The Supreme Court of Canada at sunset in Ottawa on Dec. 13, 2023.Sean Kilpatrick/The Canadian Press
Joseph Groia is a securities lawyer in Toronto, a former head of enforcement at the Ontario Securities Commission and a former bencher of the Law Society of Ontario. Jack Day is an articling student at Groia & Company.
The Supreme Court of Canada has found that people claiming bankruptcy after violating securities laws have the same rights to a fresh financial start as any other debtor who goes bankrupt. That has resulted in another siren call by some securities regulators for more powers. In our view, the court’s decision is not only legally sound – it is also in the best interests of the Canadian capital markets and investors. Here’s why.
In Poonian v. BCSC (Poonian), a case involving a pair of B.C. fraudsters, the Supreme Court decided on July 31 that bankrupts are entitled to have debts relating to administrative monetary fines and penalties discharged; they will, however, continue to have to pay compensation or disgorgement orders made by the same regulators.
The court found that administrative monetary penalties are not closely enough linked to the sanctioned misconduct which initially gave rise to the breach of securities laws to justify their collection after bankruptcy.
Unlike compensation orders, where the money usually goes to victims, proceeds collected from administrative penalties usually go to the regulators or the government. In Poonian, the bankrupts still had to pay all amounts owing from the profits they made through their fraud, but they no longer had to pay any amounts owing for the administrative penalties.
One of the main purposes of bankruptcy laws is to facilitate the financial rehabilitation of a bankrupt. It is primarily concerned with providing a “fresh start” for debtors. Parliament has decided that most bankrupts are entitled to a fresh start after a discharge, regardless of any morally blameworthy conduct that led them into bankruptcy. To that extent legislators do not agree with securities regulators. We worry sometimes that securities regulators forget that elected members of Parliament make laws in Canada and that regulators need to apply them as written.
Canadian courts have made it clear that they believe a regulator’s harsh view of dishonest market conduct is not a licence to chase a market participant to their grave to try to collect administrative fines.
It is important to note that a securities case often results in significant additional sanctions on market participants. In Poonian, the debtors were permanently prohibited from trading in securities, being a director or officer of any company, acting as a registrant or promoter, acting in a management or consultative capacity in connection with activities in the securities market, and from all investor-related activities. Many others charged with securities offences also lose their reputations and their jobs. As a result, the deterrent effect that regulators promote is already achieved in enforcement cases involving most market participants. When viewed in this light, chasing discharged bankrupts who owe money for administrative fines seems to us to be overkill.
There is, however, an even better answer to Canadian securities regulators’ calls for more powers – they already have them. The Supreme Court’s decision only applies to decisions made after an administrative hearing. Fines that are imposed by judges after a criminal or quasi-criminal trial will almost always survive bankruptcy. All securities regulators need to do to achieve their stated goals is go to a court of law more often.
Regrettably, that almost never happens as the vast majority of cases brought by securities regulators are heard by administrative tribunals. Regulators have historically had a home court advantage in this setting, with a lower standard of proof and relaxed rules of evidence.
There may be good reason to believe that Ottawa is starting to become skeptical about the fairness of some administrative decisions. We hope that is because they are starting to think carefully about the importance of the rule of law in our capital markets. There are sound legal and policy reasons for the distinction in the treatment between court-imposed fines and regulatory administrative penalties in bankruptcy legislation. We hope they are kept.
When regulators overreach and seek even greater powers, notwithstanding the extensive powers they already have, all Canadians need to carefully consider why they are doing so. It is in the public interest to maintain this critical distinction between the powers given to administrative tribunals and those given to judges. Market participants should be thankful that the Supreme Court has done exactly that once again in this case.