By Haddon Murray, Partner, Gowling WLG (Canada) LLP, Heather Fisher, Associate, Gowling WLG (Canada) LLP, and James Aston, Associate, Gowling WLG (Canada) LLP

The Supreme Court of Canada recently released its decision in Thalbinder Singh Poonian v British Columbia Securities Commission. CAIRP intervened before the Supreme Court to make submissions in this case.

The case arose out of a decision by the British Columbia Securities Commission (the “Commission”) that the Poonians had engaged in a market manipulation scheme. The Commission ordered that the Poonians pay $13.5 million in administrative monetary penalties (“AMPs”) and approximately $5 million to disgorge amounts obtained through their market manipulation.

The Poonians then made assignments in bankruptcy.

The Poonians’ application for a discharge order was dismissed. The Commission then sought an order that, pursuant to section 178(1) of the Bankruptcy and Insolvency Act, RSC, 1985, c. B-2, as amended (the “BIA”), that the amounts owed by the Poonians to the Commission shall not be released by any order of discharge granted to the Poonians. Both the BC Supreme Court and Court of Appeal held that the debts would not be released.

CAIRP’s Intervention

Nine parties intervened on the appeal to the Supreme Court of Canada, including CAIRP (represented by the authors of this article).

CAIRP took the position that section 178(1) of the BIA should be interpreted consistently with the scheme of the BIA, particularly the Bankruptcy Court’s discretion to set the terms for the discharge of a bankrupt (or to refuse the discharge) under section 172. Because section 178(1) interferes with the Court’s discretion, it should be narrowly construed. Accordingly, CAIRP submitted that AMPs are best addressed by permitting the Bankruptcy Court to fashion a discharge order that balances the interests of the debtor, creditors and the integrity of the bankruptcy system rather than the non-discretionary application of section 178(1)(a) or 178(1)(e) of the BIA, which produces an “all or nothing” result.

However, CAIRP also took the position that disgorgement orders are effectively an aggregation of the claims of individual victims which would otherwise survive the bankrupt’s discharge. Where the Commission is acting as an intermediary and there is a mechanism for the payment of these amounts to the victims, disgorgement orders should survive discharge.

Ultimately, CAIRP’s position was consistent with the decision of the majority of the Supreme Court of Canada’s – namely, that the AMPs are released upon discharge but disgorgement orders survive bankruptcy.

Securities Commission Administrative Penalties and Disgorgement Orders under Section 178(1)(a) and 178(1)(e)

The Supreme Court first addressed section 178(1)(a) of the BIA, which exempts fines, penalties or restitution orders imposed by a court in respect of an offence. The Supreme Court held that, although “offences” could mean something broader than criminal or quasi-criminal offences, 178(1)(a) could not apply to orders by the Commission because such orders are not “imposed by a court.”

The Supreme Court then addressed section 178(1)(e), which exempts “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation.” The Supreme Court held that the test to determine whether a debt survives under section 178(1)(e) requires the claiming creditor to establish that:

1. There was a fraudulent misrepresentation or false pretences. The Supreme Court noted that it is not sufficient that an administrative body make a finding of fraud, the determination of fraud must be made by a court through an independent review of the evidence in the context of the application of section 178(1)(e). This determination could be made by a review of the record.
2. There was a passing of property or provision of services. The bankrupt does not need to be the recipient of the property or services. It is sufficient that the bankrupt induced a person to provide property or services to someone.
3. The debt or liability was directly “resulting from” the fraudulent misrepresentation or false pretences. This is a higher bar than “in respect of”, “in connection with” or “in relation to”—the link must be direct, but the link does not require that the claiming creditor be the direct victim.

The decision in Poonian turned on the Supreme Court’s interpretation of the causation requirement at stage 3 of the test (i.e. the meaning of “resulting from”).

The majority of the Supreme Court held that AMPs imposed by the Commission do not survive because they did not “result from” the Poonian’s fraud. The majority interpreted “resulting from” to mean that section 178(1)(e) only applies to morally blameworthy conduct that gives rise to a debt, not morally blameworthy conduct per se. Consequently, section 178(1)(e) requires a “strict” or “direct” causal link between the creation of the debt or liability and the debtor’s deceit.

However, applying this same reasoning, the Supreme Court held that disgorgement orders can survive bankruptcy under section 178(1)(e) because those debts represented money that the Poonians had wrongly obtained through their market manipulation. Therefore, the disgorgement orders “resulted from” the Poonians’ market manipulation scheme. The Supreme Court also noted that there was a mechanism for investors who had been harmed to receive money paid to the Commission under the disgorgement orders, which could have the effect of the victim investors being the ultimate recipients of the disgorged funds.

Supreme Court’s General Guidance on Section 178(1)

Poonian provides some insight into the interpretation of debts that survive bankruptcy generally, but a number of questions remain.

The approach to interpreting the section 178(1) exceptions implemented by the Supreme Court is best described as “narrow, but not too narrow”. These exceptions must be interpreted narrowly because courts have no discretion respecting their application and debtor rehabilitation is made harder when more claims survive bankruptcy. However, the Supreme Court was careful not to interpret the section 178(1) exceptions so narrowly as to gut them of all meaning. The exceptions’ interpretation must still be tied to the actual language of the exception and aligned with other principles of statutory interpretation. Although the majority held that section 178(1) is not to be interpreted purposively, the Supreme Court’s approach echoes Justice Willcock’s remark in the British Columbia Court of Appeal’s Poonian decision that the exceptions must be interpreted narrowly while still giving effect to the intentions of Parliament, as set out in the plain language of the legislation.

However, the question of what is narrow, but not too narrow, will persist – particularly as there is no consensus among courts on whether there is a master rationale for the section 178(1) exceptions, much less what that master rationale is. In Poonian, the Supreme Court did not address a master rationale for all section 178(1) exceptions, but did consider whether there is a rationale for section 178(1)(e). In the dissenting judgment, Justice Karakatsanis held that the intention for section 178(1)(e) is to preclude dishonest debtors from benefiting for their dishonesty, while the majority decision (which holds the day) adopted a more circumscribed approach to section 178(1)(e)’s purpose.

Without a clear statement of the role that the section 178(1) exceptions are intended to play, the Supreme Court’s reasons leave lower courts without a useful tool for determining just how narrow is appropriate.

Impact for Licensed Insolvency Trustees

The Supreme Court’s decision in Poonian resolves the previous conflict between decisions in Alberta (in the Hennig case) and British Columbia (in Poonian) and clarifies the scope and meaning of sections 178(1)(a) and (e). Poonian provides clarity for Licensed Insolvency Trustees when advising consumer bankrupts regarding the dischargeability of debts arising from administrative orders.

Although AMPs are released on discharge, misconduct giving rise to AMPs may fall within the facts enumerated under section 173 of the BIA. Arguably, the reasons in Poonian put increased emphasis on the courts’ obligation to consider this conduct in determining the terms upon which to grant a conditional or suspended discharge order, or denying a discharge application.

Poonian also provides guidance with respect to the general approach the courts will apply in claims that debts survive under section 178(1).

The Supreme Court will be hearing another case regarding the interpretation of the section 178(1) exceptions on November 5, 2024 in Piekut v Canada (Minister of National Revenue). Piekut raises the question of the interpretation of the dischargeability of student loan debts under section 178(1)(g). CAIRP will be the sole voice of the insolvency industry intervening in this case.