Alberta Court of Appeal Concludes ASC Administrative Penalty Does Not Survive Bankruptcy | Bennett Jones LLP


[co-author: Katelyn Deyholos – Articling Student]

Regulatory obligations often conflict with bankruptcy law. It has long been considered a necessary benefit that people get a fresh start through bankruptcy. The law provides for exceptions to this principle, on the basis of equally important public policy grounds that certain penalties and obligations should not be so easily avoided. In Alberta Securities Commission v Hennig, 2021 ABCA 411, the Alberta Court of Appeal (the ABCA) overturned the trial decision and determined that an Alberta Securities Commission penalty is extinguished by bankruptcy because it does not fall within a permitted exception to releasing pre-existing debts under the Bankruptcy and Insolvency Act (the BIA).

The relevant provisions of the BIA can be read in full here.

Background

The ASC Decision

In 2008, the ASC determined that Mr. Hennig contravened Alberta securities laws, or acted contrary to the public interest, by:

  1. misrepresenting financial statements of a public company of which he was a director and officer;
  2. obtaining financial benefits by not disclosing material facts;
  3. participating in market manipulation; and
  4. making misrepresentations to the ASC and its staff.

As a result, the ASC imposed on Mr. Hennig a permanent ban from acting as a director or officer, a 20-year cease trade and denial of exemptions order, and an administrative penalty of $400,000 plus $175,000 in hearing costs.

Mr. Hennig filed for bankruptcy in 2011 prior to paying the amounts due to the ASC and was discharged in 2015. When the ASC attempted to renew its judgement, it a declaration from the Alberta Court of Queen’s Bench that its debt from the administrative penalty and associated costs survived Mr. Hennig’s discharge from chapter 7 v. chapter 13 bankruptcy.

The Trial Decision

At trial, Romaine J examined whether the ASC’s debt falls within one of the exemptions contained in section 178(1) of the BIA which provides that some debts can continue after discharge from bankruptcy. Romaine J took a broad approach to interpreting the BIA. She found that the purpose of section 178(1) is to ensure that debtors who engage in reprehensible, dishonest, or immoral conduct do not receive the benefit of discharge.

Romaine J granted the ASC’s application. She concluded that the ASC’s debt survives Mr. Hennig’s bankruptcy because it resulted from obtaining property or services by false pretenses or fraudulent misrepresentation (section 178(1)(e)), or in the alternative, because it constituted a fine or penalty imposed by a court in respect of an offence (section 178(1)(a)).

The ABCA Decision

The ABCA described the purpose of section 178 “as giving the debtor a fresh start and enabling the debtor to become a contributing and useful member of the community.” Although the exceptions under this section have been described as relating to immoral conduct of the bankrupt, the ABCA stated that there is “no master-rationale for all the exceptions” and “most bankrupts are entitled to a fresh start after a discharge, regardless of morally blameworthy conduct.”

In contrast to Romaine J’s approach, the ABCA interpreted the BIA narrowly. Specifically, the ABCA stated that the proper approach when interpreting the exemptions under section 178(1) is to start from the position that every debt is released unless a subsection clearly exempts the debt from release.

The ABCA ultimately determined that section 178(1)(a) does not exempt debts arising from a regulator’s imposed monetary penalty in the public interest. Rather, this section exempts fines, penalties, and restitution orders imposed in criminal or quasi-criminal proceedings. The ASC’s administrative penalty is preventative, not punitive. In addition, the ABCA stated that the ASC’s debt does not constitute a penalty or a fine under the Securities Act.

The ABCA also determined that the ASC’s administrative penalty and costs order were not “imposed by a court” simply because the ASC filed its decision with the Court of Queen’s Bench. It described the Court of Queen’s Bench’s involvement as “passive” because it did not take any action apart from putting the ASC’s decision on file.

With regards to section 178(1)(e), the ABCA examined three elements which must be met for the section to apply, including 1) a fraudulent ‎misrepresentation or false pretenses; 2) a link between the debt and the fraud; and 3) a passing of ‎property as a result of the fraud.

The ASC did not allege fraud; thus, the first element was not met for the majority. For the second element, the ABCA held that the fraudulent statements must have been directed at the creditor, and a “regulatory body imposing an administrative penalty for conduct contrary to the public interest will rarely be able to establish such a link, as typically it only becomes involved after the impugned conduct has already occurred.” The ABCA concluded that Mr. Hennig did not make fraudulent statements directed at the ASC. The final element under section 178(1)(e) relates to the transfer of property. The ABCA held that there was no evidence or findings that property was transferred in this case. Justice Pentelechuk wrote a concurring opinion but determined that the first element was met as the ASC did not need to specifically allege fraud but it can be assessed through a review of the evidentiary record.

Summary

This case clarified that the exceptions under section 178(1) of the BIA should be construed narrowly such that every debt is released unless a subsection clearly exempts the debt from release. British Columbia has amended the Securities Act to give stronger collection and enforcement powers. In addition, British Columbia’s finance minister has called on the federal government to amend the BIA to exempt the penalties assessed by securities commissions.

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