(Ottawa) The Supreme Court of Canada has ruled that people fined by a provincial securities commission can avoid those penalties in bankruptcy, but not repayment of the amounts fraudulently obtained.
The decision issued Wednesday says orders issued by administrative courts or regulatory agencies, such as securities commissions, are not covered by a list of exceptions in the Bankruptcy and Insolvency Actwhich describes the specific types of debt that “remain after bankruptcy.”
The case involved a British Columbia couple, Thalbinder Singh Poonian and Shailu Poonian, who were ordered by that province’s Securities Commission to pay $13.5 million in administrative penalties.
The commission also ordered them to hand over approximately $5.6 million, “an amount that corresponded to what they had gained from the market manipulation scheme.” […] thereby causing vulnerable investors to lose millions of dollars,” the Supreme Court recalled.
Cristie Ford, a law professor at the University of British Columbia, said the top court’s decision is “a major blow to the securities commission and its ability to protect investors in the financial markets.”
“It is a powerful regulator, with important priorities,” said Mr.me Ford. Sometimes the important priorities that securities regulators are trying to address can clash with other important priorities in other areas of the law.”
Professor Ford argues that provincial securities regulators have the power to penalize bad actors in the country’s financial markets, but this case ran into “a profound constitutional question about what the courts can do and what administrative tribunals or the executive can do.”
She said there is “a considerable challenge to ensure that securities commissions can be as effective as possible within these constraints imposed by deep constitutional principles.”
“It’s tricky,” admits the law professor.
“Indirect” sanctions
A majority of the Supreme Court justices held that these sanctions are not exempt because they are not imposed by a court and do not result directly from fraudulent conduct, but rather are imposed “indirectly” through the commission’s decision to sanction the couple.
The court ruled that if debts resulting from administrative sanctions survived bankruptcy and were covered by the law’s exemptions, there would be an opportunity to “target debts or obligations that did not directly result from the deception.”
The court, however, found that the restitution orders issued by the regulator “correspond to the value of the bankrupts’ fraud, that is, the funds they obtained by manipulating the market.”
“There is therefore a direct link between the fraudulent act of the bankrupts and the Commission’s orders for remission,” the majority judges concluded.
The Supreme Court held that “if Parliament had intended to exempt from the application of the release order under this provision fines, penalties, restitution orders or other similar orders imposed or made by administrative agencies, administrative tribunals or other administrative decision-makers, it could have done so expressly.”
According to Professor Ford, “the simplest solution to this problem” would indeed be to modify the Bankruptcy and Insolvency Act from Canada, but it is unclear whether this will happen.
I can’t really say whether or not Parliament will respond to this invitation. Even if an amendment to the Bankruptcy Act solved this immediate problem, it is more of a Band-Aid solution to a larger problem, which is that the priorities of securities commissions do not always fit neatly with other sections of the act.
Cristie Ford, professor of law at the University of British Columbia