August 9, 2024
The Effects of Bankruptcy on Regulatory Administrative Penalties: Poonian v. British Columbia (Securities Commission), 2024 SCC 28
The Supreme Court of Canada recently ruled on the issue of whether administrative penalties or disgorgement orders issued by securities regulators survive a discharge from bankruptcy, where the underlying sanctioned conduct arises from fraud.
The answer from the Supreme Court is administrative penalties do not survive, whereas disgorgement orders might, where they are issued in response to a finding of fraud or “fraud like” conduct.
In Poonian v. British Columbia (Securities Commission), 2024 SCC 28 (“Poonian”), a majority of the Supreme Court of Canada[1] addressed the issue of whether the administrative financial penalties and/or the disgorgement orders imposed by British Columbia Securities Commission (“BCSC”) survive a discharge from bankruptcy under one of the exceptions under the exceptions set out in s. 178(1) (and specifically subsections 178(1)(a) and (e)) [2] of the Bankruptcy and Insolvency Act (“BIA”)[3].
The appellants, Thalbinder Singh Poonian and Shailu Poonian, are undischarged bankrupts. Between 2007 and 2009, the Poonians were found to have engaged in market manipulation, causing millions of dollars of investor losses. The BCSC found that the Poonians had contravened s. 57(a) (now s. 57(1)(a))[4] of the B.C. Securities Act.[5] The BCSC ordered the payment of administrative penalties by both Mr. Poonian ($10 million) and Ms. Poonian ($3.5 million). The BCSC also issued orders pursuant to s. 161(1)(g)[6] of the B.C. Securities Act requiring Mr. Poonian to disgorge $1,319,167 as well as $1,126,260 jointly and severally with another participant of the market manipulation scheme, and requiring Ms. Poonian to disgorge $3,149,935. The disgorgement orders represent the amounts the Poonians obtained as a result of the market manipulation scheme.
The Supreme Court of British Columbia[7] found that the exceptions in both s. 178(1)(a) and (e) of the BIA applied, and thus found both the administrative penalties and the disgorgement orders imposed by the BCSC survive a discharge from bankruptcy.
The British Columbia Court of Appeal[8] held that the chambers judge erred in concluding the administrative penalties and the disgorgement orders were exempt from discharge pursuant to section 178(1)(a) of the BIA. However, it upheld the chambers judge’s decision that both the administrative penalties and the disgorgement orders were exempt under s. 178(1)(e), and therefore survived the discharge from bankruptcy.
The finding of the B.C. Court of Appeal in Poonian differs from the findings of the Alberta Court of Appeal in Alberta Securities Commission v. Hennig.[9] In Hennig, the Alberta Court of Appeal found that the administrative penalties issued by the Alberta Securities Commission (“ASC”), as well as the costs order of the ASC, did not survive discharge from bankruptcy under section 178(1)(e) of the BIA. The Alberta Court of Appeal made a similar finding to the B.C. Court of Appeal that they do not survive a discharge from bankruptcy under section 178(1)(a) of the BIA.
Interestingly, in Hennig, a key factor for the Alberta Court of Appeal was that the breaches of the Alberta Securities Act[10] found by the ASC did not include a breach of the fraud provisions of the Securities Act.[11] However, the findings against Mr. Hennig did include a finding of market manipulation.[12] That was the same findings made against the Poonians by the BCSC.
In any event, the potentially conflicting results in Poonian and Hennig called for clarity from the Supreme Court.
The Supreme Court framed the specific issues on the appeal as:
- Do the BCSC’s administrative penalties and disgorgement orders against the Poonians constitute debts falling within s. 178(1)(a) of the BIA, such that they are not released by an order of discharge and therefore survive bankruptcy?
- Do the BCSC’s administrative penalties and disgorgement orders against the Poonians constitute debts or liabilities falling within s. 178(1)(e) of the BIA, such that they are not released by an order of discharge and therefore survive bankruptcy?
Turning first to section 178(1)(a) of the BIA, the Supreme Court noted that for a debt to survive bankruptcy under s. 178(1)(a), the creditor must establish that the debt is (1) a fine, penalty, restitution order or other order similar in nature, (2) imposed by a court, and (3) imposed in respect of an offence.
The Supreme Court confirmed that the “fine, penalty or restitution order or other order similar in nature” does not need to arise strictly in the criminal or quasi-criminal context.
However, the Supreme Court ruled that the word “court” in s. 178(1)(a) does not capture administrative tribunals or regulatory bodies. This is so even if that decision is later registered as a judgement of the Court, as it was in both Poonian and Hennig. As noted by the Supreme Court “If Parliament had wanted fines, penalties, restitution orders or other orders similar in nature imposed by regulatory bodies, administrative tribunals or other administrative decision makers to be exempt from discharge under s. 178(1)(a), it could have said so expressly.”[13]
Broadly speaking, no fine, penalty, restitution order or other order similar in nature imposed by any regulatory or administrative body will survive discharge from bankruptcy pursuant to section 178(1)(a) of the BIA, following the reasoning in Poonian.
Turning to section 178(1)(e) of the BIA, the Supreme Court noted that “for a debt or liability to survive bankruptcy pursuant to s. 178(1)(e), the creditor must establish three elements: (1) false pretences or fraudulent misrepresentation; (2) a passing of property or provision of services; and (3) a link between the debt or liability and the fraud”.
Both the majority and the dissenting justices agreed that a claim under s. 178(1)(e) must result from the debtor (or someone associated with the debtor) having obtained property or services by false pretences or fraudulent misrepresentation. They also agreed there must have been a passing of property or provision of services. This can be either direct or indirect, and it need not be obtained by the bankrupt, so long as it was obtained by someone associated with the bankrupt.
However, the majority found there must be a direct link between the debt or liability and the fraudulent conduct, and that it is only the value of the property or services obtained as a result of that conduct that is not released by an order of discharge. As stated by the majority:
Respectfully, I am not convinced that a debt or liability that is not directly linked to a deceitful statement by the debtor, or someone associated with the debtor, can survive a discharge from bankruptcy on the basis of the s. 178(1)(e) exception. The proper scope of s. 178(1)(e) “requires a deceitful statement by which the debtor obtained property or services, causing the debt or liability of the creditor to arise” (Shaver-Kudell, at para. 44).[14]
The dissenting justices did not agree that there must be a direct correspondence between the value of the debt or liability and the gain made by the bankrupt or the person associated with the bankrupt.
The majority then went on the find that the administrative penalty issued by the BCSC does not meet the requirements of section 178(1)(e).[15]
As to the first part of the test, both the majority and the dissent were clearly satisfied that market manipulation met the test of “false pretences or fraudulent misrepresentation” on the facts of Poonian.
This means the test is therefore broader than only applying to direct findings of breaches of the specific fraud provisions of the statute in question. However, in any particular case, the judge hearing the application must make their own determination, based on a review of the record, as to whether the debt or liability falls within the exception in 178(1)(e) of the BIA.
Where the majority and dissent parted ways was on the nature of the link between the conduct and the administrative penalties imposed.
The majority in Poonian agreed with the observation that both a costs award and a penalty imposed by a regulator arise indirectly from deceitful conduct: “Fundamentally, however, both a costs award and an administrative penalty result from the regulator’s choice to sanction the impugned conduct. Neither is the direct result of the deceit.”[16]
The majority therefore found that the administrative penalties were not the direct result of the Poonians’ fraudulent misrepresentations. As such, the administrative penalties do not survive a discharge from bankruptcy under s. 178(1)(e). (As with section 178(1)(a), the majority found that if Parliament intended administrative penalties and costs orders to survive a discharge from bankruptcy, it would have stated so clearly in the BIA.)
The dissent would have found the administrative penalties here did survive a discharge from bankruptcy under s. 178(1)(e).
Both the majority and the dissent agreed, however, that the disgorgement orders imposed by the BCSC against the Poonians do survive a discharge from bankruptcy.
The disgorgement orders were found to represent the value that the Poonians gained as a result of their market manipulation. “The amounts owed under disgorgement orders thus represent the amounts the debtor obtained as a result of his or her wrongful conduct”.[17]
The Supreme Court therefore affirmed the chambers justice’s and the BC Court of Appeal’s conclusion that the disgorgement orders against the Poonians come within the purview of section 178(1)(e) of the BIA, and therefore survive a discharge from bankruptcy.
So, what does it all mean? And what is the likely effect of Poonian going forward?
It is important to recall in securities regulatory matters sanctions imposed are not remedial or punitive, but rather are meant to be preventative and protective of the market and investors. The goal is to ensure compliance.[18]
Fraud, market manipulation and similar deceptive practices are generally the kind of breaches of the various Securities Acts most in need of deterrence. If fraudsters, market manipulators and their ilk can escape or reduce imposed penalties through bankruptcy, this is likely to have less deterrent effect.
We therefore expect to see the various securities regulators petition Parliament to broaden the exemptions in section 178(1) of the BIA to expressly include the administrative penalties and cost orders imposed where there are findings of fraud by the administrative tribunals[19]. (They may even seek even broader exemptions for other kinds of breaches).
At the same time, we also expect enforcement counsel before the various securities regulators to seek disgorgement orders wherever possible as part of the “basket” of sanctions sought in fraud and “fraud-like” matters. If available, these orders should help maintain the deterrent effect of the sanctions imposed to prevent fraudulent conduct in the capital markets.
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[1] Per Côté J. (Wagner C.J. and Rowe, Jamal and O’Bonsawin JJ. concurring); Karakatsanis J. (Martin J. concurring) (dissenting in part)
[2] 178 (1) An order of discharge does not release the bankrupt from
(a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail; (a.1) any award of damages by a court in civil proceedings in respect of (i) bodily harm intentionally inflicted, or sexual assault, or (ii) wrongful death resulting therefrom; …
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim
[3] Bankruptcy and Insolvency Act, RSC 1985, c B-3
[4] 57 (1) A person must not, directly or indirectly, engage in or participate in conduct relating to a security, derivative or underlying interest of a derivative if the person knows, or reasonably should know, that the conduct (a)results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security,
[5] The Securities Act, RSBC 1996, c. 418
[6] 161 (1) If the commission or the executive director considers it to be in the public interest, the commission or the executive director, after a hearing, may order one or more of the following: (g) if a person has not complied with this Act, the regulations or a decision of the commission or the executive director, that the person pay to the commission any amount obtained, or payment or loss avoided, directly or indirectly, as a result of the failure to comply or the contravention
[7] Poonian (Re), 2021 BCSC 555
[8] Poonian v. British Columbia (Securities Commission), 2022 BCCA 274
[9] Alberta Securities Commission v Hennig, 2021 ABCA 411
[10] The Securities Act (Alberta), RSA 2000 c S-4
[12] Workum and Hennig, Re, 2008 ABASC 363, at paras 1252-1253
[15] The Supreme Court noted that the exceptions in s. 178(1)(a) through (h) of the BIA “must be interpreted narrowly and applied only in clear cases” (Poonian at para 26)
[16] Poonian at 105 (emphasis in original)
[18] Cartaway Resources Corp (Re), 2004 SCC 26 at paras 55, 60; British Columbia Securities Commission v. Branch, [1995] 2 S.C.R. 3, at para 59
[19] Indeed, this process had started to some degree before Poonian, but is likely to be of greater focus to the regulators: https://www.cbc.ca/news/canada/british-columbia/poonian-scc-decision-bankruptcy-bcsc-administrative-penalties-1.7281534
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