Judgment Debtors, Discretionary Trusts and Equitable Receivers

The British Columbia Court of Appeal has provided an outline of the scope of property that may be included in an order appointing an equitable receiver. The decision, which has been followed in Ontario, provides caution to lenders and judgment creditors in that where a judgement debtor is a trustee or protector of a discretionary trust, collection efforts against that debtor may be defeated.

What Happened?

In 2004, a discretionary family trust was created (the Brookpark Trust) by the brother of the respondent to this appeal which provided payment to the beneficiaries at the discretion of the trustee. The respondent and his children were the beneficiaries, and the respondent also acted as the protector of the trust and its initial trustee. As protector, the defendant had the power to appoint a new trustee, and did so in 2010, naming his brother to act as trustee in his place.

Quest Capital Corp. was a judgment creditor of the respondent. The respondent was initially examined in aid of execution in September 2010, during which time he claimed he had little knowledge of understanding of the Brookpark Trust. Quest Capital later obtained information that suggestion that this was not true, and was able to apply for an obtain the appointment of an equitable receiver whose had authority over:

…all the assets, undertakings and properties” belonging to the respondent.  “Property” was defined as “current and future assets, undertaking and properties, rights, powers, interest and entitlements …”.  Included without limiting the generality of the definition were:

(a)        beneficial, discretionary and contingent rights, interests and entitlements;

(b)        interests and entitlements in or under any trusts;

(c)        rights and powers as a trustee of any trust;

(d)        rights and powers as a director of any corporation;

(e)        rights and powers as a registered or beneficial shareholder of any corporation; and

(f)         rights and powers as a partner in any partnership or a limited or general partner in any limited partnership or limited liability partnership.

In November 2010, the respondent applied to set aside the order appointing the equitable receiver. The original order was set aside on the basis that a receiver could not be appointed over a judgment debtor’s discretionary interest in a trust. Quest Capital appealed.

The Appeal Decision

On appeal, Quest Capital argued that the defendant was more than just a discretionary beneficiary to the trust. He was also the protector of the trust, and that role provided him with rights and powers including the power to distribute the trust assets to himself. Quest Capital claimed that the only way to enforce the judgement was to appoint an equitable receiver over those rights and powers.

The Court of Appeal recognized the validity of Quest Capital’s concerns, noting:

I accept the proposition that the discretionary nature of the respondent’s interest as a beneficiary is qualified by his position as Protector and, on that basis, question whether the discretionary nature of his beneficial interest was a sound basis for the judge’s exercise of her discretion to set aside the order appointing the receiver.  More importantly, I do not think the fact that a debtor’s interest in a trust is discretionary is determinative of whether a receiver should be appointed.

However, the court went on to say:

That the interest of a beneficiary in a trust is discretionary does not make it any the less an interest in property.  Whether an equitable receiver should be appointed will depend on the circumstances of the trust in question, that is, the trust instrument and the relationship of the beneficiaries and the trustee.

…whether the judge erred in exercising her discretion based on the discretionary nature of the respondent’s interest need not be resolved because I do not think it was appropriate to include as property subject to the receivership order the authority to exercise the respondent’s power as the Protector or trustee.

The Court concluded:

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 to appoint an equitable receiver, but is not determinative.

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

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 Court dismissed Quest Capital’s appeal.

If you require immediate and urgent action resulting from an outstanding debt matter, contact Financial Litigation.  We are always responsive, anytime you need us. As soon as we are retained, we will act quickly to review your matter and take any necessary steps to protect your rights pending collection. Eli Karp is an experienced commercial litigator and has successfully handles collections on behalf of individuals and corporations, whether they are seeking a negotiated settlement or need to pursue a debt to litigation. Our team is available seven days a week to discuss strategy and answer questions, so clients know their matter is in good hands. To schedule a consultation, contact us online or call 416-769-4107 x1.