On July 31, 2024, five of seven Supreme Court of Canada justices allowed, in part, the appeal of Thalbinder and Shailu Poonian from a British Columbia Court of Appeal decision: Poonian et al. v. BC Securities Commission, 2024 SCC 28.
Justice Suzanne Côté
Subsection 178(1) of the Act lists certain kinds of debts that are not released by an order of discharge and that can survive bankruptcy. These “exceptions” to the usual rule that a discharged bankrupt is released from debts so that they may make a financial fresh start include “any debt or liability resulting from obtaining property or services by false pretenses or fraudulent misrepresentation” (s. (178(1)(e)) and s.178(1)(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.”
The Supreme Court was asked to determine whether the AMPs and/or the disgorgement orders imposed by the provincial securities commission would survive a discharge from bankruptcy under one of these exceptions.
The case arose when the BC Securities Commission determined on Aug. 29, 2014, that the Poonians, together with a number of relatives, friends and acquaintances, had engaged in market manipulation, in violation of s.57(a) of the provincial Securities Act. The Poonians had acquired a majority position in a public oil and gas company called OSE Corp. and then increased the price of OSE’s shares by various stock manipulations, including trades between themselves. Using pseudonyms and multiple nominee accounts, they artificially inflated OSE’s 10- to 17-cent share price to a high of almost $2. Consequently, many unsophisticated investors, who wanted to escape their personal debts through higher-yielding investments, purchased the OSE shares at the artificially inflated prices and lost millions of dollars.
As a result of the AMPs and disgorgement orders, the Poonians together owe about $19 million (plus interest) to the commission. (They also owe $4.3 million to their next largest creditor, the Canada Revenue Agency.)
The securities commission’s sanctions were registered with the B.C. Supreme Court pursuant to s.163 of the Securities Act, which states that, on filing in the court’s registry, a commission decision has the same force and effect, and all proceedings may be taken on it as if it were a judgment of that court.
In 2018, the appellants made a voluntary assignment in bankruptcy, but their application to be discharged from bankruptcy, which was opposed by the commission and the CRA, was dismissed by the B.C. Supreme Court in 2020. They remain undischarged bankrupts.
The commission successfully applied to the B.C. Supreme Court for a declaration that, pursuant to s.178(1)(a) and (e) of the BIA, the debts represented by the AMPs and disgorgement orders are not to be released by any order of discharge. The chambers judge allowed the commission’s application, finding that the debts were exempt from, and would survive, any discharge under both the ss.178(1)(a) and (e) exceptions.
The B.C. Court of Appeal held in 2022 that the AMPs and disgorgement orders would survive any future bankruptcy as both debts are exempted from discharge under s. 178(1)(e) of the BIA: Poonian v. British Columbia (Securities Commission), 2022 BCCA 274.
At the Supreme Court of Canada, all seven judges affirmed the B.C. Court of Appeal’s holding that the s. 178(1)(a) exception does not apply to the AMPs and disgorgement orders because the commission’s orders were not “imposed by a court” (notwithstanding that they are registered with the B.C. Supreme Court).
Justice Andromache Karakatsanis
In reasons backed by Chief Justice Richard Wagner and Justices Malcolm Rowe, Mahmud Jamal and Michelle O’Bonsawin, Justice Suzanne Côté agreed with the minority that the s. 178(1) (e) exception captures the disgorgement orders (requiring the Poonians to give the commission their gains from fraudulently misrepresenting the value of the shares) and, therefore, will not be released by any possible future order of discharge.
However, “the administrative penalties imposed by the commission do not fall within the exceptions set out in either ss.178(1)(a) or (e) and therefore do not survive a discharge from bankruptcy on those bases,” Justice Côté held for the majority.
Justice Côté explained that for a debt or liability to survive bankruptcy under s.178(1)(e), the creditor must establish: (1) false pretenses or fraudulent misrepresentation, (2) a passing of property or provision of services and (3) a link between the debt or liability and the fraud. She also explains how to prove these elements, adopting a more restrictive view than the minority on how the third element is made out.
Justice Côté held that in the case at bar the first two elements were met. However, the third requirement “is not met in the case of the administrative penalties, which therefore do not survive a discharge from bankruptcy under s.178(1)(e),” she ruled.
“A direct link between the debt or liability and the fraudulent conduct is required, and it is only the value of the property or services obtained as a result of that conduct that is not released by an order of discharge,” she said. “The debt represented by the commission’s administrative penalties did not result directly from the bankrupts’ fraudulent misrepresentation but arose indirectly as a result of the commission’s decision to sanction them for having obtained property through deceitful statements to investors. If the exempt debt or liability is not restricted to the value of the property or services obtained by false pretenses or fraudulent misrepresentation, then s.178(1)(e) has the potential to capture debts or liabilities that are not the direct result of deceit.”
Dissenting on this issue in an opinion endorsed by Justice Martin, Justice Karakatsanis interpreted the ambit of s. 178(1)(e) differently.
“There is disagreement with the majority regarding the scope of the causation requirement contemplated by the words ‘resulting from’ in s.178(1)(e) and the degree of link required between the debt and the deceitful behaviour,” she wrote. “Just as s.178(1)(e) does not require that there be an exact correlation between the person claiming the exemption and the victims of that deceitful conduct, it does not require that the quantum of the debt or liability be limited by the quantum of the property obtained as a result of that deceitful conduct,” Justice Karakatsanis reasoned. “Such a requirement is unsupported by the jurisprudence, is not found in the text of the provision, and is inconsistent with the provision’s central focus. The central focus is the deceitful conduct at the source of the debt or liability, not the exact gain derived thereby.”
Justice Karakatsanis noted s. 178(1)(e) is a “moral sanction” aimed at preventing the bankrupt from being rewarded by a release of liability because of their undeserving conduct that resulted in others’ detrimental reliance. “Focusing only on the gain derived in the abstract would circumvent the precise mischief s.178(1)(e) was meant to address, as it would permit bankrupts to benefit from their dishonesty through a release of liability, even when the debt directly results from the specific misconduct targeted by Parliament,” she wrote. “Rehabilitation of the bankrupt is not best served if the bankrupt can obtain a discharge for liabilities directly resulting from fraudulent conduct.”
In ruling for a unanimous court that the commission’s disgorgement orders are captured by the s.178(1)(e) exception and will not be released by any order of discharge, Justice Côté remarked that where a person has not complied with a provision of the Securities Act, the securities commission may order that person to pay to it any amount obtained as a result of the failure to comply.
“The disgorgement orders were made under the Securities Act and represent the value of the bankrupts’ fraud — the funds that they gained as a result of their market manipulation,” she said. “There is therefore a direct link between the fraudulent conduct of the bankrupts and the Commission’s disgorgement orders.”
Turning to the court’s unanimous conclusion that the AMPs and disgorgement orders were imposed by the commission, not by a court, and therefore are not captured by the s.178(1)(a) exception, Justice Côté explained that for a debt to survive bankruptcy under s.178(1)(a), the creditor must establish that the debt is (1) a fine, penalty, restitution order or other order similar in nature, (2) imposed by a court and (3) imposed in respect of an offence.
“This provision is not restricted to penalties associated with criminal or quasi‑criminal proceedings,” she said. “However, the word ‘court’ does not capture administrative tribunals or regulatory bodies.”
“If Parliament had wanted fines, penalties, restitution orders or other orders similar in nature imposed by regulatory bodies, administrative tribunals or other administrative decision-makers to be exempt from discharge under this section, it could have said so expressly,” Justice Côté wrote. “Moreover, this provision cannot be read so broadly as to include fines imposed by tribunals that are registered in a court. The registration of a decision with a court does not change the fact that it was made and imposed by an administrative decision-maker, nor does it overcome the requirement that the exempt debt be imposed by a court,” she reasoned.
Explained Justice Côté, “When a decision is registered with a court, the court’s involvement is passive, whereas the act of ‘imposing’ a fine, penalty, restitution order or other order similar in nature requires that the court be actively involved in making the decision. In the instant case, the administrative penalties and disgorgement orders were imposed by the commission, not by a court, and therefore are not captured by s.178(1)(a).”
Counsel for the Poonians, Cody Reedman of Vancouver’s Reedman Law, declined to comment on the decision.
Doug Muir, director of enforcement, BC Securities Commission
“We’re very important regulators in Canada. The Supreme Court of Canada has recognized that time and time again,” he said. “We would continue to advocate for changes to the BIA, including by working with our other colleagues across Canada and other securities regulators across Canada.”
The securities commission has “mixed feelings” about the Supreme Court’s decision that will also affect other provincial securities regulators, he said.
“We’re pleased that the court clarified that our disgorgement orders would survive bankruptcy under the BIA,” he said. “Of course, we’re disappointed though that our administrative penalties will not survive, and the legislation did not allow them to survive, as the court determined. Those are very important orders that our panels issue following hearings. And we think they’re very important for deterrence and to protect the public. So, the fact that those don’t survive bankruptcy is troubling.”
Muir said the commission will oppose a bankruptcy discharge for the Poonians should they reapply under the BIA. One of the bases on which the bankruptcy court refused to discharge them previously was “the lack of rehabilitation on their part,” Muir said. “They certainly continued to deny that they’ve done anything wrong, and the debt should be owed and … one thing that the discharge judge pointed out, in this case, is they’ve made no efforts to try to pay their debt … We’ll have to decide what arguments we would make if that application comes around again.”
Muir said the trustee in bankruptcy in the Poonians’ case was able to realize a total of about $3,000 in assets. “So, we got less than $1,000 through their bankruptcy,” he remarked.
Bigger picture, Muir said about 44 individuals and entities who have been financially sanctioned by the commission since 2001 have gone through bankruptcy. “They’ve been ordered to pay about $83.3 million,” he said. “Whether or not it survives remains to be seen.”
The fact that a bankruptcy discharge extinguishes administrative financial penalties undercuts the deterrent effect of AMPs, he noted.
“Going forward, we’re still going to continue to seek these orders from our panels,” Muir advised. “We’re going to continue to use the powers we have under our Act and other legislation to try to collect the money if these people refuse to pay, and we’ll continue to oppose discharge from bankruptcy in the cases as well.”
The appeal at the Supreme Court attracted nine interveners, including the attorneys general of B.C., Ontario, Alberta and Saskatchewan as well as the Superintendent of Bankruptcy and the Canadian Association of Insolvency and Restructuring Professionals.
The Federation of Law Societies of Canada, the umbrella group for the country’s 14 legal regulators, also intervened to argue that the top court should not pronounce on s. 178(1) (d) of the BIA, which was not an issue in the appeal.
As it turned out, the Supreme Court’s judgment does not refer to the s. 178(1) (d) exception, which provision states that an order of discharge does not release the bankrupt from “any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others.”
However, the Federation noted in its factum that the Alberta Court of Appeal's decision in Alberta Securities Commission v. Hennig, 2021 ABCA 411, found an “obvious” analogy between ss. 178(1) (d) and (e), such that a “direct link” between the debtor and creditor was required under both.
“If accepted, that view could undermine law society disciplinary processes,” the Federation warned. “Like securities commissions, law societies have a public interest mandate to impose monetary sanctions in appropriate cases for professional misconduct. Those sanctions may include fines, cost awards, and orders for the reimbursement of compensation paid to clients. But if (d) requires a ‘direct link,’ the provision could become unavailable to law societies when members make an assignment into bankruptcy. In turn, this could allow members to escape the consequences of law society sanctions, diminishing those sanctions’ effectiveness or encouraging law societies to impose other sanctions, like suspensions, that may be less well tailored to the public interest.”
Photo of Justice Suzanne Côté: Phillippe Landreville, SCC Collection
Photo of Justice Andromache Karakatsanis: Jessica Deeks Photography, SCC Collection
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