Wednesday, 1 February 2012

Equitable Receivers and Discretionary Interests, Rights and Powers of a Judgment Debtor

Obtaining a judgment may be just the first step in actually getting justice for your client. Collection and enforcement proceedings are often archaic and sometimes more complex and time consuming than the trial itself.  In the context of such proceedings, an equitable receiver, appointed under s. 39 of the LEA, Rules 10-2 & 13-2(5), or the inherent jurisdiction of the court, is the multi-tool of last resort, to be used when no other legal or equitable enforcement procedures are available.  Unfortunately, as demonstrated by the decision in Quest Capital Corp. v. Longpre, 2012 BCCA 49, even this tool has limits and can be defeated by creative judgment creditors.  In particular, a receiver cannot step into the shoes of a judgment debtor who is both a trustee and a discretionary beneficiary of a trust in order to exercise the trustee's discretion and distribute the assets.
In this case, at an examination in aid of execution, the defendant claimed indigence.  Although it appeared that he was connected to a trust that held substantial assets, he disclaimed any knowledge of or interest of this trust.  After the examination, it was discovered that the defendant was in fact the discretionary beneficiary and seemingly the trustee of this trust.  The plaintiff then obtained ex parte an appointment of an equitable receiver over the defendant’s “current and future assets, undertaking and properties, rights, powers, interest and entitlements”, including “rights and powers as a trustee of any trust”.  Ultimately, it was discovered that the defendant was the Protector and the initial trustee of this trust; however, before the examination, he exercised his powers as Protector and appointed his brother as the trustee in his place.

The chambers judge vacated the appointment on the basis that a receiver could not be appointed over a judgment debtor’s discretionary interest in a trust. On appeal, the plaintiff argued that the defendant was a lot more than a mere discretionary beneficiary, since his rights and powers as Protector gave him the power to distribute the trust assets to himself.   The only way to do justice and enforce the judgment was to appoint an equitable receiver over those rights and powers.

Although the court did “question whether the discretionary nature of [the defendant's] beneficial interest [qualified by his position as Protector] was a sound basis” for vacating the appointment, it dismissed the appeal, finding that an equitable receiver can only be appointed over property, which at common law does not include rights or powers:
[37] A beneficial interest in a trust is property and may be the subject of an equitable receivership order. The fact the interest is discretionary is relevant to the exercise of judicial discretion whether o appoint an equitable receiver, but is not determinative.

[38] Rights and powers incidental to a debtor’s property may be exercised by an equitable receiver, but property over which an equitable receiver may be appointed does not include “powers”.

[39] Rights and powers vested in a debtor as a result of an office held by the debtor generally are not the debtor’s property and generally are not property over which an equitable receiver may be appointed.
The following points from the decision are also notable:
  • an equitable receiver cannot be appointed over an office or position held by a judgment debtor, and thus access the rights and powers arising out of that office or position; and 
  • only a trustee or receiver appointed under the BIA can access rights and powers of a debtor, because s. 67(d) of the BIA has “[swept] up a variety of assets of the bankrupt not normally considered ‘property’ at common law”:
67. …The property of a bankrupt divisible among his creditors ... shall comprise ...
(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.
Lenders and judgment creditors beware: discretionary trusts, even when in fact controlled by the judgment debtor as trustee or protector, may still defeat collection efforts. Thus, two options remain:
  1. petitioning the judgment debtor into bankruptcy, where the trustee in bankruptcy can exercise the debtor's powers over the trust and thus access the trust assets; and/or 
  2. lobbying for a legislative change to the B.C. collection regime to bring it into the 21st century and harmonize it with the BIA.