Co-authored with Cassiopée Mailloux-Boucher
In a recent decision of the Supreme Court of Canada in Poonian v. British Columbia (Securities Commission), the Court determined that while disgorgement orders made by the British Columbia Securities Commission (the "Commission") survive bankruptcy under theBankruptcy and Insolvency Act(the "BIA"), administrative penalties may not.
In response to the decision, on August 1, 2024, the Commission issued a press release calling for changes to be made to the BIA to address the outcome, noting that since 2001, more than 40 individuals and companies, owing approximately $80 million to the Commission, have gone through bankruptcy and had their debts extinguished.
This is not the first time reform has been called for in the province. In 2020, the B.C. Finance Minister lobbied the federal government for similar reasons, noting that in the United States, the Bankruptcy Code allows for fines imposed by the Securities Exchange Commission to survive bankruptcy. At that time, no changes were made.1
There is accordingly a question of whether the decision inPoonianwill prompt policy makers to reconsider whether a distinction should indeed be drawn under the BIA between disgorgement orders and administrative penalties, or other kinds of orders imposed by the Commission.
The decision inPoonian
1. Facts and procedural history
In Poonian, the appellants, Thalbinder Singh Poonian and Shailu Poonian, were found by the Commission to have contravened s. 57(a) (now s. 57(1)(a)) of the B.C. Securities Act, as a result of engaging in a fraudulent market manipulation scheme, which was described as "serious misconduct" and as "elaborate, involving layers of deception to conceal the ... participation [of the Poonians and their associates] in the manipulation".2
The Commission ordered the payment of administrative penalties by Mr. Poonian in the sum of $10 million and by Ms. Poonian in the sum of $3.5 million. The Commission also issued orders requiring Mr. Poonian to disgorge $1,319,167 as well as $1,126,260 jointly and severally with another participant, and requiring Ms. Poonian to disgorge $3,149,935, representing funds obtained as a result of the market manipulation.3
Following the orders made by the Commission, the Poonians made a voluntary assignment into bankruptcy. They later applied for a discharge from bankruptcy. The Commission opposed a discharge of the debts arising from its orders, relying on ss. 178(1)(a) and 178(1)(e) of the BIA, which provide that an order of discharge does not release a bankrupt from:4
(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
...
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation...
If either of these exemptions apply, the debt in question will not be discharged.
In the first instance, the B.C. Supreme Court held that both the administrative penalties and disgorgement orders made by the Commission were exempt from discharge under ss. 178(1)(a) and 178(1)(e) of the BIA. The Court of Appeal upheld the lower court's decision with respect to 178(1)(e) only.
2. Decision of the Supreme Court of Canada
In reaching its decision, the Supreme Court noted that, while under s. 172, courts have a broad discretion "to grant or refuse an absolute order of discharge, to suspend the operation of a discharge order for a specified time or to grant a conditional order of discharge", s. 178(1) is not "a catchall of debts arising from morally objectionable conduct, but rather sets out categories of specific wrongful conduct that give rise to debts that are not released, and specifies the criteria to be applied".5
With that in mind, a majority of the Supreme Court held that s. 178(1)(a) did not include orders issued by securities regulators, which expressly exempts orders "imposed by a court", as distinct from administrative tribunals and regulatory bodies such as the Commission. The B.C. Securities Act allows decisions of the regulator to be registered as a judgement in court and to be enforced as such, similar to other securities acts in the province. Nevertheless, the Supreme Court found this was not sufficient to conclude the orders at issue in Poonian were imposed by a court within the meaning of s. 178(1)(a) of the BIA.6
With respect to s. 178(1)(e), the Court found that for a debt or liability to be excluded from discharge, there must be:7
- false pretences or fraudulent misrepresentation;
- a passing of property or provision of services; and
- a link between the debt or liability and the fraud.
Having found that the third criteria requires a "direct" link to be shown, the majority determined that the scope of non-dischargeable debts under s. 178(1)(e) is confined to the value of the property or services obtained through fraud, though the bankrupt themselves need not have been the recipient.8
On this basis, the majority distinguished between the nature of administrative penalties and disgorgement, stating that administrative penalties are more akin to costs awards, which have been previously found to fall beyond the purview of s. 178(1)(e):9
Both a costs award and a penalty imposed by a regulator arise indirectly from deceitful conduct. Without the occurrence and sanctioning of that conduct, neither a penalty nor a costs award would exist. Fundamentally, however, both a costs award and an administrative penalty result from the regulator's choice to sanction the impugned conduct. Neither is the direct result of the deceit. In other words, but for Mr. Goldstein's fraud, there would have been no costs award. Similarly, but for the Poonians' fraud, there would be no administrative penalty.
The same could arguably be said about disgorgement orders, which "may" be made by the Commission or Executive Director "after a hearing" pursuant to s. 161 of the Securities Act:10
161 (1) If the commission or the executive director considers it to be in the public interest, the commission or the executive director, after a hearing, may order one or more of the following:
. . . . .
(g) if a person has not complied with this Act, the regulations or a decision of the commission or the executive director, that the person pay to the commission any amount obtained, or payment or loss avoided, directly or indirectly, as a result of the failure to comply or the contravention;
This was recognized by the opinion of the minority, dissenting on this issue, who stated:11
Both the disgorgement orders and the administrative penalties under the Securities Act are monetary sanctions for the unlawful conduct.
However, the majority also had regard to the differing implications of administrative penalties and disgorgement orders.
While both orders have a deterrent effect, the majority emphasized that one of the implications of a disgorgement order is that it causes the wrongdoer to relinquish their ill-gotten gains, thereby depriving the wrongdoer of any benefit.12 It was on this basis that the Court found disgorgement orders have a "direct link" to the fraudulent conduct, whereas administrative penalties do not.
Notably, the Superintendent of Bankruptcy made submissions that the purpose of s. 178(1)(e) is not only aimed at preventing wrongdoers from profiting, but is also aimed at making fraud victims whole. The Court stated:13
... Intervening on appeal, the Superintendent explains that s. 178(1)(e) "is aimed at making fraud victims whole, rather than at preserving penalties imposed for deterrence purposes" (I.F., at para. 18). By not releasing debts or liabilities that resulted directly from deceit, s. 178(1)(e) prevents debtors "from profiting as a result of their wrongdoing" (H.Y. Louie Co. v. Bowick, 2015 BCCA 256, 386 D.L.R. (4th) 117, at para. 47, per Newbury J.A., dissenting, but not on this point). I therefore disagree with my colleague that the "central focus" of s. 178(1)(e) is "deceitful conduct", not the "gain derived" from that conduct (para. 126 (emphasis deleted)). I am of the view that in the interpretation of s. 178(1)(e), "deceitful conduct" and "gain derived" are two inextricably linked concepts.
Where the Commission is able to recover funds from a disgorgement order, the funds may be returned to the investors who suffered harm at the hands of the respondent. Indeed, as recognized by the majority, s. 15.1 of the Securities Act and the regulations thereunder set out a notice and claims procedure for those who have suffered pecuniary loss as a result of the conduct that lead to the disgorgement order. Although compensation is not the objective of disgorgement ordersper se, in this sense they could be said to similarly be "aimed at making fraud victims whole".14 While, according to the Commission, administrative penalties can also be used to make payments to third parties harmed by the respondent's misconduct,15 this was not commented on in the decision inPoonian.
Ultimately, having found that the Poonians obtained funds as a result of their fraudulent market manipulation, the majority found that the disgorgement orders made by the Commission met the test under s. 178(1)(e) but administrative penalties did not.
Takeaways
Poonian makes clear that, pursuant to s. 178(1)(e) of the BIA, debts arising from funds that are obtained under false pretenses should not be discharged. However, it is possible for securities regulators to order disgorgement against a respondent who did not, in fact, receive the funds themselves, such as in cases where funds were diverted. Accordingly, in light of the Court's determination that s. 178(1)(e) does not require that the bankrupt be the recipient of the property or services obtained through fraud, circumstances may arise where a bankrupt will not be discharged from the amount of the funds obtained, regardless of the fact that they did not receive them.
In any event, as noted above, legislative reforms would be needed to address the distinction drawn by the Supreme Court with respect to the treatment of disgorgement orders and administrative penalties under the BIA, should policy makers find reform desirable. WhetherPoonianwill lead to substantive policy change remains to be seen.
Footnotes
1 McArthur, G, "B.C. Finance Minister lobbies Ottawa for amendment to Bankruptcy and Insolvency Act", Globe and Mail,February 4, 2020.
2 Poonian v. British Columbia (Securities Commission),2015 BCSECCOM 96, at para. 17
3 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at para. 4.
4 Bankruptcy and Insolvency Act,R.S.C. 1985, c. B-3, ss. 178(1)(a) and (e).
5 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at para. 26 and 81.
6 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at paras. 46-47. Notably, in contrast to s. 178(1)(a), s. 69.6 of the BIA expressly refers to administrative tribunals.
7 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at para. 54.
8 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at paras. 73 and 76.
9 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at para. 105. (emphasis added)
10 Securities Act,R.S.B.C. Ch. 418, s. 161(1)(g). (emphasis added)
11 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at para. 134.
12 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at para. 110.
13 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at para. 56. (emphasis added)
14 Poonian v. British Columbia (Securities Commission),2024 SCC 28, at paras. 75-76.
15 B.C. Securities Commission –Administrative Sanctions.
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