British Columbia Couple Successful in Bankruptcy Battle Against Securities Regulator

The Supreme Court of Canada has ruled that individuals who have been fined by provincial securities regulators can eliminate penalties through bankruptcy, although orders to repay ill-gotten gains remain in effect.

In a decision issued on July 31, the court stated that penalties imposed by “administrative tribunals or regulatory agencies” are not exempted by the Bankruptcy and Insolvency Act, which specifies particular types of debts that “survive bankruptcy.”

This ruling pertained to a B.C. couple, Thalbinder Singh Poonian and Shailu Poonian, who were directed by the British Columbia Securities Commission to pay $13.5 million in administrative penalties and $5.6 million to reimburse those affected by a market manipulation scheme that resulted in significant financial losses for vulnerable investors.

Cristie Ford, a law professor at the University of British Columbia, noted that the Supreme Court’s decision could impact the securities commission’s ability to safeguard investors in the capital markets.

Although provincial securities regulators have the authority to penalize wrongdoers in the country’s capital markets, this case raised a fundamental constitutional question related to the powers of courts, administrative tribunals, and the executive branch.

Ford emphasized the significant challenge of ensuring that securities commissions can effectively operate within the limits imposed by constitutional principles.

The majority of the Supreme Court determined that penalties do not qualify for exemptions because they are not imposed by a court and do not directly relate to fraudulent activities but rather stem indirectly from the commission’s decision to penalize the Poonians.

The court concluded that including debts from administrative penalties in the bankruptcy exemptions could potentially encompass liabilities that are not directly linked to fraudulent behavior.

However, the court affirmed that disgorgement orders issued by the regulator symbolize the amount of the bankrupts’ fraud—specifically, the proceeds gained from their market manipulation.

“Therefore, there exists a direct connection between the fraudulent actions of the bankrupt individuals and the regulator’s disgorgement orders,” as stated in the ruling.

The Supreme Court highlighted that if Parliament intended for fines or penalties imposed by regulators like the commission to endure bankruptcy, it would have explicitly stated so.

Ford suggested that amending the Bankruptcy and Insolvency Act in Canada would be the most straightforward solution to this issue, but the likelihood of such an amendment remains uncertain.

“It’s unclear whether Parliament will act on the opportunity to amend the bankruptcy act,” she remarked. “While amending the bankruptcy act could address this immediate issue, it essentially serves as a temporary fix for a larger problem—namely, that the priorities of securities commissions do not always align seamlessly with other areas of the law.”