Regulatory penalties can potentially be wiped out by filing for bankruptcy, but disgorgement orders cannot, according to a ruling from the Supreme Court of Canada (SCC).
In a split decision released Wednesday, the SCC ruled that administrative penalties imposed by the British Columbia Securities Commission (BCSC) in a market manipulation case can be eliminated by the fraudsters filing for, and being discharged from, bankruptcy. However, the court held that the disgorgement ordered by the regulator does survive the bankruptcy.
The ruling stems from a securities fraud case involving market manipulation. The BCSC found that Thalbinder Singh Poonian and Shailu Poonian violated securities law when they manipulated the price of an energy company, OSE Corp., causing investors to lose millions of dollars.
In 2014, the BCSC ordered the Poonians to disgorge $5.6 million and to pay $13.5 million in penalties, and it sought to enforce those orders by registering them with the courts in B.C.
In 2018, the Poonians filed for bankruptcy, and in response to an application from the BCSC, the Supreme Court of British Columbia ruled that the regulator’s sanctions against them would survive the bankruptcy. That decision was upheld on appeal.
Now, however, the SCC has partly overturned these rulings.
The majority decision found that the disgorgement ordered against the Poonians does survive the bankruptcy, as this order represents the direct proceeds of their fraud, and so, it is exempted from discharge under bankruptcy law. However, it also ruled that this isn’t the case for the penalties imposed by the regulator.
Writing for the majority, Justice Côté (along with Chief Justice Wagner and Justices Rowe, Jamal and O’Bonsawin) held that the penalties imposed by the BCSC “did not result directly from the fraudulent scheme; rather, they arose indirectly as a result of the commission’s decision to sanction the Poonians.”
The majority also ruled that sanctions imposed by a regulator, and later registered with the courts, aren’t the same as sanctions imposed by a court and shouldn’t be treated the same as court rulings.
“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,” the majority said.
It also said that the enforcement order being registered with the courts doesn’t change the fact that the decision came from a regulator, not a court.
“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,” the majority said.
Two members of the court, Justices Karakatsanis and Martin, dissented from the majority and would have completely rejected the Poonians’ appeal.
While the dissenting justices agreed that there’s a distinction between decisions of regulators and decisions of courts, they said both penalties and disgorgement orders from a regulator should fall under the narrow exemptions from bankruptcy discharge involving fraud cases.
“They are both debts that originate from the bankrupts having obtained property by false pretenses or fraudulent misrepresentations. Both are monetary sanctions imposed because of, and thus resulting from, deceitful conduct that Parliament specifically sought to address,” they said.
Justices Karakatsanis and Martin likened regulatory penalties to punitive damages and said there’s no reason to allow them to be avoided by declaring bankruptcy.
“To exclude administrative penalties on the basis that they have an element of general deterrence amounts to reading in an additional limitation that is found nowhere in the text of the provision, and is inconsistent with the purpose of the exception,” the minority opinion said.
The dissenting justices added that the exemption under bankruptcy law “should ultimately be interpreted purposively so as to ensure that dishonest debtors do not benefit from their dishonesty.”
“This purpose would surely extend to a decision of a securities commission, charged with enforcing securities laws in order to protect the interests of the public and promoting the integrity of the capital markets,” they concluded.