Alberta Securities Commission v Hennig, 2021: The conflict between the fresh start principle in bankruptcy law and enforcement action of securities regulators

The Alberta Court of Appeal has overturned a decision of the Alberta Court of Queen’s Bench, holding that an administrative penalty of the Alberta Securities Commission (the “ASC”) does not survive bankruptcy. We discussed the Alberta Court of Queen’s Bench decision in a previous legal update found here.

Background

The ASC issued administrative penalties against Hennig after a panel of the ASC found that Hennig contravened Alberta securities laws and acted contrary to public interest. In particular, the ASC found that Hennig had violated securities laws by misrepresenting financial statements, participating in market manipulation, contravening insider trading reporting requirements, obtaining financial benefits from investor funds, and making misrepresentations to the ASC. As a result of these findings, the ASC panel imposed administrative penalties against Hennig totalling $400,000. Hennig did not pay the penalties imposed on him, and instead filed for bankruptcy. In the Alberta Court of Queen’s Bench decision under appeal, the Court held that Hennig’s discharge from bankruptcy did not release him from the ASC penalties, as they fell within the excluded categories of claim set out in s. 178(1) of the Bankruptcy and Insolvency Act (the “BIA”). The exceptions set out in the BIA that are relevant to this decision are as follows:

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.

Regarding the interpretation and scope of the BIA, the Alberta Court of Queen’s Bench found that the exceptions set out in s. 178(1) “exists to ensure that debtors who have been found to have engaged in fraudulent or dishonest conduct are not entitled to a discharge.” In the Court’s view, the exceptions set out in s. 178(1) of the BIA should be interpreted purposively with the policy considerations in mind, including the consideration that “a debtor that has engaged in fraudulent or dishonest conduct is not entitled to the fresh start offered by a general discharge of bankruptcy.”

The Alberta Court of Appeal’s decision

In contrast to the broad and purposive interpretation to s. 178(1) taken by the Court of Queen’s Bench, the Court of Appeal adopted a more narrow interpretation. In particular, the Court held that ‎ “the ‎proper approach to interpreting the exemptions in s 178(1) starts from the position that every debt is ‎released on a discharge of the bankrupt unless one or more of s 178(1)’s subsections clearly exempts ‎the debt from release”.

Respecting the particular exemptions, the Court of Appeal held that the ASC’s debt does not fall within the scope of s. 178(1)(a) of the BIA which ‎exempts fines, penalties or restitution orders.  In finding that this provision did not apply, the Court noted that the ASC had proceeded administratively against Mr. Hennig, and not by way of criminal prosecution of quasi-criminal prosecution.

Under the Alberta Securities Act, an administrative penalty imposed by the ASC is characterized as a debt for enforcement  purposes.

The Court rejected the ASC’s argument that the administrative penalty and costs order were “imposed by ‎a court” because the ASC filed the decisions of the ASC panel with the Alberta Court of Queen’s Bench. The Court ‎noted that the Court’s involvement was passive as it “did not take any action apart from putting ‎‎[the ASC decisions] on file” and this is not consistent with being ‎‎“imposed by the court”. Furthermore, the Court held that the word “offence” in s 178(1)(a) of the ‎BIA refers to a breach of the criminal or quasi-criminal law, which further reinforces the Court’s conclusion ‎that the ASC’s debt does not fall within the scope of s 178(1)(a) of the BIA.‎

Respecting s. 178(1)(e) which exempts debts arising from false pretences or fraudulent misrepresentation, the Court of Appeal identified three elements required for this provision:

1. a fraudulent ‎misrepresentation or false pretences;
2. a link between the debt and the fraud; and
3. a passing of ‎property as a result of the fraud.

The majority of the Court of Appeal held that  the ASC did not allege that Hennig committed fraud in its Notice of Hearing and the ASC Panel made ‎no express findings of fraud against Hennig. Given the finding that the ASC “is a sophisticated regulatory body that operates with the assistance of in-house legal counsel, and conducts many complex hearings”, the Court concluded that the ASC was not able to meet the first requirement of s. 178(1)(e). However, the minority opinion, while concurring in result, did not agree with the majority that the first requirement under s. 178(1)(e) had not been met. In particular, the minority opinion held that the chambers judge was entitled to look beyond the pleadings and assess the factual findings of the ASC in assessing whether there was fraudulent misrepresentation or false pretences.

Although the majority held that the ASC could not prove the first element, it also canvassed the ‎second element, namely the link between the debt and fraud. In this regard, the Court held that “… the required link between the ‎fraudulent statement and the debt is established only if the debtor makes the fraudulent statement to ‎the creditor relying on s 178(1)(e)”. ‎ The Court looked to the ‎ASC Panel’s decision to conclude that “the ASC’s debt against Mr. Hennig is not based on ‎Mr. Hennig’s lies to ASC staff [but] on Mr. Hennig’s misleading statements in the capital markets and ‎other market wrongdoing” and that the required link between the fraudulent statements and ASC’s ‎debt was therefore not established. ‎

Takeaways

This decision comes at the heels of statements by securities regulators regarding challenges they face when attempting to collect on monetary penalties for securities violation and the recent sweeping amendments to the British Columbia Securities Act, giving the British Columbia Securities Commission some of the strongest collection and enforcement powers in Canada. As part of these efforts, British Columbia’s Finance Minister has also called on the federal government to amend the BIA to give securities commissions an explicit exemption from discharge. The BCSC has stated that the proposed amendments to the BIA would be another step to improving collection rates by securities regulators across the country so that those sanctioned by regulators cannot use bankruptcy to evade paying penalties. It remains to be seen if Parliament will act on such proposals to expand the discharge exemptions under s. 178(1). In the absence of any such legislative amendment, securities regulators will need to rely upon other remedies at their disposal (including, but not limited to, pursuing quasi-criminal enforcement action) to ensure that their monetary orders survive bankruptcy.

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