditor: his applications were not an instance of a secured creditor seeking an appointment under security it held, did not involve the appointment of a receiver under insolvency or securities legislation, and were neither representative or class actions.
“In the case of a receivership in aid of execution, at least, the appointment requires evidence that the creditor’s right to recovery is in serious jeopardy,” the court noted.
As Blair saw it, the case would have been less likely to go astray had it not proceeded on an ex parte basis and had it not featured a “somewhat relaxed” procedural approach. Ex parte proceedings were to be taken sparingly and even then only on full disclosure and where notice would undermine the purpose of the exercise. At best, the steps here “sailed very close to this line”: a proper record was lacking as the Receiver had failed to file a notice of motion, a motion record, or lay a proper evidentiary foundation; adequate judicial reasons for the orders were not given; and the decision not to disclose the termination of the CRA investigation bordered on “failing to make full and fair disclosure.”
Although the judgment against Synergy was based on fraud, that was in itself insufficient to support the orders. As a judgment creditor, Akagi was required to show that a receivership order freezing and otherwise interfering with the assets of the debtors and others was needed to protect his ability to recover on the debt.
Akagi, however, had made no effort to collect on his judgment in any way but to apply for the appointment of a receiver, nor was there other evidence of urgency or any reason to believe that notice would prompt the respondents to frustrate the legal process or undermine prospects of recovery.
There was also no evidence that Synergy or others affected had insufficient assets to satisfy the judgment.
The upshot was that both the procedures leading up to the orders and the scope of the orders themselves were flawed, based on the “faulty premise that the Receiver could be appointed in these circumstances to carry out a broad, stand-alone, investigative inquiry — the civil equivalent of a criminal investigation or public inquiry — for the purposes of determining whether wrongs were suffered by an unidentified hodgepodge of non-party persons who were not represented by anyone in the proceedings, who had expressed no interest in becoming parties or in having their rights protected in the proceedings, and whose interests did not need to be protected to preserve the interests of the appointing creditor.”