Canada: British Columbia Securities Commission Finds Common Law Due Diligence Defense Available in Administrative Proceedings for Breach of Securities Legislation

In a decision released on February 20, 2017, a panel of the British Columbia Securities Commission (the "Commission") held that a defence of due diligence is available in the context of contraventions of securities legislation that proceed under an administrative process.

In Re SunCentro, the respondent SunCentro Corporation ("SunCentro") entered into a business development agreement with the respondents YDS Energy, Resources and Humanitarian Relief Corporation ("YDS"), to provide marketing and financing services to SunCentro. SunCentro also entered into an agreement with Donald Weiss ("Weiss"), authorizing Weiss to raise money for SunCentro. As part of these agreements, SunCentro agreed to pay the YDS and Weiss commissions for referring investors to SunCentro.

SunCentro never filed a prospectus under the British Columbia Securities Act (the "Act") and instead relied on prospectus exemptions to raise money from investors. However, none of the investors referred to SunCentro qualified under a registration or prospectus exemption. Accordingly, the executive director of the Commission alleged that each of the respondents contravened section 61 of the Act, which prohibits the distribution of securities without a prospectus in the absence of an exemption. The executive director also alleged that the directors and officers of SunCentro and YDS authorized, permitted or acquiesced to those contraventions, and were therefore liable under section 168.2 of the Act.

The agreed statement of facts and affidavits filed by the respondents contained admissions of liability for contraventions of section 61 of the Act. However, the Commission did not find the admissions conclusive of the issue of liability of the respondents, on the basis that other evidence tendered by the respondents suggested the possibility of there being a due diligence defence available with respect to some of the impugned distributions.

In considering the availability of the due diligence defence, the Commission noted that neither the applicable Companion Policy nor the Act expressly created a legal basis for establishing a due diligence defence to an allegation of a contravention of section 61.  Accordingly, the Commission premised the availability of such a defence on whether there was such a defence at common law, which, in turn, depended on whether a contravention of section 61 was properly considered an absolute liability or strict liability offence.

Due to the inconsistent findings among Commission panels and other securities regulatory authorities across Canada on the categorization of section 61 contraventions, the Commission looked to the British Columbia Court of Appeal's decision in Whistler Mountain Ski Corp v British Columbia (General Manager Liquor Control and Licensing Branch) ("Whistler") for guidance on whether the section 61 contraventions should be considered absolute or strict liability offences. In Whistler, the Court found that administrative proceedings that could result in significant sanctions being imposed for contraventions should be strict liability offences, absent clear legislative language to indicate that an offence is one of absolute liability. Finding the enforcement regime under the Act analogous to that considered by the Court in Whistler, and noting that there was no language in the Act prescribing that such contraventions should be absolute liability offences, the BCSC followed Whistler and found the due diligence defence was available to the respondents.

The Commission proceeded to evaluate the availability of the due diligence defence for each of the respondents. On the facts, the Commission ultimately found that SunCentro, and one of its director/officers, successfully made out the due diligence defence with respect to seven investors, where they received confirmation of the accuracy of the investors' subscription agreements, exercised reasonable care by establishing a board policy around capital raising, and made efforts to understand the exemptions it intended to rely on. However, SunCentro, YDS, and their officers and directors were unable to make out the due diligence defence with respect to the issuance of securities for 19 other investors, and were sanctioned accordingly.

Overall, this decision is significant for its definitive finding that a common law due diligence defence is available in administrative proceedings under provincial securities legislation, and will have a considerable impact on the conduct of such proceedings going forward. Given their historical disagreement on this point, we expect the other provincial securities regulatory authorities to weigh in on this important issue in the near future.

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