Court Concludes that Securities Commission Administrative Penalty is Not Discharged Through Bankruptcy

In the recent decision of Alberta Securities Commission v. Hennig (2020 ABQB 48), the Alberta Court of Queen’s Bench (Court) addressed the question of whether an administrative penalty imposed by a securities regulator could survive discharge in bankruptcy of the person subject to the penalty.

BACKGROUND

In 2008, the Alberta Securities Commission (Commission) imposed C$575,000 in administrative penalties (Penalty) against an individual (Respondent) for contravening Alberta securities laws and acting contrary to the public interest by, among other things, (a) being responsible for misrepresentations in the financial statements of a public company of which he was an officer; (b) failing to disclose certain commission payments made to him; and (c) engaging in market manipulation.
 
The Commission’s decision imposing the Penalty was certified by the Court and therefore had the force and effect of a judgment of the Court. The Respondent’s appeal of the Commission’s decision was dismissed in 2010.

The Respondent filed an assignment in bankruptcy in 2011 and was discharged as a bankrupt pursuant to the “fresh start” provisions of the Bankruptcy and Insolvency Act (Canada) (BIA) in 2015.

The Commission took the position that the Penalty survived the bankruptcy pursuant to certain exclusions to the “fresh start” rule found in the BIA and applied to the Court for a declaration to that effect.

THE “FRESH START” RULE AND ITS EXCEPTIONS

Generally, a bankrupt is released from all debts following a discharge from bankruptcy. However, there are important exceptions to this “fresh start” rule found in s. 178(1) of the BIA, including that (a) fines, penalties or orders similar in nature imposed by a court in respect of an offence (s. 178(1)(a)) and (b) debts arising from obtaining property or services by false pretences or fraudulent misrepresentation (s. 178(1)(e)) are not discharged through bankruptcy.

THE PENALTY WAS NOT DISCHARGED

The Court’s decision that the Penalty survived bankruptcy was guided by the policy objective underlying the statutory exceptions to the “fresh start” rule—a debtor who has engaged in dishonest conduct will not be entitled to the benefit of “fresh start” provisions that are intended to protect an honest but hapless debtor. The Court found that the Penalty was not discharged by operation of both s. 178(1)(a) and 178(1)(e) of the BIA, holding that the Penalty was (a) a debt that resulted from obtaining property by false pretense or fraudulent misrepresentation or, alternatively, (b) a fine imposed by a court in respect of an offence.

The Court found that the payments made to the Respondent that were not properly disclosed amounted to property that he obtained by false pretense or fraudulent misrepresentation, and therefore, s. 178(1)(e) applied. The Court also concluded that in the specific circumstances of this case, the Penalty amounted to a judgment of the Court with respect to an offence, as the Commission’s decision was upheld on appeal and was registered with the Court.

The Court’s decision in this case appears to be the first reported decision to conclude that administrative penalties awarded by a securities regulator may not be subject to the “fresh start” discharge provisions found in the BIA. Given the fact specific nature of the Court’s decision, including the procedural history of the registration of the Commission’s decision imposing the Penalty and the dismissal of the Respondent’s appeal, it remains to be seen whether the same result will occur in subsequent cases and in other jurisdictions.

For further information, please contact:

Sean Boyle                   604-631-3344
Peter Bychawski         604-631-4218
Claire Hildebrand       604-631-3331

or any member of our Securities Litigation or Restructuring & Insolvency groups.