The general rule in bankruptcy is that a debtor receives a “fresh start” and is discharged from prior debts, but this is subject to certain exceptions. Subsection 178(1) of the Bankruptcy and Insolvency Act (BIA) sets out eight classes of debts that are not released by an order of discharge including an exception for debts that arise out of fraud. In Poonian v. British Columbia (Securities Commission) the Supreme Court of Canada adopted a narrower interpretation of whether a claim should survive bankruptcy under the fraud exception finding that administrative monetary penalties imposed for securities violations are discharged by bankruptcy. However, a disgorgement order to repay monies obtained through wrongful conduct can survive bankruptcy under the fraud exception.
Background
Thalbinder Singh Poonian and Shallu Poonian, along with three other individuals, contravened the market manipulation provision of the Securities Act. Among other sanctions, the British Columbia Securities Commission (“Securities Commission”) imposed a disgorgement order of approximately 5.6 million and administrative penalties in the amount of $13.5 million. The Poonians declared bankruptcy and unsuccessfully applied for an absolute discharge from bankruptcy. The Poonians claimed to be entitled to a fresh start whereas the Securities Commission successfully argued that they are unrepentant market manipulators and tax cheats.
The British Columbia Securities Commission sought a declaration that the amounts owed by the bankrupts would not be released by a discharge order, relying on subsections 178(1)(a) and (e). Subsection 178(1)(a) exempts “any fine, penalty, restitution order…imposed by a court in respect of an offence,…” from a discharge order. Subsection 178(1)(e) exempts “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation…” from a discharge order.
We have followed this case up to the Supreme Court and you can read our earlier blog posts for more information about the British Columbia Appeal Court decision and the leave to appeal decision.
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