How do you uncover a suspected fraud when you cannot obtain any information from the suspected fraudster in the first place? And what do you do if the suspected fraudster has avoided complying with a court order to produce documents? One under-utilized strategy is to seek to appoint a receiver over the books and records of the alleged fraudster.

In Degroote v. DC Entertainment Corp., an individual loaned over $110 million to a corporate entity all supported with the appropriate contracts and loan agreements. After the money was advanced, it appeared that the specific purposes for the loans were not carried out. When the individual tried to obtain the reports and information that were required to be produced under the loan agreement, his attempts were thwarted as his requests were either ignored or he was provided seemingly false and contradictory information. So while he was looking to claim that the corporate defendants had perpetrated fraud and had breached the obligations under the loan agreements, he was not able to obtain any information that would support such a claim. Despite the court in an earlier proceeding ruling that the individual had an independent and general right to review the books and records under the loan documents, none were ever made available for review.

Thus still, unable to get any information, the individual brought an application to appoint a receiver over the books and records. The facts put before the Commercial List Court all indicated a constant disregard for the requirement to produce information and records. Some of the excuses that the defendants gave for not producing documents included:

  • the books and records were stolen;
  • there was no remaining electronic information; and
  • certain transactions were conducted in cash and the cash was stolen.

In making an order to appoint a receiver over the books and records, the Honourable Justice Newbould made it clear that the Court had seen more than enough, and appointed a receiver under section 101 of the Courts of Justice Act as it appeared to be just or convenient to do so.

As Justice Newbould noted, a court may apply this remedy but with regard to the circumstances of the case and the rights of the parties.

In this case, Justice Newbould found that equity cried out for the need to have all books and records produced.

The defendants appeared to have done their best to prevent a review of the documents from happening, and the individual that advanced the loan was clearly prejudiced by this. Justice Newbould noted that while there are no pre-conditions for the exercise of a court’s discretion to appoint a receiver, each case will depend on its own facts. Nevertheless, the appointment of a receiver is another potent tool in the arensal of those pursuing suspected frauds.