VANCOUVER, BC, Aug. 1, 2024
/CNW/ - The B.C. Securities Commission (BCSC) is calling for
changing the federal Bankruptcy and Insolvency Act after the
Supreme Court of Canada ruled that
some financial sanctions can be extinguished through the bankruptcy
process.
The court, in a 5-2 decision, said that administrative
penalties, which are imposed by the BCSC and other Canadian
securities regulators to deter future misconduct, can be eliminated
from a person's debt upon being discharged from bankruptcy.
"This case demonstrates one of the many challenges securities
regulators face in collecting financial penalties from
lawbreakers," said BCSC Chair & CEO Brenda Leong. "The fact that administrative
penalties can be extinguished through bankruptcy seriously
undermines securities regulators' duty to protect investors, and
highlights a significant flaw in federal bankruptcy law that needs
to be fixed."
The ruling came in litigation between the BCSC and a B.C.
couple, Thalbinder Singh Poonian and Shailu
Poonian. A BCSC panel found that they ran a
pump-and-dump scheme involving an Ontario company whose shares traded on the TSX
Venture Exchange.
The BCSC panel concluded that the Poonians inflated the
company's share price through trading among themselves, relatives,
friends and acquaintances, and then illegally obtained
approximately $7 million by selling
shares to unsuspecting buyers, many of them living paycheck to
paycheck. Most of them had no idea they were victims of misconduct
until they were contacted by the BCSC.
The BCSC panel levied two types of financial sanctions against
the Poonians:
- Administrative penalties of $13.5
million, intended to deter future misconduct by the Poonians
and others who might contemplate committing similar wrongdoing
- Disgorgement of $5.6 million,
representing the amount the Poonians obtained from their illegal
activity. Any funds collected for disgorgement orders can be
returned to victims of that misconduct.
The Poonians have not made any effort to pay. After the BCSC
imposed its sanctions, they filed for bankruptcy. The Poonians
asked the B.C. Supreme Court to extinguish their debts, including
those owed to the BCSC but that request – which
was opposed by the BCSC – was denied by the
court in 2020.
The BCSC also applied to the court for an order that its
financial sanctions against the Poonians persist, even if all of
the couple's other debts are extinguished through bankruptcy,
because the Bankruptcy and Insolvency Act allows some types
of debts to survive bankruptcy, including:
- Debts arising from a fine, penalty or restitution order imposed
by a court, and
- Debts arising by obtaining property or services by false
pretenses or fraudulent misrepresentation.
The BCSC argued that its sanctions – both the administrative
penalties and the disgorgement orders – met those criteria.
The Supreme Court of Canada
unanimously agreed with the BCSC that "the Poonians' scheme to
mislead and exploit investors amounted to fraudulent
misrepresentation." But it did not agree that the sanctions,
despite being registered with a court, qualified as court-imposed
orders.
The court's five-member majority said there is a direct link
between the amounts of the disgorgement orders and the Poonians'
fraudulent conduct, so those debts to the BCSC survive bankruptcy.
But the administrative penalties, the majority said, arose most
directly from the BCSC's decision to sanction the couple, and only
indirectly from the Poonians' unlawful conduct. So those penalties,
the majority said, are extinguished if the Poonians exit
bankruptcy.
Two justices dissented, saying that the administrative
penalties, along with disgorgement, should persist to "ensure that
dishonest debtors do not benefit from their dishonesty."
"We are pleased that the Poonians, as a result of this decision,
will forever owe $5.6 million, which
represents the money they obtained from their pump-and-dump
scheme," Leong said. "However, this has always been about more than
this one case, and we are disappointed that people who cheat or
swindle investors can avoid paying administrative penalties through
an exit from bankruptcy."
Since 2001, more than 40 individuals and companies, owing a
total of about $80 million to the
BCSC, have gone through bankruptcy, and as a result, have had their
BCSC debts extinguished.
The Supreme Court of Canada, in
its written opinion, said that Parliament could have drafted the
Bankruptcy and Insolvency Act to expressly say that
financial sanctions of regulatory bodies or administrative
tribunals are exempt from bankruptcy discharge. But the Act does
not say that.
"An obvious solution is to revise the law to deal with this
'escape hatch,'" Leong said.
About the B.C. Securities Commission (www.bcsc.bc.ca)
The B.C. Securities Commission, an independent provincial
government agency, strives to make the investment market benefit
the public. We set rules, monitor compliance by industry, take
action against misconduct, and provide guidance to investors and
industry. As guardians of B.C.'s investment market, we're committed
to maintaining a market that is honest, fair, competitive and
dynamic, enabling British Columbians to thrive.
Learn how to protect yourself and become a more informed
investor at www.investright.org
SOURCE British Columbia Securities Commission