BCSC calls for amending federal bankruptcy law to protect Canadian investors

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

Media Contact:: Brian Kladko, 604-899-6713; Public inquiries: 604-899-6854 or 1-800-373-6393 (toll free), [email protected]