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September 4, 2012

A Receiver’s Obligation to Disclose: Navigating Through the Intersection of Insolvency and Criminal Law

In his recent decision in SA Capital Growth Corp. v. Brooks,1 Justice Pattillo of the Ontario Superior Court of Justice (Commercial List) addressed the question of whether a court-appointed receiver should be required to disclose documents and information obtained by it as a result of a court-ordered investigation to one of the subjects of the investigation, where that party is facing allegations by the Ontario Securities Commission (“OSC”).  In making his decision, Justice Pattillo examined the interplay between the protections afforded to a receiver by the court to assist the receiver in fulfilling its mandate and an individual’s right to make full answer and defence based on Section 7 of the Charter of Rights and Freedoms.2

On March 17, 2010, Duff & Phelps Canada Restructuring Inc. (formerly RSM Richter Inc.) was appointed receiver (the “Receiver”) over the assets, property and undertaking of E.M.B. Asset Group Inc. (“EMB”) and Robert Mander (“Mander”).  Through his company, EMB, Mander was allegedly operating a Ponzi scheme that saw him misappropriate tens of millions of dollars.3

Pursuant to certain court orders, the Receiver compelled the production of documents from certain parties with knowledge of Mander’s affairs and the affairs of his companies, including their lawyers and accountants.  The Receiver also met with several individuals who had knowledge of and were involved with Mander and his companies.

In its Fourth Report to the Court, the Receiver advised that as a result of its investigation into Mander and his companies, it had identified certain issues that suggested that an investigation into the affairs of Dr. Peter Sbaraglia (“Sbaraglia”), his wife and their companies, CO Capital Growth Corp. (“CO Capital”) and 91 Days Hygiene Inc. (together, the “CO Group”), should be undertaken.  Pursuant to the Order dated July 14, 2010, the Receiver was authorized to commence an investigation into the business and affairs of the CO Group.4

In its Seventh Report to the Court, the Receiver advised the court of its findings including, inter alia, that testimony given by Sbaraglia before the OSC was misleading, that the CO Group knew or ought to have known that they were not generating returns sufficient to repay their obligations to investors and that the CO Group had advised that they made payments to family members in preference to their creditors.  The OSC commenced an application for the appointment of a receiver over the CO Group and, despite their objections that they were victims of Mander’s fraud, the OSC’s application was granted.5

The OSC issued a Notice of Hearing and Statement of Allegations naming Sbaraglia as the respondent and alleging that he had breached the Ontario Securities Act (the “Act”) by committing fraud and misleading OSC staff.  Among the fraud allegations, the OSC alleged that Sbaraglia had mislead investors by using $6-$7 million of the $21 million raised from CO Capital’s investors for purposes that were inconsistent with CO Capital’s business model as well as using CO Capital investor funds to fund his personal lifestyle.  The OSC also alleged that Sbaraglia had failed to do any due diligence with respect to Mander and had failed to secure any objective evidence from Mander to support the alleged profits he would make after investing in Mander’s companies.

Sbaraglia brought a motion seeking an Order requiring the Receiver to, amongst other things: (i) produce transcripts, recordings and/or notes of interviews with 16 named individuals who met with the Receiver as part of its investigation and the documents provided to the Receiver by those individuals; (ii) produce documents provided to the Receiver by the lawyers and accountants for EMB, Mander and the CO Group; (iii) produce copies of emails to and from Sbaraglia which had been deleted but subsequently recovered by the Receiver from CO Capital’s computers and servers which were referred to in the Receiver’s Fourth Report; and (iv) prepare an index of all documents in the Receiver’s possession and control.

Sbaraglia asserted that given the serious nature of the OSC allegations, he was entitled to production of the documents and information so as to allow him to make full answer and defence.  According to Sbaraglia, his motion was analogous to an application for third party production as set out in the Supreme Court of Canada’s decision in R. v. O’Connor.6  The Receiver opposed the motion on the grounds that the documents and information had been generated as a result of the Receiver’s investigations pursuant to court Orders and it could not and should not be compelled to produce them either in the receivership proceeding or in an outside proceeding such as Sbaraglia’s OSC proceeding.  Further, the Receiver asserted that it was prohibited from producing the documents requested pursuant to the common law implied undertaking rule.  The Receiver argued that the O’Connor test had no application to the instant case and that, notwithstanding the test’s inapplicability, Sbaraglia had still failed to prove that the documents sought were likely relevant as required under O’Connor.  Lastly, the Receiver noted that the expense of complying with Sbaraglia’s request would be borne by the estate and, thus, deprive creditors of a possible distribution.7

Justice Pattillo commenced his analysis by stating that it is clear that, as court-appointed officers, receivers are afforded certain protections by the court in order to assist them in fulfilling their mandates.  For instance, beyond the information contained in their reports, receivers are not generally required to produce the details of their investigations and they are not generally subject to cross-examination on their reports except in “exceptional or unusual” circumstances.8  Justice Pattillo then turned to the position asserted by Sbaraglia that, based on Section 7 of the Charter, he was entitled to production of the documents and information requested so as to allow him to make full answer and defence to the OSC’s allegations.  Citing the Supreme Court’s decisions in R. v. Stinchcombe9 and Deloitte & Touche LLP v. Ontario (Securities Commission),10 Justice Pattillo stated that the OSC, like the Crown in a criminal prosecution, has a duty to disclose all information in its possession or control unless it is clearly irrelevant or protected by privilege in proceedings under s. 127 of the Act.

Justice Pattillo reviewed the O’Connor decision wherein the Supreme Court held that third parties not involved in a prosecution may be required to turn over documents in their  possession to enable an accused to make full answer and defence.  However, as a third party has no duty to disclose, is not involved in the proceeding and may have privacy interests that would be implicated if the disclosure sought was granted, Justice Pattillo noted that different rules apply in determining whether third party documents should be disclosed.11

According to Justice Pattillo, the O’Connor decision established a two-step procedure for the accused when seeking the disclosure of documents or information in a third party’s possession.  Upon application by the accused, the judge would first determine based on the evidence whether the information sought is likely relevant to the proceedings.  If the judge finds that it is likely relevant, they would then review the actual documents and based upon the judge’s review, they would determine if disclosure was warranted and, if so, to what extent.12

Justice Pattillo cited the Supreme Court’s decision in R. v. McNeil13 to further elaborate on the two-step procedure.  According to the court in McNeil, documents and information are “likely relevant” if there is a reasonable possibility that the information is logically probative to an issue at trial or the competence of a witness to testify.  If the court is satisfied that the documents or information sought is likely relevant to the proceedings, the court is to consider various factors in determining whether or not to order disclosure, including the extent to which the record is necessary for the accused to make full answer and defence, the probative value of the record in question and the nature and extent of the reasonable expectation of privacy vested in the record.

Contrary to the Receiver’s position, Justice Pattillo held that the principles enunciated in O’Connor and McNeil were applicable to the instant case and, in fact, Justice Pattillo noted that they were of general application to all records held by third parties, including court officers such as the Receiver.  According to Justice Pattillo, the protections afforded a receiver to not have to generally provide information or documents regarding the receivership beyond that which is included in the receiver’s reports cannot be allowed to interfere with the rights of an accused to production so to allow them to make full answer and defence.14

With respect to the 16 individuals who spoke to the Receiver and provided documents to the Receiver as part of its investigation, Justice Pattillo found that Sbaraglia had failed to demonstrate that the documents and information sought were likely relevant.  Justice Pattillo also held that any documents provided to the Receiver by the OSC during the Receiver’s meeting with the OSC staff investigator did not have to be disclosed as Sbaraglia had received full disclosure from the OSC, including all information provided to the Receiver by the OSC, and Sbaraglia had failed to establish that any of the Receiver’s records with respect to its meeting with the staff investigator were likely relevant.15

While Justice Pattillo did find that certain documents provided to the Receiver by the lawyers and accountants that worked for EMB, Mander and CO Capital may be likely relevant and, therefore, should be reviewed further by the court, Justice Pattillo decided that none of the Receiver’s notes of its discussions with those parties were likely relevant and, therefore, did not have to be produced.16

With respect to the deleted emails, although Justice Pattillo stated that he thought the Receiver’s reference to them in its Fourth Report was only a factual statement and not one that spoke to their relevance, he decided that he was unable to conclude that they were not likely relevant to Sbaraglia’s defence and, therefore, should be reviewed by the court.  Lastly, Justice Pattillo found that Sbaraglia’s request for an index of all documents in the Receiver’s possession and control was overly broad and amounted to nothing more than a fishing expedition and was not something that the court could or would permit to be provided by the Receiver.17

While it may be trite law to say that court-appointed receivers are afforded certain protections to assist them in fulfilling their duties and mandates in the most efficient manner possible, the decision in SA Capital Growth Corp. sheds some light on the limits to those protections.  Given that OSC investigations into securities law violations have lead to receiverships of entities regulated by the OSC, the decision in SA Capital Growth Corp. may serve as a roadmap for receiver’s counsel looking to navigate through this intersection of insolvency law and criminal law.

 

1 SA Capital Growth Corp. v. Brooks, 2012 CarswellOnt 6330, 2012 ONSC 2800 [SA Capital Growth Corp.]

2 Canadian Charter of Rights and Freedoms, R.S.C., 1985 Appendix II, No. 44 see also Part I (ss. 1 to 34) of the Constitution Act, 1982.

3 SA Capital Growth Corp., ibid at para. 3.

4 SA Capital Growth Corp., ibid at paras. 5-6.

5 SA Capital Growth Corp., ibid at para. 8.

6 R. v. O’Connor, [1995] 4 S.C.R. 411 (S.C.C.).

7 SA Capital Growth Corp., supra at para. 21.

8 SA Capital Growth Corp., ibid at para. 27.

9 R. v. Stinchcombe, [1991] 3 S.C.R. 326 (S.C.C.).

10 Deloitte & Touche LLP v. Ontario (Securities Commission), [2003] 2 S.C.R. 713 (S.C.C.).

11 SA Capital Growth Corp., supra at para. 33.

12 SA Capital Growth Corp., ibid at para. 35.

13 R. v. McNeil, [2009] 1 S.C.R. 66 (S.C.C.).

14 SA Capital Growth Corp., supra at para. 39.

15 SA Capital Growth Corp., ibid at para. 66.

16 SA Capital Growth Corp., ibid at paras. 60 and 63.

17 SA Capital Growth Corp., ibid at para. 71.

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