The Supreme Court of Canada's recent decision in Poonian v. British Columbia (Securities Commission), 2024 SCC 28, has prompted the B.C. Securities Commission (BCSC) to call for bankruptcy law reform.
As we reported here, the Supreme Court in Poonian issued a 5-2 ruling that administrative penalty sanctions imposed by the BCSC (and other Canadian securities regulators) can be extinguished through the bankruptcy process. The Supreme Court found these administrative sanctions do not fit within a strict interpretation of s. 178(1) of the Bankruptcy and Insolvency Act (BIA), a section providing that only certain prescribed debts must survive the bankruptcy process. Notably, the Supreme Court held that disgorgement penalties (the return of unlawful profits to the BCSC, which are then made available to investors who suffered harm in that particular case) do survive the bankruptcy process. Nevertheless, the BCSC is still seeking changes to address administrative penalties.
In response to Poonian, the BCSC issued a press release calling for amendments to the BIA as an "obvious solution" to deal with the bankruptcy "escape hatch" for administrative penalties. The BCSC highlighted that since 2001, over $80 million in debts owed to the BCSC have been extinguished through bankruptcy. "This case demonstrates one of the many challenges securities regulators face in collecting financial penalties from lawbreakers," said BCSC Chair and CEO, Brenda Leong.
The Supreme Court majority in Poonian acknowledged that Parliament could amend the BIA to ensure that administrative penalties survive the bankruptcy process. We expect that such amendments would require a coordinated effort from both federal Parliament and provincial securities regulators. To date, the BCSC is the only Canadian securities regulator to comment on Poonian suggesting amendments to the BIA; however, the Ontario Securities Commission has said it is considering the decision.
The aggressive pursuit of enforcement action and collection of financial penalties is consistent with the approach taken by securities regulators in recent years. It will be important to monitor if, and how, parliament responds to Poonian, and whether other securities regulators join the call for reform. Further, while this case focuses on administrative penalties imposed by securities regulators, it has broader implications for other regulatory organizations who may also call for reform. No doubt, the BCSC will need to make compelling arguments to affect changes to the carefully crafted bankruptcy regime addressing priorities among creditors.
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