The British Columbia. Securities Commission (BCSC) is calling for changes to the federal Bankruptcy and Insolvency Act (the Act) after the Supreme Court of Canada ruled that some financial sanctions can be extinguished through the bankruptcy process.
The Court, ruled in a 5-2 decision, that administrative penalties, which are imposed by the BCSC and other Canadian securities regulators to deter future misconduct, can be eliminated from a person’s debt upon being discharged from bankruptcy.
The regulator is concerned that the extinguishing of these administrative penalties seriously undermines securities regulators’ duty to protect investors. It believes this highlights a significant flaw in federal bankruptcy law that needs to be addressed.
The BCSC’s concerns stem from a ruling against a BC couple who ran a pump-and-dump scheme involving an Ontario company whose shares traded on the TSX Venture Exchange. Although the couple were ordered to pay financial sanctions amounting to over $19 million, which included administrative penalties and the disgorgement of illegally obtained profits, they subsequently filed for bankruptcy. After having their request to have the sanctions extinguished as part of their bankruptcy turned down by the provincial court, the couple appealed to the Supreme Court of Canada, which reversed the decision.
The regulator had opposed this, arguing before the Court that the Act allows some types of debts to survive bankruptcy, including:
- Debts arising from a fine, penalty or restitution order imposed by a court; and,
- Debts arising by obtaining property or services by fraudulent misrepresentation.
The BCSC argued unsuccessfully that its sanctions met these criteria, but the court disagreed, stating despite being registered with a court, the sanctions did not qualify as court-imposed orders.
For more information, please call Barbara Hendrickson at BAX Securities Law (647) 403-4606.
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