In Akagi v. Synergy Group (2000) Inc. (“Akagi“), the Ontario Court of Appeal set aside a series of ex parte orders made by Toronto’s Commercial List Court granting broad investigative powers to a court-appointed receiver. The receiver had been empowered under section 101 of the Courts of Justice Act which gives the court powers to make such an order “where it appears to a judge of the court to be just or convenient to do so”. The Court of Appeal ruled in its decision released on May 22, 2015, that there are situations where it is appropriate to appoint a receiver to investigate the affairs of a debtor or to review certain transactions including even, in proper circumstances, the affairs of and transactions concerning related non-parties. However, the Court of Appeal ruled that the receivership in Akagi had morphed into an expansive investigation on behalf of non-parties which the Court found to be improper and misguided.
The Akagi case arose out of Trent Akagi’s contribution to a tax loss allocation scheme that was marketed and sold by the Synergy Group (2000) Inc. (“Synergy”). In June 2013, he obtained a default judgement for fraud for approximately $137,000 and applied for an ex parte order appointing a receiver over all assets, undertakings, and property of Synergy and a related company called Integrated Business Concepts Inc. Subsequently, through a series of further ex parte applications, the receivership expanded into a wide ranging investigation that targeted non-parties. The subsequent orders obtained by the receiver included the authorization to register certificates of pending litigation against properties of additional entities and individuals, none of which were party to the receivership proceeding, and only three of which had any connections to the underlying Akagiaction. On September 16, 2013, the appellants moved to set aside the receivership and ex parte orders under a “come-back” clause in the receivership order that allowed the court to review whether the receivership should continue. This motion was dismissed and the matter was appealed to the Court of Appeal.
History of the “Investigatory” Receiver
In the past, the powers that have been granted to a receiver to investigate a matter in dispute include:
- compelling production of financial records from financial institutions or other third parties;
- compelling the examination under oath examination of persons thought to have knowledge of the matters being investigated;
- compelling persons with knowledge to advise and provide access to the receiver to all relevant records; and
- permitting the entry and search of premises to locate records.
One of the first Ontario cases where a receiver was granted investigative powers was Stroh v. Millers Cove Resources Inc.,  O.J. No. 1376 (Gen. Div.). In this case which involved allegations of corporate oppression by a majority shareholder, Justice Farley empowered a receiver to take control of the company’s assets, investigate, and conduct an independent review of self-dealing transactions by the company’s majority shareholder. The appointment of the receiver was affirmed on appeal on the basis that it was appropriate to fashion a remedy that was investigatory in nature in light of the secrecy and power exercised by the majority shareholder.
In a 2009 decision in Loblaw Brands Ltd. v. Thornton, Justice D.M. Brown (as he then was) adopted the terminology of an “investigatory receiver” as a specific class of receiver. The case involved a fraud perpetrated against Loblaw by an employee, who had diverted $4.2 million to his own company. The “investigatory receiver” was appointed after a Norwich Pharmacal order and a Mareva injunction had already been granted against the employee and his company. A Norwich Pharmacal order is a court order for the disclosure of documents from third parties, and a Mareva injunction provides for a freezing of a defendant’s assets.
Akagi and the “Roving Receivership”
Writing for the Court of Appeal, Justice Blair reviewed the two cases above and several others in describing what he called consistent themes from prior investigatory receiverships:
- the appointment of an investigative receiver is necessary to alleviate the risk posed to the plaintiff’s right to recovery;
- the primary objective of the investigative receivership is to gather information and “ascertain the true state of affairs” concerning the financial dealings and assets of a debtor and any relevant related network of individuals or corporations;
- the investigative receiver will not control the debtor’s assets or operate its business, leaving the debtor to continue to carry on its business in a manner consistent with the preservation of its 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 setting aside the orders that had been granted in Akagi, Justice Blair found that the receiver had taken a useful tool and run too far with it and at the same time procedural safeguards were left in the dust of the chase to freeze assets. Justice Blair described the problem as follows:
The fundamental flaw underlying the Initial and Subsequent Orders is 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.
Justice Blair found that the powers granted to the receiver had seriously overreached appropriate bounds because it had granted the authority to investigate, without notice, the private financial affairs of a myriad of targets that were only indirectly, if at all, related to the defendants and granted the authority to tie up and freeze the assets and property of those targets, again without notice, pending the termination of the receivership. It had become a “roving receivership” trampling on non-parties’ procedural and substantive rights.
- The Court of Appeal has endorsed investigative receiverships as useful tools; however, a receiver does not have “carte blanche” to investigate and trample basic rights of parties and non-parties to a proceeding.
- Without evidence of how other available remedies to enforce its judgments have been attempted and failed, a judgment that is based on fraud may not be sufficient to successfully support an order for an investigative receivership.
- A receiver has obligations as a court-appointed officer to act even-handedly and cannot become blinded by the thrill of the chase.
The authors thank Glenn Gibson, a summer student, for her assistance with this article.