Overview
Individuals subject to administrative monetary penalties levied by securities regulators – even for fraudulent conduct such as market manipulation – are absolved from payment upon being discharged from personal bankruptcy, based on the recent decision of the Supreme Court of Canada in Poonian v. British Columbia (Securities Commission)(Poonian).[1]
In Poonian, one of the major issues the Court grappled with was the balance between the general purpose of the insolvency regime under the Bankruptcy and Insolvency Act (BIA) – to provide the “honest but unfortunate” debtor with absolution from indebtedness – and the statutory provisions in the BIA that create exceptions to the general rule and ensure certain debts, including debts arising from certain court-imposed orders and qualifying fraud-related debts, survive bankruptcy. The majority of the Court found that administrative monetary penalties (AMPs) registered with a court are not the same as orders imposed by the court, and for the fraud exception to apply in personal bankruptcy there must be a direct link between the fraud-related debt and the impugned conduct. As a result, the AMPs imposed by the British Columbia Securities Commission (the Commission) fell outside the fraud exception as they did not result directly from the market manipulation at issue.
In contrast, the Court found that disgorgement orders are distinct from AMPs because they represent the value of the fraudulent gain and strip the fraudster of the benefit of their wrongdoing. The direct link requirement in the fraud exception is therefore satisfied with the result that disgorgement orders imposed by securities commissions will survive an order of discharge from bankruptcy.
Background
The appellants, the Poonians, were found by the Commission to have engaged in a market manipulation scheme with relatives, friends and acquaintances, contrary to the British Columbia Securities Act. After acquiring a majority position in a public oil and gas company, the Poonians artificially inflated the share price and sold the shares to unsophisticated investors.[2] The Commission ordered the Poonians to pay CA$13.5 million in AMPs and also made several disgorgement orders totalling CA$5,595,362. These orders were registered with the Supreme Court of British Columbia (the BCSC) under section 163 of the Securities Act, resulting in the sanctions having the same force and effect as if they were a judgment of the court.[3]
In 2014, the Poonians made a voluntary assignment in bankruptcy. In 2020, the Poonians applied for a discharge from bankruptcy, which was opposed by the Commission and subsequently dismissed by the BCSC. In 2021, the Commission applied to the BCSC for a declaration that the debts owed to it by the Poonians would not be released by an order of discharge pursuant to sections 178(1)(a) and (e) of the BIA, which are reproduced below:[4]
Debts not released by order of discharge
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;
[…]
(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
Lower Court decisions
The BCSC allowed the Commission’s application, finding that both sections 178(1)(a) and 178(1)(e) applied such that the Poonians’ debt would not be released by a discharge.
The Poonians appealed this decision to the British Columbia Court of Appeal. Their appeal was dismissed in 2022. In its decision, the Court of Appeal confirmed the BCSC’s conclusion that the debts were exempt from release under section 178(1)(e), but overturned its conclusion that section 178(1)(a) applied.
The Court of Appeal agreed that section 178(1)(a) was not restricted to monetary orders in criminal or quasi-criminal proceedings, but held that monetary orders that were merely registered with the court cannot be said to be an order “imposed by the court” such that they would fall within the exception under section 178(1)(a).[5]
However, the Court of Appeal held that the Commission’s AMPs and disgorgement orders still fell within section 178(1)(e) since the Poonians’ debt arose as a result of obtaining property by fraudulent misrepresentation through their market manipulation.[6] The Court of Appeal further concluded that a debtor’s fraudulent statements did not have to be made to the creditor seeking to rely on section 178(1)(e) – i.e., the Poonians were not required to make their fraudulent statements to the Commission for it to invoke section 178(1)(e).[7]
Decision of the Supreme Court of Canada
The Court affirmed the Court of Appeal’s decision in part, confirming its conclusion that neither administrative penalties nor disgorgement orders fell within the purview of section 178(1)(a) and that disgorgement orders survived a discharge order under section 178(1)(e). However, in a five to two decision, the majority of the Court overturned the Court of Appeal’s conclusion that section 178(1)(e) applied to AMPs.
The Court held that AMPs and disgorgement orders cannot be said to have been “imposed by a court” under section 178(1)(a). The term “court” does not include administrative tribunals and regulatory bodies, as the term implies that the dispute would be adjudicated by the judiciary as opposed to an administrative tribunal, which is a hybrid entity that exercises a quasi-judicial function.[8] Further, an order by an administrative tribunal is not “imposed” by a court notwithstanding registration of the order with the court, as registration does not change the fact that the order was made by an administrative tribunal. A court is only passively involved when it registers a decision of an administrative tribunal, and the Court held that the act of “imposing” a penalty or restitution order requires the court to be actively involved in making the decision.[9] On this basis, the Court concluded that AMPs and disgorgement orders do not fall under section 178(1)(a).[10]
With respect to section 178(1)(e), case law has established that a creditor seeking to rely on the exception must prove: (1) false pretences or fraudulent misrepresentations; (2) a passing of property or provision of services; and (3) a link between the debt or liability and the fraud.[11] The Court explained that property is not required to pass to the bankrupt in order to satisfy the second prong of this test. Rather, property may pass either directly to the bankrupt or indirectly to a third party at the bankrupt’s direction or on their behalf. All that is required is that the fraudulent misrepresentation induced a person to give the property to someone else.[12]
However, in order to meet the third prong of the test, the Court held that there must be a “direct link” between the debt or liability and the false pretences or fraudulent misrepresentations that resulted in the passing of property. This “direct link” limits the exception to the value of property obtained by the debtor, preventing debtors from profiting from their dishonesty.[13] In other words, the debt or liability cannot exceed the benefit gained by the debtor’s fraud, as section 178(1)(e) could otherwise capture debts or liabilities that are not the direct result of deceit.[14]
The “direct link“ requirement does not require that the creditor seeking to rely on the provision be a direct recipient of a deceitful statement. A creditor who was not directly victimized by the false pretences or fraudulent misrepresentations could still bring an application under section 178(1)(e) provided that the claim is “the result of a person being deprived of property or services after having detrimentally relied on the debtor’s false pretences or fraudulent misrepresentation.”[15] However, the AMPs levied by the Commission did not meet this threshold, as the underlying debt did not result directly from fraud. Rather, the Court held that it arose indirectly as a result of the Commission’s decision to sanction the Poonians for having obtained property through their deceitful statements to investors.[16] In contrast, the Court held that a disgorgement order, which represents the amounts the debtor obtained as result of their misconduct, satisfies the “direct link” requirement.
Conclusion
The impact of Poonian will be immediate on the securities law enforcement process, including securities investigations, settlement negotiations and administrative hearings. Individuals under investigation for fraud or fraud-related conduct will be motivated to avoid any findings of direct harm to investors impacted by their conduct that could support a disgorgement order. For securities regulators, AMPs may become less effective as a deterrent to fraudulent conduct in public markets since the regulator’s ability to collect on any monetary penalties can be frustrated through an assignment into bankruptcy.
In Poonian, the Court was tasked with striking a balance between promoting the BIA’s goals of equitable distribution of assets between creditors and a bankrupt’s financial rehabilitation on one hand, and the protection of Canadian investors and markets through securities legislation on the other. Time will tell if the federal government agrees with the balance that has been set by the Court, or if it will deem it necessary to amend the BIA to expressly include AMPs made by a securities regulator as a debt that is not released upon discharge from bankruptcy.
For more information, please contact Michael Beeforth, Brandon Barnes-Trickett, Raphael T. Eghan and Kelly Osaka.
The authors would like to thank Janson Fu, who assisted in the preparation of this article.
[1] Poonian v British Columbia (Securities Commission), 2024 SCC 28 [Poonian]. Note the authors represented the Alberta Securities Commission as an Intervenor in Poonian.
[2] Ibid at paras 7–8.
[3] Ibid at para 9.
[4] Ibid at para 10.
[5] Ibid at para 16.
[6] Ibid at para 17.
[7] Ibid at paras 18–19.
[8] Ibid at para 46.
[10] Ibid at paras 51–52.
[11] Ibid at para 54.
[12] Ibid at para 73.
[13] Ibid at paras 75-76.
[14] Ibid at para 106.
[16] Ibid at paras 102-103.
