A recent Alberta decision found that the Alberta Securities Commission’s regulatory penalty levied against a man who subsequently filed for bankruptcy survived the discharge of the bankrupt.
On June 7, 2008, a panel of the Alberta Securities Commission (the “Commission”) issued a decision that found, among other things, that the bankrupt had contravened Alberta securities laws and acted contrary to the public interest.
The panel found that the bankrupt was responsible for misrepresentations in the financial statements of a public company of which he was a director and officer, that he obtained financial benefits as a result of non-disclosure of material facts, that he participated in market manipulation which resulted in artificial prices for another company, and that he made ongoing misrepresentations to Commission staff, all contrary to the public interest.
On December 18, 2008, the panel rendered a sanctions decision that levied an administrative penalty against the bankrupt in the amount of $400,000, and required that he pay $175,000 toward the costs of the Commission investigation and hearing.
The decisions were certified by the Court of Queen’s Bench and thus had the force and effect of a judgment of the Court. The Commission registered a writ at the Court and at the Personal Property Registry.
On July 4, 2011, the bankrupt filed an assignment in bankruptcy. The Commission filed a proof of claim in the bankruptcy, but stated its position that the judgment arising from the Commission decisions survived the bankruptcy pursuant to subsections 178 (1)(a), (d) and (e) of the Bankruptcy and Insolvency Act (“BIA”). The Commission received a dividend of approximately $889 in the bankruptcy.
The bankrupt was discharged from bankruptcy on August 19, 2015.
The amount owing under the judgment was $642,849, plus interest accruing.
The Commission made an application to the court for a declaration that an administrative penalty levied against the bankrupt survived his discharge as a bankrupt pursuant to subsections 178(1)(a), (d) and (e) of the BIA.
The bankrupt argued that none of the exemptions from discharge set out in s. 178(1) applied to the administrative penalty, which has been filed with the Court of Queen’s Bench and thus, by statute, “has the same force and effect as if it were a judgment of the Court”.
The court explained that, as a basic principle, a bankrupt is released from all claims provable in bankruptcy by an order of discharge under s. 178(2) of the BIA. However, s. 178(1) of the BIA sets out eight classes of exceptions to that rule. Relevant to the Commission’s application, subsections 178(1)(a)(d) and (e) of the BIA provide that an order of discharge does not release the bankrupt from:
a) any fine, penalty, restitution order or other order similar in nature imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;
d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity; or
e) any debt or liability arising from obtaining property or services by false pretences or fraudulent misrepresentation.
The court stated that the exceptions set out in s. 178(1) of the BIA exist to ensure that debtors who have been found to have engaged in fraudulent or dishonest conduct are not entitled to a discharge. It stated that they are to be interpreted purposively with that policy consideration in mind.
The court concluded that while not all regulatory penalties would fall within the exceptions from discharge, it found that the Commission’s administrative penalty in the bankrupt’s case fell within subsection 178(1)(e) and survived the bankrupt’s discharge from bankruptcy. It found that the nature and substance of the debt satisfied the requirements of the subsection, as it resulted from obtaining property by false pretences or fraudulent misrepresentation.
The court stated:
“There is nothing in the language of subsection 178(1)(e) that requires that the false pretence or fraudulent misrepresentation be made to the party claiming the exception. A purposive interpretation of the subsection in view of the intention of section 178 – to preclude dishonest debtors from benefitting from their dishonesty – would surely extend to a decision of a securities commission, charged with enforcing securities laws in order to protect the interesting public and promoting the integrity of the capital markets, in circumstances that would otherwise fit within the subsection. This case does not involve an unrelated creditor seeking to invoke the subsection, but a regulatory authority representing the interests of those affected by the fraudulent misrepresentations and/or false pretences.”
As a result, the court found that the administrative penalty survived the bankrupt’s discharge after bankruptcy pursuant to the exception set out in s. 178(1)(e).
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