The Supreme Court of Canada has ruled that people fined by provincial securities regulators can wipe out penalties through bankruptcy, but orders to pay back ill-gotten gains remain in place.
The ruling handed down Wednesday says penalties imposed by “administrative tribunals or regulatory agencies” are not covered by a list of exceptions in the Bankruptcy and Insolvency Act, which outlines specific types of debts that “survive bankruptcy.”
The case involved a B.C. couple, Thalbinder Singh Poonian and Shailu Poonian, who were ordered by the British Columbia Securities Commission (BCSC) to pay $13.5 million in administrative penalties and $5.6 million to repay those who lost money in a market manipulation scheme that “caused vulnerable investors to lose millions of dollars.”
A ‘bit of a blow’ to BCSC
University of British Columbia law professor Cristie Ford said the high court’s ruling is a “bit of a blow to the securities commission and its ability to protect investors in the capital markets.”
“It’s a powerful regulator with important priorities,” Ford said. “Sometimes, the important priorities that securities regulators are trying to take care of can run up against other important priorities when it comes to other areas of law.”
Ford said provincial securities regulators are empowered to penalize bad actors in the country’s capital markets, but this case saw it run up against a “deep constitutional question around what courts can do and what administrative tribunals or the executive can do.”
She said there is a “considerable challenge around making sure that securities commissions can be as effective as possible within the bounds of these constraints that are imposed by deep constitutional principles.”
“It’s tricky,” she said.
A majority of Supreme Court judges in the case ruled penalties are not exempt because they aren’t imposed by a court, and don’t directly result from fraudulent conduct, but rather are made “indirectly” through the commission’s decision to sanction the Poonians.
The court ruled that if debts from administrative penalties did survive bankruptcy by being covered by the law’s exemptions, there would be “potential to capture debts or liabilities that are not the direct result of deceit.”
The court found, however, that disgorgement orders issued by the regulator “represent the value of the bankrupts’ fraud — the funds that they gained as a result of their market manipulation.” A disgorgement order is a type of sanction that requires someone to give up funds that they obtained as a result of their misconduct.
“There is therefore a direct link between the fraudulent conduct of the bankrupts and the commission’s disgorgement orders,” the ruling says.
The high court said if Parliament wanted fines or penalties levied by regulators like the commission to survive bankruptcy, “it could have said so expressly.”
Amending Canada’s Bankruptcy and Insolvency Act, Ford said, would “be the simplest fix for this problem,” but whether that happens is unclear.
“I can’t really say whether or not Parliament is going to take up this invitation to amend the bankruptcy act,” she said.
“While an amendment to the bankruptcy act would fix this immediate problem, it is sort of more of a Band-Aid solution to a bigger problem, which is that securities commission priorities don’t always fit perfectly well with other parts of the law.”