Law Times

Page 4 June 1, 2015 • Law Times www.lawtimesnews.com Commercial list informality criticized in receivership case By JuliuS Melnitzer For Law Times I n its first pronouncement on so-called investigative receiverships, the Ontario Court of Appeal has sound- ed a cautionary note about the informality of procedural and substantive practices on Toron- to's celebrated commercial list. "The judgment tells receiv- ers that they have to play by the substantive and procedural rules even when they suspect that something is wrong some- where," 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 receiv- ers are not ombudsmen who can just head out and start investi- gating 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 con- troversy. Indeed, retired justice James Farley, who along with the late justice Lloyd Houlden cre- ated the commercial list in 1993, was rotated off the list twice after some 10 years on the court amid persistent but unproven sugges- tions that some lawyers were unhappy with the brusque de- meanour and informal practices that went hand in hand with his undeniable talent for getting cas- es 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 unani- mous court in Akagi didn't like what it saw in this particular case is apparent from the first para- graph of Justice Robert Blair's judgment with justices Janet Simmons and Russell Juriansz concurring. "The appointment of a re- ceiver in a civil proceeding is not tantamount to a criminal in- vestigation or a public inquiry," wrote Blair. "Regrettably, those respon- sible for obtaining the appoint- ment in this case thought that it was. As a result, the receivership proceeded on an entirely mis- guided course." Akagi arose after Trent Akagi contributed funds to a tax pro- gram 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 ob- tained 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 Busi- ness Concepts Inc. The main evidence in support was a three-page af- fidavit from Akagi and three affidavits from the Canada Revenue Agency. The CRA affidavits outlined the details of its investigation and indi- cated there may have been as many as 3,800 investors who were defrauded. What it didn't reveal was that the CRA had ter- minated its investigation in Feb- ruary 2013, which was some four months before Akagi's ex parte application. Between June and September 2013, Akagi brought four addi- tional 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 af- fected by the orders brought a motion to set aside the receiver- ship orders, but their applica- tions 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 pow- ers to make such orders where it was " just or convenient to do so." Despite the expansive word- ing 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 Receiv- er 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 appoint- ment under security it held. In addition, they didn't involve the appointment of a receiver under insolvency or securities legisla- tion nor were they a representa- tive or class action. While the idea of appointing a receiver to investigate the affairs of a debtor was "not unsound," difficulties arose from "the run- away nature" of its use here. Although there were argu- ments in favour of such a tool, it was an "extraordinary and in- trusive remedy" the court should grant only after carefully balanc- ing the interests of all of those af- fected. "In the case of a receiver- ship in aid of execution, at least, the appointment requires evi- dence 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 obscur- ing some important proce- dural 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 proceed- ed on an ex parte basis and had it not featured a "some- what relaxed" procedural ap- proach. "Had the normally salu- tary processes of the Com- mercial List — carefully designed to permit the par- ties 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 re- ceivership 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 re- ceiver 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 it- self insufficient to support the orders. As a judgment creditor, Akagi had to show that a receiv- ership order freezing and other- wise 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 judg- ment 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 re- spondents to frustrate the legal process or undermine the pros- pects of recovery. Jeffrey Leon, a partner at Ben- nett Jones LLP's Toronto office who represented Akagi on the appeal only, considers it note- worthy 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 com- mercial list, that procedures do get followed, and that some de- gree of informality is important because it allows the court to be f lexible and responsive." What's clear is that investi- gative receiverships now have some boundaries. "Akagi cer- tainly 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. LT NEWS A legal classic for your bankruptcy and insolvency practice Always up to date – two editions a year The Annotated Bankruptcy and Insolvency Act continues to be the resource you can rely on for authoritative guidance and current law and policy at a moment's notice. This practical softcover is a condensed version of the five-volume classic Bankruptcy and Insolvency Law of Canada, 4th Edition. 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Price(s) subject to change without notice and subject to applicable taxes. 00229LQ-A49938 Available risk-free for 30 days Order online: www.carswell.com Call Toll-Free: 1-800-387-5164 In Toronto: 416-609-3800 'The message is that receivers are not ombuds- men who can just head out and start investigating people,' says Jonathan Lisus.

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