Commercial list informality criticized in receivership case

In its first pronouncement on so-called investigative receiverships, the Ontario Court of Appeal has sounded a cautionary note about the informality of procedural and substantive practices on Toronto’s celebrated commercial list.

“The judgment tells receivers that they have to play by the substantive and procedural rules even when they suspect that something is wrong somewhere,” says Jonathan Lisus of Lax O’Sullivan Scott Lisus LLP. He represented the successful appellant in Akagi v. Synergy Group (2000) Inc.

“The message is that receivers are not ombudsmen who can just head out and start investigating people.”

Lawyers have long lauded the commercial list for its efficient and effective handling of urgent and complex commercial and insolvency matters. It hasn’t, however, been free from controversy. Indeed, retired justice James Farley, who along with the late justice Lloyd Houlden created the commercial list in 1993, was rotated off the list twice after some 10 years on the court amid persistent but unproven suggestions that some lawyers were unhappy with the brusque demeanour and informal practices that went hand in hand with his undeniable talent for getting cases resolved expeditiously.

Most recently, in late May, the appeal court got another chance to take a look at the way the court worked. That the unanimous court in Akagi didn’t like what it saw in this particular case is apparent from the first paragraph of Justice Robert Blair’s judgment with justices Janet Simmons and Russell Juriansz concurring.

“The appointment of a receiver in a civil proceeding is not tantamount to a criminal investigation or a public inquiry,” wrote 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 arose after Trent Akagi contributed funds to a tax program marketed and sold by the Synergy Group. The program didn’t produce the expected tax-loss allocation. Akagi sued the Synergy Group for fraud and obtained default judgment for about $137,000.

In June 2013, Akagi obtained an ex parte order from now-retired commercial list justice Colin Campbell. The order appointed a receiver over all assets, undertakings, and property of the Synergy Group and an additional company, Integrated Business Concepts Inc.

The main evidence in support was a three-page affidavit from Akagi and three affidavits from the Canada Revenue Agency. The CRA affidavits outlined the details of its investigation and indicated there may have been as many as 3,800 investors who were defrauded. What it didn’t reveal was that the CRA had terminated its investigation in February 2013, which was some four months before Akagi’s ex parte application.

Between June and September 2013, Akagi brought four additional ex parte applications that, according to Blair, “morphed into a wide-ranging ‘investigative receivership’” that affected the assets of 43 other individuals and entities.

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 appeal court set aside the orders.

All of the receivership orders, Blair observed, came under s. 101 of the Courts of Justice Act that 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.

“Mr. Akagi is an unsecured judgment creditor,” wrote Blair. “However, it is apparent from the record that the relief sought was intended to reach far beyond his interests in that capacity. It was intended to empower the Receiver to root out the details of the broader tax allocation scheme as it affected a large number of other investors beyond Mr. Akagi — although to what end is unclear, as there is no pending or intended proceedings on behalf of those investors.”

Akagi’s applications, then, weren’t an instance of a secured creditor seeking an appointment under security it held. In addition, they didn’t involve the appointment of a receiver under insolvency or securities legislation nor were they a representative or class action.

While the idea of appointing a receiver to investigate the affairs of a debtor was “not unsound,” difficulties arose from “the runaway nature” of its use here.

Although there were arguments in favour of such a tool, it was an “extraordinary and intrusive remedy” the court should grant only after carefully balancing the interests of all of those affected. “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 appeal court noted.

Here, however, the receiver “took a useful concept and ran too far with it” while obscuring some important procedural safeguards “in the dust of the chase,” according to Blair.

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.

“Had the normally salutary 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 casual, as they did, the galloping nature of the receivership may well have been reined in,” wrote Blair.

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” with a proper record lacking as the receiver had failed to file a notice of motion or a motion record or lay a proper evidentiary foundation, according to Blair.

Although the judgment against the Synergy Group was based on fraud, that was in itself insufficient to support the orders. As a judgment creditor, Akagi had to show that a receivership order freezing and otherwise interfering with the assets of the debtors and others was necessary 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 the prospects of recovery.

Jeffrey Leon, a partner at Bennett Jones LLP’s Toronto office who represented Akagi on the appeal only, considers it noteworthy that the court saw fit to comment on the importance of maintaining “a certain degree of formality” in commercial list procedures.

“I do think there’s a limit on bypassing the usual procedures,” he says.

“But generally I think that things do work well on the commercial list, that procedures do get followed, and that some degree of informality is important because it allows the court to be flexible and responsive.”

What’s clear is that investigative receiverships now have some boundaries. “Akagi certainly clarifies the test for relief by providing helpful guidance as to when these types of orders are appropriate,” says Linda Fuerst, a partner at Lenczner Slaght Royce Smith Griffin LLP.

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