In the April 2022, Toronto Law Journal, I wrote an article entitled “There is No Afterlife for Administrative Monetary Penalties After Bankruptcy”. In that article I used the following hypothetical.
A securities broker may be alleged to have defrauded investors by making false statements regarding the use of their funds, and by using invested funds for improper purposes.[1] In the administrative regime, the securities broker may face restrictions on professional activities or an administrative monetary penalty (“AMP”) of not more than a $1 million for each failure to comply.
Following the imposition of a significant AMP in the millions of dollars, that same securities broker may think that she was fortunate that she was not prosecuted for fraud under the Criminal Code. She may also take some solace in the thought that the AMP, unlike a criminal fine in relation to fraudulent conduct, would not survive a pending bankruptcy. This would enable her to get on her feet again.
Securities regulators take a different view and would argue that extinguishing the AMP would undermine the deterrent effect of the penalty imposed.[2]
The cases were split. The Alberta Court of Appeal in Alberta Securities Commission v. Hennig.[3] held that AMPs for contraventions of securities laws related to misrepresentations are extinguished by a bankruptcy. The Court of Appeal majority (Watson and Khullar JJA) held that exceptions to the release of liabilities under s 178(1) of the Bankruptcy and Insolvency Act (BIA) “should be construed narrowly and applied only in clear cases.”[4]
The British Columbia Court of Appeal went the other way in the case of Poonian v. British Columbia (Securities Commission)[5]. Justice Willcock concluded that both the administrative penalties and the disgorgement orders imposed by the Commission were non dischargeable debts under s. 178(1)(e), because they had arisen from the Poonians having obtained property by false pretences or fraudulent misrepresentation.
In 2024 the Supreme Court of Canada resolved the debate in the decision in Poonian[6] by confirming that there really is no afterlife for AMPs after bankruptcy except for disgorgement orders of amounts obtained as a result of fraudulent conduct.
The majority judgment was written by Justice Côté who summarized the penalties and disgorgement order as follows:
The appellants, Thalbinder Singh Poonian and Shailu Poonian, are undischarged bankrupts. Between 2007 and 2009, the Poonians engaged in market manipulation that caused vulnerable investors to lose millions of dollars. The Commission found that the Poonians had contravened s. 57(a) (now s. 57(1)(a)) of the Securities Act. It ordered the payment of administrative penalties by both Mr. Poonian ($10 million) and Ms. Poonian ($3.5 million). The Commission also issued orders pursuant to s. 161(1)(g) of the Securities Act 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. The disgorgement orders represent the amounts the Poonians obtained as a result of the market manipulation scheme.[7]
The question before the Court was whether the administrative penalties and/or the disgorgement orders imposed by the Commission can be characterized as either “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” (s. 178(1)(a)) or “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim” (s. 178(1)(e)). If so, they will not be released by any order of discharge and will survive bankruptcy.
The Court concluded that the administrative penalties imposed by the Commission do not fall within the exceptions set out in either s. 178(1)(a) or (e) and therefore do not survive a discharge from bankruptcy on those bases. Justice Côté also concluded that the disgorgement orders imposed by the Commission do not fall within the s. 178(1)(a) exception and do not survive a discharge from bankruptcy on that basis. However, they are captured by s. 178(1)(e) and therefore will not be released by any possible future order of discharge.
THE FACTS
In order to fully appreciate the decision in the case of Poonian, it is helpful to briefly review the facts. The British Columbia Securities Commission found that the Poonians, together with a number of relatives, friends and acquaintances, had engaged in market manipulation, contrary to s. 57(a) of the Securities Act. The Poonians had acquired a majority position in a public oil and gas company called OSE Corp. (“OSE”) and had then increased the price of OSE’s shares by various manipulations, including trades between themselves. Using pseudonyms and multiple nominee accounts, they had artificially inflated the share price from $0.10 to $0.17 per share to a high of near $2.00.
The Commission found that the Poonians, and those working with them in this scheme, had sold the overpriced OSE shares to investors with the assistance of an entity called the Phoenix Group. The Poonians had paid commissions to the Phoenix Group, which had in turn encouraged its clients, generally unsophisticated investors seeking to escape personal debt through investment in higher yield vehicles, to purchase OSE shares at the artificially inflated prices.
The Commission described the scheme as “serious misconduct” and as “elaborate, involving layers of deception to conceal the . . . participation [of the Poonians and their associates] in the manipulation”[8] The Commission ordered the payment of administrative penalties by Mr. Poonian ($10 million) and Ms. Poonian ($3.5 million). The Commission later issued orders pursuant to s. 161(1)(g) of the Securities Act, which are commonly referred to as disgorgement orders. Mr. Poonian was ordered to disgorge $1,319,167 to the Commission and an additional $1,126,260 on a joint and several basis with another participant in the scheme, and Ms. Poonian was ordered to disgorge $3,149,935. As a result, the Poonians together owed $19,095,362 (plus interest) to the Commission. These sanctions were registered with the Supreme Court of British Columbia pursuant to s. 163 of 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 all proceedings may be taken on it, as if it were a judgment of that court. The Poonians owed $4,335,252.60 to their next largest creditor, the Canada Revenue Agency.
Subsequently the Poonians made a voluntary assignment in bankruptcy and applied for discharge from bankruptcy, which the Commission and the Canada Revenue Agency opposed.
COMPETING PRINCIPLES
Justice Côté traces the rationale behind the discharge provisions in the BIA as furthering two important purposes: “the equitable distribution of a bankrupt’s assets among creditors and the bankrupt’s financial rehabilitation. Financial rehabilitation means that a debtor will be afforded a “fresh start” when appropriate. The fresh start principle is codified in s. 178(2) of the BIA; it allows a bankrupt to be released from outstanding debts at the end of the bankruptcy process. Thus, subject to reasonable conditions, the BIA permits an honest but unfortunate debtor to be freed from the burdens of indebtedness and to reintegrate into economic life.”[9]
While financial rehabilitation is an important goal of the BIA, the Court observes that it has its limits. These limits are set out in both ss. 172 and 178(1) of the BIA. Section 172 provides that an order of discharge may be granted, refused, its operation may be suspended, or it may be granted subject to conditions. Section 178(1) lists specific debts that are not released by discharge and that survive bankruptcy. “These provisions demonstrate Parliament’s attempt to balance financial rehabilitation with other policy objectives, such as confidence in the credit system, that require certain debts to survive bankruptcy”.[10]
THE STUMBLONG BLOCK OF “IMPOSED BY A COURT”
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:
178 (1) 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, or any debt arising out of a recognizance or bail;
Justice Côté rules that the fines, penalties, restitution orders and other orders that the BIA exempts are not restricted to those imposed in a criminal or quasi criminal context. To that extent, an AMP might fall within the exception. The stumbling block, however, are the words “imposed by a court”. The key passage in the decision deals with this stumbling block:
However, the word “court” in s. 178(1)(a) does not capture administrative tribunals or regulatory bodies. The term “court” implies that a dispute will be adjudicated by a judge or judges (Black’s Law Dictionary (11th ed. 2019), at p. 444). By comparison, an “administrative tribunal” is “[a] court like decision making authority that resolves disputes [or] an administrative agency exercising a quasi judicial function” (p. 1814). A “regulatory agency” can be defined as “[a]n official body, esp. within the government, with the authority to implement and administer particular legislation” (pp. 77 78 and 1538). “Court” refers to the judiciary, whereas administrative bodies are hybrid entities “falling between the judiciary and government departments created to perform as separate bodies functions transferred from both” (L. Sossin, Practice and Procedure Before Administrative Tribunals (loose leaf), at § 2:1).[11]
The Court then deals with the potential application of the section 178(1)(e) exception:
178 (1) An order of discharge does not release the bankrupt from
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim
Here the stumbling block to an AMP surviving bankruptcy is the stubborn fact that an AMP does not arise directly from fraudulent misrepresentation but rather is the result of a sanction decision:
The debt represented by the Commission’s administrative penalties did not result directly from the Poonians’ fraudulent misrepresentation. Rather, it arose indirectly as a result of the Commission’s decision to sanction the Poonians for having obtained property through deceitful statements to investors (Girgis and Telfer (2023), at p. 448; Nocilla, at p. 186).[12]
The administrative penalties are not the direct result of the Poonians’ fraudulent misrepresentation. They do not survive a discharge from bankruptcy under s. 178(1)(e).[13]
DISGORGEMENT ORDERS ARE DIFFERENT
While the administrative penalties did not result from the Poonians having obtained property by fraudulent misrepresentation, Justice Côté held that the situation is different for the disgorgement orders:
The amounts that the Poonians have been ordered to pay under s. 161(1)(g) represent the amounts they obtained as a result of their fraudulent market manipulation. There is therefore a direct link between their fraudulent conduct and the Commission’s disgorgement orders. While I have concluded that the Commission need not have been directly victimized by the Poonians’ conduct in order to claim that the disgorgement orders are non dischargeable under s. 178(1)(e), the victim investors may very well be the ultimate recipients of the sums of which they were deprived, provided that they submit appropriate claims in accordance with the s. 15.1 procedure.
The Commission’s disgorgement orders are captured by the s. 178(1)(e) exception and will not be released by any order of discharge.[14]
In the final result the Commission’s application for a declaration that the amounts the Poonians owe by way of administrative penalties shall not be released by any order of discharge was dismissed. However, the chambers judge’s order that the amounts the Poonians owe to the Commission pursuant to the disgorgement orders shall not be released by any order of discharge was upheld.
POLICY IMPLICATIONS
The decision of Justice Côté respects the institutional reality of administrative monetary penalties being imposed in a setting that does not have the institutional protections of a court, including robust rules of evidence.
This case will have major implications for strategic decisions of regulators in their proceedings against individuals who may avoid paying the AMPS imposed by declaring bankruptcy. This decision may lead to a more robust use of the restorative justice pyramid as regulators may use offence proceedings instead, where the fines may not be extinguished by a bankruptcy.
From a reform perspective, the question arises as to whether Parliament ought to consider amending section 178 to explicitly refer to AMPS such that they would live on in the afterlife after bankruptcy in the same way that fines from offences do.
I would recommend against this type of amendment because AMPs are truly different from offences.
AMPs are decided with lower procedural protections than those in a court, including different standards for receipt of evidence.[15] AMPs vary widely in type, nature, seriousness, and administrative processes.[16]
If regulators want penalties to survive bankruptcy, the better vehicle would be to rely on existing regulatory offences or Criminal Code offences that would be prosecuted in a Court, where the actus reus at least is proven beyond a reasonable doubt. The fines obtained in these forums presently live on in the afterlife of bankruptcy under section 178 of the BIA as it now exists. The criminal and regulatory route ensures that those who commit fraud cannot simply declare bankruptcy to avoid the consequences of their bad conduct. This approach would be consistent with a restorative justice pyramid.
[1] Meharchand (Re), 2019 ONSEC 7, 42 O.S.C.B. 1135, 2019 CarswellOnt 1504 (Ont. Securities Comm.).
[2] Alberta Securities Commission v. Hennig, [2021] A.J. No. 1667, 2021 ABCA 411 at para. 100.
[3] Alberta Securities Commission v. Hennig, [2021] A.J. No. 1667, 2021 ABCA 411
[4] Alberta Securities Commission v. Hennig, [2021] A.J. No. 1667, 2021 ABCA 411 at para. 25.
[5] Poonian, 2022 BCCA 274, 65 B.C.L.R. (6th) 213 (Harris, Willcock and Fenlon JJ.A.).
[6] Poonian v. British Columbia (securities Commission), 2024 SCC 28.
[7] Poonian at para. 4.
[8] Poonian (Re), 2015 BCSECCOM 96 (CanLII) (“Sanctions Decision”), at para. 17.
[9] Poonian at para. 1.
[10] Poonian at para. 22.
[11] Poonian at para. 46.
[12] Poonian at para. 103.
[13] Poonian at para. 107.
[14] Poonian at paras. 113 to 114.
[15] “Clear and Convincing” Evidence Cannot Reside in the House of Balance of Probabilities: A Scientific Approach” The Advocates’ Quarterly (March, 2021) 51 Advoc. Q. 315 written with Justice Todd Archibald
[16] See Archibald and Jull, Profiting from Risk Management and Compliance (Thomson Reuters 2023) Chapter 6 “The Growth and Validity of Administrative Monetary Penalties”
