The Newly Muddied Waters for the Discharge of Securities Penalties in Bankruptcy

Introduction

Securities penalties are increasingly being evaded by Canadians through the disclosure provisions of the bankruptcy system.[1] The fines are administered by provincial agencies, which results in their automatic release when the debtor is discharged from bankruptcy.[2] Parliament has been hesitant to include too many exceptions to discharge in the bankruptcy regime because it will make it more difficult to achieve the policy objectives of providing a fresh start for debtors and an orderly liquidation process for creditors.[3] The discharge of securities penalties has presented a challenge for regulators, who often use the funds raised from fines to educate investors and enhance their own knowledge about how capital markets operate.[4] This case comment highlights how a recent decision from the Alberta Court of Queen’s Bench may give securities regulators another option to ensure that their penalties survive bankruptcy. After explaining the factual context in Alberta Securities Commission v Hennig,[5] the Court’s analysis and the potential implications of the decision will be discussed.

Facts

Mr. Hennig was charged with violating various securities laws in June 2008 when he was a director and officer of a publicly traded corporation (the “Corporation”). A panel of the Alberta Securities Commission (the “Commission”) held that he had manipulated the market, misrepresented financial statements of the Corporation, and had received a financial benefit from not disclosing material facts.[6] The panel ordered to Mr. Hennig pay $575,000 in fines and costs.[7] The Court of the Queen’s Bench confirmed the decision, and it was registered under the Personal Property Registry. Mr. Hennig appealed to the Alberta Court of Appeal, which largely upheld the Commission’s findings.[8]

Eighteen months after the Court of Appeal’s decision, Mr. Hennig assigned himself into bankruptcy. The Commission filed a proof of claim and argued that its claim should survive the bankruptcy because of how the fine arose. The Commission received a dividend of almost $900, or 1.5% of the original fine, before Mr. Hennig was discharged in August 2015.[9]

In this case, the Commission sought a declaration that the administrative penalty levied against Mr. Henig survived his discharge in the bankruptcy under ss 178(1)(a), (d), and (e) of the Bankruptcy and Insolvency Act (BIA).[10] Once interest was applied on the remaining unpaid portion of the penalty, the Commission’s fine had risen to $640,000 by the date the case was heard.   

Issues and Analysis

Unlike in many cases involving administrative penalties in bankruptcy, the Court did not need to assess if the claim was provable or not. The penalty was ordered before Mr. Hennig assigned himself into bankruptcy, and the Commission had filed a proof of claim that resulted in it receiving a dividend. Rather, the Commission argued its claim should not be discharged because it arose from Mr. Hennig’s reprehensible conduct.