The chair of the British Columbia Securities Commission is calling on the federal government to change legislation to protect investors after the Supreme Court of Canada ruled fines issued by regulators can be wiped out by bankruptcy.
Brenda Leong said the high court’s ruling is a “set back,” but also a “partial win” for investors because the direction to pay back ill-gotten gains — known as disgorgement orders — will remain in place even after an individual is discharged from bankruptcy.
“This commission has long advocated for changes to the bankruptcy legislation in order to expressly exempt securities sanctions,” Leong said at a news conference Wednesday. “The federal government needs to act now to make that change in order to protect investors in this country.”
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 to pay $13.5 million in administrative penalties and to repay $5.6 million to those who lost money in a market manipulation scheme that “caused vulnerable investors to lose millions of dollars.”
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.”
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“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 the high court 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.”
“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 will happen is unclear.
“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,” she said.
Jassmine Girgis, a University of Calgary law professor who specializes in bankruptcy and insolvency law, said Wednesday that she understands the set back for provincial securities commissions is significant.
“I feel for the securities commission. I mean, these are massive penalties that they’re not getting, and it’s important that they are able to collect their penalties because their functioning requires that,” she said. “But it’s also really important that the legislation be read the way that it is written and according to its purpose.”
Girgis said the high court distinguished between penalties issued by the regulator and disgorgement orders, which corresponds with how much was obtained through deceitful conduct and used to pay back amounts taken from victims.
“The securities commission is not the victim of the fraud,” she said. “But that doesn’t mean that Parliament can’t revisit this and give something to the securities commission.”
Girgis said there had been competing findings by courts in B.C., Alberta and Manitoba on the issue, and the Supreme Court’s ruling Wednesday clears up those disagreements.
“It’s probably why the Supreme Court wanted to hear this, but maybe now that there has been a clear voice from the Supreme Court, maybe the federal government would be interested in revisiting it,” Girgis said.
The Poonians, she said, still remain in bankruptcy and haven’t been discharged, so their debts to the B.C. Securities Commission and the Canadian Revenue Agency remain in place for now, and in bankruptcy law, “that’s the price you pay for being a dishonest debtor.”
“These are long, hard-fought policy battles between different stakeholders,” Girgis said. “It leaves the court in a situation where they’re supposed to interpret the legislation and the court here did, which is great, and once they do that, then I guess it’s up to Parliament to consider: do we need to change something?”
This report by The Canadian Press was first published July 31, 2024.
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