The Supreme Court of Canada rules that while BC Securities Commission disgorgement orders survive bankruptcy discharge, administrative penalties do not

In Poonian v British Columbia (Securities Commission), 2024 SCC 28, the Supreme Court of Canada clarified which monetary sanctions ordered by the British Columbia Securities Commission would survive an order of discharge under the Bankruptcy and Insolvency Act (the “BIA”) and which would not.

As we have written about previously, the Supreme Court’s decision comes in the wake of conflicting decisions from the BC Court of Appeal in Poonian v British Columbia (Securities Commission), 2022 BCCA 274, and the Alberta Court of Appeal in Alberta Securities Commission v Hennig, 2021 ABCA 411.

The Supreme Court of Canada has drawn a distinction between orders requiring persons to disgorge the proceeds obtained through a fraudulent scheme (“disgorgement orders”) and administrative penalties designed to denounce and deter fraudulent conduct (“administrative penalties”). While disgorgement orders will survive a discharge in bankruptcy, administrative penalties will not.

The proceedings

The Poonians were found guilty of contravening the Securities Act. The BC Securities Commission (the “Commission”) found that the Poonians orchestrated an elaborate market manipulation scheme resulting in unsophisticated investors losing millions of dollars. The Commission ordered the Poonians to pay:

• Disgorgement orders totalling over $5.5 million, and

   

• Administrative penalties totalling $13.5 million.

After an application by the Poonians for an absolute discharge from bankruptcy was dismissed, the Commission obtained an order from the BC Supreme Court declaring that both the disgorgement orders and the administrative penalties were debts that could not be discharged by bankruptcy under section 178(1)(a) and (e) of the BIA. The BC Court of Appeal upheld the result, finding that while section 178(1)(a) did not apply to the Commission’s order, section 178(1)(e) did. This exempted both the disgorgement orders and the administrative penalties from discharge.

Engorgement orders, but not administrative penalties, are exempt from discharge under section 178(1)(e)

On appeal, the Supreme Court of Canada upheld the BC Court of Appeal’s ruling with respect to section 178(1)(a) of the BIA, but partially overturned their ruling on section 178(1)(e).

Section 178(1)(e) provides that an order of discharge does not release the bankrupt from any debt resulting from obtaining property by false pretences or fraudulent misrepresentation.

The majority emphasized that section 178(1) is not “a catchall of debts arising from morally objectionable conduct.” Its mandatory exemptions must be interpreted narrowly and applied only in clear cases.

They concluded that the purpose of section 178(1)(e) is preventing bankrupts from profiting from fraud and making their victims whole, not preserving penalties imposed for deterrence purposes. While a claim under section 178(1)(e) can be brought by a creditor who was not the direct victim of the fraud – such as the Commission on behalf of victims – for section 178(1)(e) to apply, the debt or liability must,

• have been directly caused by a fraudulent misrepresentation of the bankrupt or someone in association with the bankrupt; and
  
  
• must represent the value of the property or services obtained by that deceit.

On this test, section 178(1)(e) applied to the disgorgement orders, but not the administrative penalties. While the disgorgement orders arose directly from the Poonians’ market manipulations and reflected the amount obtained through their deceit, the administrative penalties arose indirectly as a result of the Commission’s decision to sanction the Poonians and exceeded the gain derived through fraud.

The minority’s dissent

The Supreme Court’s two-member minority disagreed on the scope of section 178(1)(e). They noted that courts had repeatedly applied section 178(1)(e) to debts that exceeded the value of the fraudster’s gain, such as awards of punitive damages. In their view, nothing in section 178(1)(e) excludes a debt that has an element of general deterrence or compensation that exceeds the value obtained by deceit, provided the debt directly results from the bankrupt having obtained property or services through deceit.

Punitive damages also not exempt from discharge under section 178(1)(e)

In responding to the minority, the Supreme Court’s majority made comments going beyond administrative penalties, concluding that since punitive damages do not reflect the gain derived through the bankrupt’s deceit, they are also not exempt from discharge under section 178(1)(e).

The majority was quick to state that this did not necessarily mean that punitive damages would be released by an order of discharge under the BIA. Without specifying which, they wrote that punitive damage awards could potentially be captured by another exemption in section 178(1). They also noted that punitive damages – and presumably administrative penalties – could form part of the basis for denying an unconditional discharge under sections 172 and 173 of the BIA.

The impact of this decision on the use of bankruptcy to avoid paying administrative penalties or punitive damages remains to be seen. While such circumstances may lead to discharge being refused or only granted conditionally, unless Parliament amends the BIA, section 178(1)(e) will have no effect on either type of debt. Section 178(1)(e) will only operate to prevent the discharge of disgorgement orders and other debts directly tied to the amount gained through a bankrupt’s deceitful conduct.