Tuesday, June 9, 2015

Court of Appeal Sets Aside "Breathtakingly Broad" Receivership Order

Akagi v Synergy Group (2000) Inc., 2015 ONCA 368, 14/4731,


In this case, the Ontario Court of Appeal overturned  a series of ex parte orders that put in place an investigative receivership over three judgment debtors from an initial fraud proceeding between Mr. Trent Akagi and Synergy Group ("Synergy"). The orders were overturned for two main reasons: first, they were deemed to be "breathtakingly broad" because while the initial proceeding involved only one plaintiff and three defendants, the applications for receivership listed 43 non-party "Alleged Offenders", and appeared to be concerned with the interests of over 3800 victims of potential fraud. Second, the applications were granted ex parte without full and fair disclosure from the Receiver. 

From 2006 to 2008, Mr. Akagi invested approximately $210,000 into small businesses managed by Integrated Business Concepts ("IBC") as part of a tax loss allocation program marketed and sold by Synergy Group ("Synergy"). Representatives of Synergy told Mr. Akagi that IBC's businesses would generate legitimate losses, thereby allowing him to claim his proportionate share of those losses on his tax returns in order to achieve tax savings. However, in 2008 the CRA and the RCMP launched fraud investigations into Synergy's tax allocation program. Mr. Akagi was disallowed from claiming the IBC tax losses, amounting to $104,000, on his 2006 tax return. He was required to pay approx. $55,000 in penalties to the CRA and sued Synergy and certain individuals associated with it for fraud. Mr. Akagi obtained summary judgment against Synergy, Shane Smith (president of Synergy), and David Prentice (vice-president). At the time of the ex parte orders that followed, there remained $182,000 outstanding in damages and costs from this initial action. Of that amount, the defendants had already paid $60,000 into court to the credit of the action pending the outcome of the proceedings, and so the remaining amount that Mr. Akagi could claim against the defendants was $122,000.

Less than two months following the judgment in the initial action, Mr. Akagi applied for and obtained an ex parte order appointing a Receiver over all assets, undertakings, and property of Synergy and IBC (note that IBC was not a party to the initial Akagi action). The ex parte order was obtained on the basis of affidavits from Mr. Akagi and from three CRA employees. The materials did not disclose that the CRA investigation had been terminated four months prior.


Following the initial ex parte receivership application, the order morphed into an wide-ranging "investigative receivership" which froze and otherwise reached the assets of 43 additional individuals and entities who were deemed to be "Alleged Offenders". The investigative receivership no longer acted solely in Mr. Akagi's interests, but rather in the interests of Synergy's some 3800 investors, none of whom had made efforts to advance their own claims and none of whom were parties to the initial action. The subsequent three orders empowered the Receiver to direct financial institutions to disclose information and documentation regarding payment and transfers of money not only by Synergy and IBC, but also by the list of "Alleged Offenders", any affiliates of those individuals, any corporations directly indirectly controlled by those individuals, any corporation in respect of which the listed individuals were entitled to conduct financial transactions, and any entity with a registered head office at the premises occupied by Synergy and IBC. The final order froze the accounts of these individuals and granted the Receiver a $500,000 borrowing charge against frozen funds to fund its activities, despite the fact that the maximum amount owing to Mr. Akagi from the initial action was $122,000. These ex parte applications were made with no notice of motion or application, no further evidence, and no factum. The appellants moved in a "come-back proceeding" to set aside the receivership orders. That application was dismissed.

In this case, Justice Blair clarified the concept of an "investigative receivership". He noted that the appointment of a Receiver under s. 101 of the Courts of Justice Act is "an extraordinary and intrusive remedy" which should "be granted only after a careful balancing of the effect of such an order on all of the parties and on others who may be affected by the order." Justice Blair makes specific reference to the case in Loblaw Brands Ltd. v Thornton [2009] O.J. No. 1228 (S.C.), in which the investigative Receiver's mandate was to "locate, investigate, and monitor". It was not empowered to seize and freeze assets, as the Receiver was in this case. Justice Blair asserts that, "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 go no further than necessary to achieve these ends." This was misapplied here because (i) there was no indication that Mr. Akagi's right to recover on the initial judgment was in jeopardy, and (ii) there was no evidence of a "dramatic disparity" between the assets of Synergy, Smith, and Prentice, and the amount of the outstanding judgment. Justice Blair emphasized that the investigative receivership should not have the effect of creating a criminal investigation or public inquiry, as it did here.


On the issue of the orders being granted ex parte, Justice Blair states that the failure to disclose that the CRA investigation had been discontinued "sailed close to the line of failing to make full and fair disclosure." He reasons that ex parte proceedings are to "be taken sparingly" and "only where it is demonstrated that notice to other parties would undermine the purpose of the proceeding." This was not the case here. Thus, even if the receivership was not unnecessarily wide, it would fail on the grounds that it should not have been granted ex parte.





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