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21 de agosto de 20226 minute read

BC Court of Appeal sides with Securities Commission in the latest decision on exemption of administrative ‎penalties in Bankruptcy

In Poonian v British Columbia (Securities Commission), 2022 BCCA 274, the British Columbia Court of Appeal found that an order of discharge under the Bankruptcy and Insolvency Act (the “BIA”) would not release a debtor from debts arising from monetary sanctions owed to an administrative body. The decision runs contrary to a recent Alberta Court of Appeal decision in Alberta Securities Commission v Hennig, 2021 ABCA 411.

The proceedings

The Poonians were found guilty of contravening the Securities Act. The British Columbia Securities Commission found that the Poonians orchestrated an elaborate market manipulation scheme resulting in unsophisticated investors losing millions of dollars. As a result, the Poonians were ordered to pay over $5 million in administrative penalties to the Commission. The Commission registered that order with the British Columbia Supreme Court, pursuant to the BIA, giving the Commission’s order the same force and effect as though it were a court judgement.

After an application by the Poonians for an absolute discharge from bankruptcy was dismissed, the Commission obtained an order declaring that the administrative penalties were debts that could not be released by an order of discharge under section 178(1)(a) and (e) of the BIA. The Poonians appealed that order.

Registered administrative penalties are not “imposed” by a court for the purposes of section 178(1)(a)

Section 178(1)(a) provides that an order of discharge does not release the bankrupt from any fine, penalty, restitution order, or other order similar in nature, imposed by a court.

The Poonians argued that the administrative penalties did not fall under this exemption for two reasons.

  1. The administrative penalties were not a “fine, penalty, restitution order or other order similar in nature”, on the basis that the provision was restricted to orders made in criminal or quasi-criminal proceedings. The Court of Appeal rejected this argument and held that section 178(1)(a) is broad enough to include at least fines, penalties and restitution orders imposed by courts other than the superior courts of the provinces.
  2. Orders made by an administrative tribunal, albeit registered, did not constitute judgements “imposed” by a court. The Court of Appeal held that tribunal orders that are simply registered, without judicial scrutiny, are enforceable as if they are judgements of the court, but they are not “imposed” by courts as required to fall within the section 178(1)(a) exemption.

Having accepted the second argument of the Poonians, the Court of Appeal held that the administrative penalties were not exempted from discharge under section 178(1)(a).

Misrepresentations need not be pleaded or to the creditor under section 178(1)(e)

Section 178(1)(e) provides that an order of discharge does not release the bankrupt from any debt arising from obtaining property by 0 pretences or fraudulent misrepresentation.

In considering the application of this provision, the Court of Appeal noted several additional considerations:

  1. A debtor’s impugned behaviour does not need to satisfy the test for the tort of deceit, and market manipulation can fall within the conduct contemplated by section 178(1)(e).
  2. Section 178(1)(e) may still be found to apply even where fraudulent misrepresentation and 0 pretences are not pleaded in the original proceeding. It is open to the court to conclude that a debt arose from fraudulent misrepresentation despite the fact that pleadings or an original action did not make a claim of fraud.
  3. The section 178(1)(e) exemption is not restricted to cases where the creditor is the target of the fraudulent conduct; the section exempts debts collected by an intermediary on behalf of victims. Put another way, although the misrepresentation was not made to the Commission (but rather to the victims of the scheme), the Court was nevertheless satisfied that there was a direct link between the debt and the fraud.
Clear as mud — Two competing appellate decisions

This decision conflicts with the Alberta Court of Appeal decision in Alberta Securities Commission v Hennig, 2021 ABCA 411, an important decision which we previously discussed. In particular:

  1. The Alberta Court in Hennig took a narrow interpretation of s. 178(1)(a) and required the penalty to be administered by way of criminal or quasi-criminal prosecution. In Alberta, an administrative penalty is a debt for enforcement purposes under the Securities Act. As noted above, the British Columbia Court of Appeal took a more liberal interpretation, and concluded that the administrative penalty did constitute a fine or penalty, as required under s. 178(1)(a).
  2. The Alberta Court and the British Columbia Court agreed that s. 178(1)(a) requires more than mere registration of the order with the court in order for the fine or penalty to be “imposed by the court”. On this basis, both Courts concluded that s. 178(1)(a) did not apply in the circumstances.
  3. The Alberta Court and British Columbia Court took very different approaches under s. 178(1)(e). The Alberta Court held that unless there were express findings of fraud, the court could not apply s. 178(1)(e). As discussed above, the British Columbia Court disagreed. In addition, the Alberta Court found that the fraudulent statement and the debt must be linked, meaning that the debtor must have made the fraudulent statement to the creditor. This was not satisfied: the fraudulent statements were made to the investors, not to the Commission. The British Columbia Court expressly held that this was not a requirement. In the end, the Alberta Court did not allow the exemption under s. 178(1)(e), while the British Columbia Court did.

This issue needs resolution, and the appellate decisions to date have only brought a lack of clarity to the issue. Ideally, legislative amendment will bring clarity to the issue and provide securities regulators with a clear exemption. Alternatively, this issue may be on the way to the Supreme Court. 

 

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