An Ontario court declined to stay the receivership imposed on a collection of real estate investment firms that was sought by the Ontario Securities Commission (OSC) amid concerns about potential misconduct.
In May, the Ontario Superior Court of Justice granted the OSC’s application for a receiver to be appointed to manage the affairs of a group of companies and related limited partnerships, including Cacoeli Asset Management Inc. and Cacoeli Capital Inc., that are in the business of acquiring, operating, and selling residential real estate projects. Since 2015, it has raised about $13 million from investors.
The OSC sought a receiver for the companies after the regulator’s investigation — prompted by a complaint from Cacoeli’s former chief financial officer — found evidence that investor money may have been improperly diverted from certain projects to other ventures.
That investigation is ongoing, the OSC hasn’t made any enforcement allegations in the case, and there hasn’t been any wrongdoing proven.
Indeed, in granting the order, the court said that the OSC didn’t need to prove that a breach of securities rules has occurred, it only needed to establish that it has “serious concerns” about potential misconduct — and, that a receivership is in the best interest of creditors.
Now, the Court of Appeal for Ontario has dismissed an application from the Cacoeli companies seeking a stay of the receivership.
According to court filings, among other things, they argued that the judge erred in finding that “the OSC did not need to demonstrate a prima facie case to obtain the receivership order.”
To justify a stay, the companies also needed to establish that they would suffer “irreparable harm” without a stay, and that the “balance of convenience” justifies a stay.
However, the court found that Cacoeli didn’t meet these tests.
While Cacoeli argued that, without a stay, its business will suffer serious harm from the receivership, the appeal court said that it did not find its evidence on irreparable harm to be compelling.
Instead, the court concluded that these “fears are speculative.”
“Counsel for the receiver emphasized at the stay hearing that it has no interest in shutting Cacoeli down, assuming its ongoing operations are viable,” the court noted.
“There is no indication, on the evidence before me, that the receiver has concluded the interests of stakeholders would be better served by winding up Cacoeli’s activities, as opposed to attempting to conduct ongoing operations so that outstanding obligations are met,” it said.
While the receiver may have to make difficult decisions about the business, the court said that the need to make tough choices “is not the result of the receivership order but rather liquidity issues which predate the OSC investigation and have already resulted in mortgage defaults, tax issues, and unanticipated inter-party transfers.”
“The mere possibility of financial harm, and even bankruptcy, is not enough to satisfy the irreparable harm test,” it also said.
And, it said that the evidence about potential reputational harm is “weak” too.
If appointing a receiver could cause reputational harm, “this harm has already occurred,” the court said. “The receivership order has been made. It is on the public record.”
Additionally, on the question of the “balance of convenience,” the court found that “the public interest will be harmed if a stay is granted.”
“The OSC obtained the receivership order in furtherance of its duties under the Securities Act as the regulator of capital markets, after an ongoing investigation found concerns about improper inter-party transfers,” it said — adding that the public needs confidence that the securities laws will be enforced.
“I conclude that the interests of justice do not favour a stay of the receivership order,” the court ruled. “Although there is a serious question to be tried on appeal, there is little evidence that the appellants will suffer irreparable harm if a stay is not granted. The balance of convenience weighs against a stay.”