Earlier this year ( June 9th ), I wrote about a case in which the Court of Appeal for Ontario set aside "breathtakingly broad" receivership orders that put in place an "investigative receivership". This month, the court released
its ruling on costs arising from its decision. See Akagi v. Synergy Group (2000) Inc. 2015 ONCA 771.
On the appeal, the court had set aside ex parte orders issued by Justice Colin Campbell of the Superior Court of Justice (Commercial List). The court concluded that the orders appointing the receiver stood “on a fundamentally flawed premise” and were “unjustifiably
overreaching in the powers they granted”.
In the court’s view, both the judgment creditor, Mr. Akagi - who commenced the
receivership proceedings without taking any initial steps to recover on his
judgment - and the receiver, J.P. Graci and Associates Ltd., who took the
investigative receivership too far, should bear the cost consequences of the
orders having been set aside.
Mr. Akagi applied for the initial ex parte order
appointing the receiver after obtaining a default judgment in the amount of
approximately $147,000 based on allegations of fraud arising out of the loss of
funds he had contributed to a tax program marketed and sold by the Synergy
Group. The program was supposed to generate tax loss allocations for him,
but did not. His judgment was against the Synergy Group and certain
individuals associated with it. The initial order
made by Justice Campbell granted a receivership over all the assets and
undertakings of the Synergy Group and an additional company, Integrated
Business Concepts Inc. (“IBC”).
It soon became clear however that the principal purpose of
the receivership order was not to recover on Mr. Akagi’s judgment debt but to
institute a broad ranging inquiry – a roving “investigative receivership” –
into what was alleged to be a much larger tax fraud scheme, and to do so,
purportedly on behalf of approximately 3,800 other investors who may have been
caught in the tax scheme as well. None of these investors were a party to
the Akagi action or the receivership application, none purported to seek to
have their interests protected, and Mr. Akagi and the receiver maintained
throughout that they did not purport to represent the interests of those
investors.
Subsequently, through a series of further ex parte
applications, the receivership order morphed into a wide ranging investigative
receivership, freezing and otherwise reaching the assets of 43 additional
individuals and entities including authorizing the registration of certificates
of pending litigation against their properties. Only three of these
entities and individuals had any connection to the underlying Akagi action and
only two were actually judgment debtors.
The Court of Appeal set aside the receivership orders on the
basis that the receivership had proceeded on an entirely misguided course, the
orders were impermissibly over-reaching, and the ex parte proceedings
themselves had been tainted by certain procedural errors including the
receiver's failure to disclose to Justice Campbell that the Canada Revenue
Agency had discontinued its investigation into the tax allocation scheme
several months before the receivership was sought when evidence of that inquiry
had formed the basis for obtaining the orders.
All of the appellants, including IBC and Student
Housing Canada Inc., sought their costs on a full or substantial indemnity
basis against both Mr. Akagi and the receiver, jointly and severally.
The receiver argued that no costs should be awarded
against it because it was proceeding in good faith and simply carrying out what
it understood to be its court-ordered mandate. It’s conduct and activities
pursuant to the receivership orders were approved by the court in two orders
and the general rule is that a receiver is not exposed to costs against it
personally in receivership proceedings.
Mr. Akagi argued that his involvement with the receivership
had been limited solely to obtaining the initial receivership order and to defend that order throughout the receivership. He argued
against responsibility for costs incurred by the appellants subsequent to the
initial order.
The Court of Appeal did not accept that Mr. Akagi’s
involvement in the receivership proceedings was minimal or limited to obtaining
the initial order. Mr. Akagi had tenaciously defended the subsequent ex
parte orders. Mr. Akagi’s counsel had attended and participated in
various motions, scheduling appointments and examinations. Mr. Akagi was a
central participant on the appeal itself. He instituted and supported the
proceedings throughout.
As a result, the Court of Appeal found him responsible for
costs.
As for the receiver, the court held that it was also liable
to pay costs. The principle that costs are rarely awarded against
the receiver applies only when the receiver is acting in his capacity as
receiver in the course of the receivership. It does not apply where the
receiver turns itself into a real litigant, drawing others into
the fray and forcing them to defend themselves in what amounted to a process
that was extraneous to the creditor-driven receivership.
The court did not make a finding that the receiver acted in
bad faith. In its view however, the receiver had misconceived its role, and in the
process had lost its objectivity in the notion that it was an investigative
receiver. Mr. Akagi’s claim was a relatively small one that did not
justify or require the intrusive and far-reaching mareva like orders that were
obtained. In taking these steps, the receiver undermined its neutral
position as an officer of the court and turned itself into a litigant for the
cause. As a litigant, it was subject to the loser pays costs regime that
applies.
The court awarded costs against the receiver on a
substantial indemnity scale as a measure of its disapproval of its
conduct.
It awarded costs against Mr. Akagi on a partial indemnity
basis. It appeared to the court that the receiver was the more active
litigant pushing for potential action on behalf of all 3,800 alleged victims
and calling the shots on the over-reaching orders that were obtained. In
addition, the court reasoned that Mr. Akagi, as an unpaid creditor at least had some interest in
pursuing the receivership.
Regards,
Blair
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