Administrative Monetary Penalties and Bankruptcy: Poonian v. British Columbia (Securities Commission), 2024 SCC 28

A favoured tool of contemporary legislatures and regulators is the administrative monetary penalty. Rather than imposing criminal liability on regulated entities for breaches of industry standards, legislatures have regularly chosen to empower regulators to impose fines — often substantial — on offenders. These administrative monetary penalties have become an important part of the modern regulatory toolbox: as an alternative both to criminal liability (procedurally onerous and difficult to establish) and to merely taking non-binding enforcement action (like advising or attempting to persuade) they are seen as useful in ensuring compliance.

In Poonian v. British Columbia (Securities Commission), 2024 SCC 28, the Supreme Court of Canada considered the interaction between the administrative monetary penalty regime in British Columbia and federal bankruptcy law.

The general rule is that at the end of the bankruptcy process under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, the bankrupt person is released from outstanding debts. But there is an exception in s. 178(1) for various debts, including “any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail” (s. 178(1)(a)) and “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim” (s. 178(1)(e)).

The BC Securities Commission found that the Poonians had engaged in market manipulation in violation of provincial securities law. The Commission ordered them to pay administrative monetary penalties and to disgorge the profits of their nefarious scheme. The question for the courts was whether the administrative monetary penalties and/or the disgorgement orders (altogether, around $20m) survived the bankruptcy process. At first instance, Crerar J held that the exceptions in s. 178(1)(a) and s. 178(1)(e) applied. The Court of Appeal disagreed on s. 178(1)(a) but agreed on s. 178(1)(e). The majority of the Supreme Court, per Côté J, held that neither exception applied to the administrative monetary penalties but that s. 178(1)(e) applied to the disgorgement orders.

First, the scope of s. 178(1)(a). Côté J accepted that it could encompass penalties imposed outside a criminal or quasi-criminal context (at paras. 33-41), concluding that “if Parliament had intended to limit the application of this section to criminal or quasi‑criminal proceedings, it could have done so more clearly” (at para. 42). However, penalties imposed by an administrative tribunal are not “imposed by a court”. For one thing, an administrative tribunal is not, generally speaking, a court:

However, the word “court” in s. 178(1)(a) does not capture administrative tribunals or regulatory bodies. The term “court” implies that a dispute will be adjudicated by a judge or judges (Black’s Law Dictionary (11th ed. 2019), at p. 444). By comparison, an “administrative tribunal” is “[a] court‑like decision‑making authority that resolves disputes [or] an administrative agency exercising a quasi‑judicial function” (p. 1814). A “regulatory agency” can be defined as “[a]n official body, esp. within the government, with the authority to implement and administer particular legislation” (pp. 77‑78 and 1538). “Court” refers to the judiciary, whereas administrative bodies are hybrid entities “falling between the judiciary and government departments created to perform as separate bodies functions transferred from both” (L. Sossin, Practice and Procedure Before Administrative Tribunals (loose‑leaf), at § 2:1) (at para. 46).

For another, the fact that the penalties at issue here could be registered with a court did not mean they are “imposed by a court” within the meaning of s. 178(1)(a):

The effect of an administrative decision being registered with a court is that the creditor is able to use civil methods to enforce the decision as if it were a judgment of that court. The registration of the decision does not change the fact that it was made and imposed by an administrative decision maker, nor does it overcome the BIA’s requirement that the exempt debt be imposed by a court (C.A. reasons, at para. 48; Hennig (C.A.), at para. 52). When a decision is registered with a court, the court’s involvement is passive, whereas the act of “imposing” a fine, penalty, restitution order or other order similar in nature requires that the court be actively involved in making the decision (see Hennig (C.A.), at para. 52) (at para. 49).

In partial dissent, Karakatsanis J agreed with this analysis (at para. 117).

That makes it 12-1 on this point: 9 SCC judges and 3 BCCA judges against Crerar J. I am loathe to swim against such a strong tide of authority, but I nevertheless feel compelled to point out that in other contexts administrative tribunals have been considered to be “courts”, most notably for the purposes of s. 24 of the Charter of Rights and Freedoms. If they can be courts for the purposes of remedying violations of the Charter, why can’t they be courts for the purposes of bankruptcy legislation? In addition, registering a penalty with a court involves some judicial scrutiny of the penalty in question, giving meaning to the requirement that the penalty be “imposed” by a court. Ultimately, I found much force in Crerar J’s observation at first instance:

[G]iven the purpose of s 178(1) — to avoid rewarding dishonest behaviour — there is no principled basis to refuse to exempt debts imposed after a hearing before an administrative tribunal such as the Commission Panel. As discussed in the next section, a debt arising from a judgment may be exempted regardless of the strict cause of action in the original pleading: a court will consider whether the bankrupt seeking exemption was an honest but unfortunate debtor, or, rather, fell into liability through reprehensible behaviour. A debt, based in reprehensible behavior, imposed by an administrative body statutorily entrusted to make findings and impose penalties and to which courts grant deference, should be treated equally in our administrative state to a debt arising from a judgment (2021 BCSC 555, at para. 92).

Second, the scope of s. 178(1)(e). Here, it is important to keep the distinction between the administrative monetary penalties and disgorgement order in mind, as the majority saw an important difference between the two.

Teasing out the elements required to engage s. 178(1)(e) — fraud, obtaining property and causal connection between the fraud and the penalty — was almost entirely a question of bankruptcy law, about which I have little to say. But there were a couple of administrative law matters. To begin with, for s. 178(1)(e) to apply, there must be fraud. Côté J held that it will be for the court managing the bankruptcy process to make its own determination on the point, without any deference to the administrative tribunal:

In the case of a debt or liability resulting from a finding by an administrative tribunal, an application judge must make his or her own determination, based on a review of the record, as to whether the debt or liability falls within a s. 178(1) exception (Hennig (C.A.), at para. 63). Thus, even where all of the required findings for false pretences or fraudulent misrepresentation have been expressly made by an administrative decision maker, “[a] determination of whether the claim falls within one of the categories of non‑dischargeable claims must be made by a court” (Wood, at p. 314). In sum, for a creditor to be able to pursue its claim against a bankrupt under s. 178(1)(e), a court order declaring fraud must be obtained, whether “before, during or after a discharge from bankruptcy” (Bourassa, at para. 5) (at para. 69).

More generally, s. 178(1)(e) imports a causation requirement, Côté J held, which requires proof of a link between the debt or liability (here, the administrative monetary penalty and the disgorgement order) and the fraud (at para. 102). Here, although the other elements of s. 178(1)(e) were satisfied, the causation requirement was not met in respect of the administrative monetary penalty. The source of the penalty was the Commission’s decision, not the underlying conduct:

Both a costs award and a penalty imposed by a regulator arise indirectly from deceitful conduct. Without the occurrence and sanctioning of that conduct, neither a penalty nor a costs award would exist. Fundamentally, however, both a costs award and an administrative penalty result from the regulator’s choice to sanction the impugned conduct. Neither is the direct result of the deceit. In other words, but for Mr. Goldstein’s fraud, there would have been no costs award. Similarly, but for the Poonians’ fraud, there would be no administrative penalty. However, as I have explained, and as my colleague acknowledges at para. 124 of her reasons, a but‑for connection is not the appropriate link under s. 178(1)(e). A direct causal link is required. I therefore respectfully disagree with my colleague that the Commission’s administrative penalties “have as their only source or origin the Poonians’ deceitful conduct” (para. 134 (emphasis in original)). Rather, their only source is the Sanctions Decision: “Considering it to be in the public interest, and pursuant to sections 161 and 162 of the Act, we order that . . . a) [Thalbinder] Poonian pay to the Commission an administrative penalty of $10 million; b) [Shailu] Poonian pay to the Commission an administrative penalty of $3.5 million” (para. 96) (at para. 105).

This was not true, however, of the disgorgement order, because “[t]he amounts owed under disgorgement orders … represent the amounts the debtor obtained as a result of his or her wrongful conduct” (at para. 112) and those amounts can, in principle, be distributed to victims under provincial securities legislation (at para. 113). Jurisdiction to make a disgorgement order thus maps directly onto the underlying conduct. The bottom line, then, was that the disgorgement order survived the bankruptcy process, but the administrative monetary penalties did not, because their sources were different.

To my sceptical eye, Côté J’s source-based distinction is too fine and formal. Perhaps it is justifiable given the need to interpret the exceptions in s. 178(1) narrowly (at para. 26). But I found Karakatsanis J’s approach persuasive. In her view, there is no need for a direct link between the amount of the debt or liability (the administrative monetary penalty) and the ill-gotten gain, just the common-sense conclusion that the penalty arose from proceedings triggered by the fraud:

The amounts the Commission submits should survive discharge (which do not include costs) thus have as their only source or origin the Poonians’ deceitful conduct. Both the disgorgement orders and the administrative penalties under the Securities Act are monetary sanctions for the unlawful conduct. This is not a step removed. As my colleague notes, the breach of the Securities Act is factually based on obtaining property by false pretences or fraudulent misrepresentation within the meaning of s. 178(1)(e) of the BIA(paras. 99-100) (at para. 134).

There have been calls for reform subsequent to this decision. To my ear, these calls are entirely unsurprising. Painting with very broad brush strokes, and leaving aside the difficult interpretive questions the case posed, the Supreme Court’s decision in Poonian fits poorly on the modern regulatory tapestry: given the popularity of administrative monetary penalties with legislatures and regulators alike, it would make for a more cohesive overall picture if penalties imposed by administrative tribunals survived the bankruptcy process (though I note that one perspicacious group of bankruptcy experts suggests that unpaid administrative monetary penalties “are likely to make the Debtors’ discharge more difficult to obtain”).

This content has been updated on September 3, 2024 at 14:44.