Supreme Court of Canada decision impacts Securities Commissions’ ability to collect from bankrupt transgressors

On July 31, 2024, the Supreme Court of Canada released its decision in Poonian v. British Columbia (Securities Commission), on whether financial sanctions imposed by securities regulators are dischargeable through bankruptcy. The decision resolves a conflict between Alberta and B.C. jurisprudence and will have a significant impact on the treatment of all administrative orders in bankruptcy proceedings.

The facts

In 2014, the B.C. Securities Commission (the Commission) found that Thalbinder Singh Poonian and Shalu Poonian, together with others, had breached section 57(a) of the B.C. Securities Act by engaging in trades designed to artificially inflate the share price of OSE Corp. and then selling their inflated shareholdings to unsuspecting buyers.^[1] In 2015, the Commission imposed financial sanctions against the couple, which, following an appeal to the B.C. Court of Appeal, included approximately $13.5 million in administrative penalties and  approximately $5.6 million in disgorgement. These sanctions were registered with the B.C. Supreme Court pursuant to the Securities Act, which provides that, on being filed in a registry of that court, a decision of the Commission has the same force and effect and that all proceedings may be taken on it, as if it were a judgment of that court.

In April 2020, the Poonians brought an unsuccessful application for discharge from bankruptcy.  Following this application, the Commission applied for an order declaring that, pursuant to section 178(1) of the Bankruptcy and Insolvency Act (the BIA), a discharge from bankruptcy would not release the Poonians from the amounts owed to the Commission. The relevant portions of section 178(1) read

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, …;

…

(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, …

The B.C. Supreme Court found that section 178(1)(a) applied, reasoning that because the Commission had registered the order with the court, the sanction had been “imposed by a court.” The Court also found that section 178(1)(e) applied, because

1. the Poonians’ market manipulation constituted fraudulent misrepresentation and false pretense
2. the Poonians’ market manipulation and exploitation of investors constituted the deceitful conduct which was the essence of section 178(e)

On appeal, the B.C. Court of Appeal found that section 178(1)(a) did not apply to the sanctions imposed by the Commission but that section 178(1)(e) did. In reaching this conclusion, the B.C. Court of Appeal disagreed with the narrow interpretation of section 178(1)(e) recently adopted by the Alberta Court of Appeal in Alberta Securities Commission v. Hennig.^[2] 

The conflict in the B.C. and Alberta jurisprudence

In Hennig, the Alberta Court of Appeal had found that section 178(1)(e) required that the fraudulent statement had to have been made to the creditor relying on the exemption. Under this approach, while the victims of a market manipulation scheme may have been entitled to rely on section178(1)(e), a securities regulator could not do so because they were not the recipients of the misrepresentation.

In Poonian, by contrast, the B.C. Court of Appeal found that section 178(1)(e) is not restricted to cases in which the bankrupt made a fraudulent statement to the specific creditor relying on this provision. Accordingly, both the administrative penalties and disgorgement orders imposed by the Commission were non-dischargeable because they arose from the Poonians’ having obtained property by false pretenses or fraudulent misrepresentation.

The Supreme Court of Canada majority decision

At the Supreme Court of Canada, Justice Côté, writing for a 5–2 majority, endorsed the principle that, to allow financial rehabilitation of debtors, “every claim is swept into the bankruptcy … unless the law sets out a clear exclusion or exemption.” This principle is limited by section 172 of the BIA, which permits the Court to refuse or suspend discharge in certain circumstances, and by section 178(1), which sets out specific debts which are not released by discharge and therefore survive bankruptcy. In part because courts have no discretion about whether or not an exception under section 178(1) applies, these exceptions “must be interpreted narrowly and applied only in clear cases.”

Application of section 178(1)(a)

The Supreme Court found that section 178(1)(a) is not restricted to fines, penalties, restitution orders and other orders imposed in a criminal or quasi-criminal proceeding. However, the Court also found that for such a debt to be “imposed by a court”, a court (as distinct from a tribunal) must have been “actively involved in making the decision”; it is not sufficient merely to register an order made by regulatory agency as a judgment of a court. Therefore, neither the administrative penalties nor disgorgement orders imposed on the Poonians by the Commission were exempt from discharge under section 178(1)(a), regardless of their having been subsequently registered with a court.

Application of section 178(1)(e)

The Supreme Court majority found that for a debt or liability to survive bankruptcy pursuant to section 178(1)(e), the creditor must establish three elements:

1. false pretenses or fraudulent misrepresentation
2. a passing of property or provision of services
3. a link between the debt or liability and the fraud

With respect to the first element, the Court found that deceit, whether by positive act or omission, is at the core of both “false pretenses” and “fraudulent misrepresentation”. The onus of proof is on the creditor; courts cannot take judicial notice of fraud and parties cannot presume that a claim resulted from deceit without proving the required elements.

In every case, a court applying section 178(1)(e) must make its own findings of fact based on “clear and cogent” evidence of fraud or dishonesty. Where a debt or liability results from the finding of an administrative tribunal, the court must make its own determination based on a review of the record, even where the required findings for false pretences or fraudulent misrepresentation were “expressly made by [the] administrative decision maker”.

With respect to the second element, the Court rejected the Poonians’ arguments that section 178(1)(e) applied only where property passed directly to the debtor, rather than to a third party. The Court also rejected their argument for a “direct victim” requirement, which would have limited the application of section 178(1)(e) to circumstances where the misrepresentations were made directly to the creditor, rather than to a third party.

With respect to the third element, the Supreme Court majority found that the use of “resulting from” in section 178(1)(e) requires a strict causal link between the debtor’s deceit and the creation of the debt or liability. In other words, the debt or liability must have been created as a result of false pretences or fraudulent misrepresentation. There must have been detrimental reliance on the misrepresentation and the debt or liability must be limited to the “value of the property [or services] obtained.”  This means that incidental penalties, such as costs or punitive damages, are not exempt from discharge through section 178(1)(e).

Application to the Poonians

Applying the above elements, the Supreme Court majority held that the B.C. Supreme Court had correctly found that the Poonians’ market manipulation amounted to fraudulent misrepresentation and that the Poonians had obtained property, in the form of millions of dollars, as a result of their fraudulent misrepresentation. However, the majority concluded that the administrative penalties levied by the Commission did not result directly from that misrepresentation, but rather indirectly through the Commission’s decision to sanction the Poonians. Even though the misrepresentation was a “but for” cause of the administrative penalties, this was insufficient to satisfy the requirement for a direct link. The dissenting justices would have found that “but for” causation was sufficient, so that the administrative penalties would not be discharged through bankruptcy.

However, the majority concluded that section 178(1)(e) applied to, and thus prevented the discharge of, the Commission’s orders for disgorgement of profits. The Court reasoned that these amounts represented the amounts the debtors had obtained directly through their wrongful conduct. The Court also noted that monies disgorged could be distributed to victims through section 15 of the B.C. Securities Act.

Takeaways and implications

The decision in Poonian will have significant implications for securities regulatory enforcement in Canada. Defendants facing enforcement proceedings must be aware of the different treatment of disgorgement orders and administrative penalties and the possibility of discharging administrative penalties through bankruptcy.

It remains to be seen whether the rationale identified by the Supreme Court of Canada will apply to other disgorgement orders issued under provincial securities legislation. Certain differences between disgorgement under the B.C. and Ontario securities legislation were previously addressed by the B.C. Court of Appeal in an appeal by the Poonians against their sanctions decision.^[3] It will have to be determined whether these differences affect the Supreme Court of Canada’s analysis, which turned at least in part on the specific text of section 161(1)(g) of the B.C. Securities Act.

The securities regime in Canada is filled with anomalies and gaps that can likely only be filled through legislative action; the decision of the Supreme Court of Canada highlights one such gap. While the decision will add to the challenges regulators face in enforcing sanctions, the majority’s treatment of administrative penalties is compelling; securities law jurisprudence is clear that monetary sanctions imposed by capital markets tribunals are not to be imposed as penalties or punishments but are instead intended to fulfill regulators’ public-interest mandates through specific and general deterrence.

In practice, however, the magnitude of the penalties imposed by recent tribunal decisions tends to be somewhat arbitrary, with little or no analysis of the relationship between the sanction imposed and what is needed to advance the tribunals’ mandate to deter future conduct. This approach suggests a regulatory focus on punishment rather than deterrence and a continuation of the move by regulators away from their traditional roles as defenders of the public interest and towards law enforcement. This trend is also reflected in policy initiatives proposed and advanced by regulators and governments. For example, the B.C. Securities Commission has been given significantly expanded powers pursuant to amendments made to the B.C. Securities Act in recent years and has been aggressively using its enforcement powers. The efficacy of these initiatives, too, may be affected by this decision.  The recent Ontario Capital Markets Modernization Task Force has also recommended a number of “enhancements” to the tools available to the Ontario Securities Commission’s enforcement team.

If policy makers determine that it is desirable that such penalties survive bankruptcy, legislative amendments are likely required. Because the constitutional division of powers allocates bankruptcy to the federal parliament and most aspects of securities regulation to the provincial legislatures, such amendments will likely require coordination between the levels of government.

More generally, the decision may have significant impacts on the treatment of administrative penalties outside of the securities area under the BIA. The decision will also assist in the interpretation and application of section 19(2)(d) of the Companies’ Creditors Arrangement Act. That provision, which uses the same language as section 178(1)(e) of the BIA, prohibits CCAA debtors from compromising claims that relate to any “debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation” unless the plan of compromise and arrangement explicitly provides for the claim’s compromise and the creditor in relation to that debt has voted in favour.

---

[1] Singh Poonian (Re), 2014 BCSECCOM 318.

[2] Alberta Securities Commission v. Hennig, 2021 ABCA 411.

[3] Poonian v. British Columbia Securities Commission, 2017 BCCA 207.