At the very end of July 2024, the Supreme Court of Canada released its decision in Poonian v. British Columbia Securities Commission, giving those sanctioned by regulators the opportunity to discharge some financial penalties through the bankruptcy process.
Following the release of the decision, the British Columbia Securities Commission (BCSC) took the unusual step of calling for changes to the federal Bankruptcy and Insolvency Act (BIA) after it was determined that the administrative penalties it imposed in the case where the Poonians ran a pump-and-dump scheme defrauding investors of approximately $7-million, were allowed to be included in their bankruptcy.
A serious flaw
“The fact that administrative penalties can be extinguished through bankruptcy seriously undermines securities regulators’ duty to protect investors and highlights a serious flaw in federal bankruptcy law that needs to be fixed,” said BCSC chair and CEO, Brenda Leong.
In a follow-up response to the Insurance Portal, Leong adds that “the gap in the BIA allows market predators to exploit an omission in federal bankruptcy law, enabling them to walk away from the consequences of their dishonest, unfair and abusive behaviour by cynically using the fresh start offered to honest debtors. This gap undermines accountability and integrity in Canadian investment markets and is a betrayal of people who have been victimized – or will be – by financial wrongdoers.”
Notably, insurance regulators would not comment on the matter when the Insurance Portal requested their input through the Canadian Council of Insurance Regulators (CCIR). In response to the publication’s request for comment, only the Financial Services Regulatory Authority of Ontario (FSRA) would say “we are aware of the recent decision and will continue using all the tools at our disposal to protect consumers. These tools include compliance orders and administrative monetary penalties, which help ensure regulatory compliance in our licensed sectors, help maintain high standards of business conduct and sanction misconduct.”
In the BCSC case, the regulator levied two financial sanctions: an administrative penalty of $13.5-million, intended to deter future misconduct, and disgorgement of $5.6-million representing the amount the Poonians obtained from the illegal activity. The court decided that the couple could discharge the administrative penalty but not the amount they were ordered to disgorge.
Escape hatch
“The Supreme Court of Canada, in its written opinion, said that Parliament could have drafted the BIA to expressly say that financial sanctions of regulatory bodies or administrative tribunals are exempt from bankruptcy discharge. But the Act does not say that,” the BCSC said in a statement at the time the decision was released. “An obvious solution is to revise the law to deal with this escape hatch.”