Supreme Court Narrows the Scope of Non-Dischargeable Debts in Bankruptcy

In the recent case of Poonian v. British Columbia (Securities Commission) (“Poonian”), the Supreme Court of Canada clarified the specific nature and requirements of debts that survive bankruptcy under sections 178(1)(a) and (e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3 (“BIA”).

Section 178(1)(a) of the BIA (the “Fine Exception”) provides that “any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail” is not released by an order of discharge from bankruptcy.

Similarly, section 178(1)(e) of the BIA (the “Fraud Exception”) provides that “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation” is also not released by an order of discharge from bankruptcy.

In Poonian, the bankrupts had engaged in market manipulation, harming vulnerable investors and violating the Securities Act. As a result, the British Columbia Securities Commission sanctioned the bankrupts, ordering them to pay $13.5 million in administrative penalties (the “Penalties”), and to disgorge funds of $5.6 million obtained through their market manipulation scheme (the “Disgorgement Order”). 

The court held that only the Disgorgement Order would survive bankruptcy. The court reasoned that the Fine Exception under s. 178(1)(a) captured neither the Penalties nor the Disgorgement Order, as they were made by a regulatory agency, the Securities Commission, and not by a judgment of a court. 

The court further held that while the Fraud Exception did not capture the Penalties, it did capture the Disgorgement Order. It focused on the causal link between the fraudulent conduct and the liability: while the Penalties were a punitive response, the Disgorgement Order targeted profits incurred as a result of the fraudulent scheme.

This decision directs the focus of legal analysis on the discrete causal relationship between the debt at issue in bankruptcy, its underlying fraudulent cause, and its legal origin. In declining to take a more robust approach to the relationship between fraudulent conduct and resulting liability, the court limited the ability of punitive damages to survive bankruptcy, and reduced the power of regulatory agencies to sanction improper conduct. It remains to be seen whether this decision will shift the calculus of would-be fraudsters, and allow them to “price in” a significant portion of any punitive monetary consequences.

Written by: Cora Madden