Bankruptcy discharge not an option for securities law violators B.C. Court rules

On April 15, 2020, the British Columbia Supreme Court denied an application by a married couple previously found to have contravened B.C. securities laws for an absolute or suspended discharge from bankruptcy under s. 172 of the Bankruptcy and Insolvency Act (the “BIA”). The ruling sends a strong message that securities law violators will have difficulty using the bankruptcy process to absolve themselves of the financial consequences of their misdeeds.

Thalbinder Singh Poonian and Shailu Poonian made a joint assignment into bankruptcy in April 2018 after racking up more than $25 million in debts. Their biggest creditors were the British Columbia Securities Commission (the “Commission”) and the Minister of National Revenue (the “Minister”). The Poonians’ were indebted to the Commission in the amount of over $19 million in connection with a 2014 securities law contravention. The Minister was owed in excess of $4 million following an audit and reassessment by the CRA of the Poonians’ tax returns. The application for a discharge was opposed by the Commission and the Minister, who accused them of being “unrepentant market manipulators and tax cheats”.

In the 2014 securities proceedings, the Commission found that the Poonians had contravened section 57(a) of the B.C. Securities Act, commonly referred to as the market manipulation provision. First, the Poonians, alongside friends and relatives, acquired a dominant share position in a company trading on the TSX. They inflated the share price by trading through brokerage accounts which the Poonians and others controlled. They then offloaded the overpriced shares on unsophisticated investors including to a number of clients of a company that provided debt management services and helped debtors access their RRSP and retirement account funds. Investors suffered an estimated book loss of $7.1 million. The Commission ordered the Poonians to pay in excess of $19 million in disgorgements and penalties.

The CRA commenced an audit of the Poonians’ tax returns in 2012. Among other things, the audit found that share dispositions by the Poonians were on account of income and not capital as they had reported. The audit also found significant discrepancies in certain gains and losses reported by the Poonians, and that they had grossly underreported their actual gains from stock trading. The CRA reassessed the Poonians’ 2008 and 2009 tax returns in accordance with the audit findings, in addition to reassessing them for unpaid taxes in subsequent years. In total, the Poonian’s pre-bankruptcy tax liability was in excess of $4.3 million in aggregate.

At the time of the discharge application, the Poonians had not made any payments to the Commission, nor had they made any voluntary payments to the Minister on account of their tax debts.

Under the discharge process contained in the BIA, the court may:

• grant an absolute discharge, which results in a complete discharge of all debts;
• grant a conditional discharge, which results in a complete discharge of all debts upon satisfaction of those conditions;
• suspend the discharge, which results in a complete discharge of all debts at a future point in time; or
• refuse to grant a discharge, whether absolute, conditional or suspended.

In light of the serious misconduct found by the Commission and the underreporting of tax income, the court dismissed the application.  Even though this was an “extreme” result, the court concluded that it was warranted in the circumstances. First, the value of the Poonians’ assets was not equal to fifty cents on the dollar of their unsecured liabilities and it could not be said that the shortfall arose from circumstances for which the Poonians were not responsible. As such, an absolute discharge could not be granted.  Second, the court held that granting a suspended discharge would not serve the twin goals of rehabilitating the bankrupt and maintaining the integrity of the bankruptcy system. In making this decision, the court emphasized the potential impact on the enforcement powers of securities regulators if a discharge were granted in this case, observing that it would undermine the Commission’s ability to deter wrongdoing if a person who committed serious securities law violations (conduct that was, in the words of the Commission, “fraud adjacent”) could so easily avoid the financial consequences of their actions. The court also drew a distinction between the securities regulator and other creditors, noting that the Commission cannot compromise payments that would ultimately be collected in the public interest and for the benefit of investors. Furthermore, the court found that the Poonians had refused to take responsibility for their actions.

The decision highlights courts’ continued unwillingness to allow the bankruptcy process to be used as a “fiscal carwash” for financial wrongdoing - those who commit serious securities law violations cannot simply declare bankruptcy and expect administrative penalties and disgorgement orders imposed on them to go away. In upholding the integrity of the bankruptcy system, the court takes on a gatekeeper role to ensure that the financial rehabilitation allowed by the bankruptcy system is not used to absolve wrongdoers of their misdeeds. The case also shows that courts, when seeking to uphold the integrity of the bankruptcy system, will also take into account other regulatory schemes such as securities regulation. In this case, one of the primary purposes of the Commission’s enforcement powers is deterrence. As noted by the Court, that purpose would be frustrated if “a person having been ordered by the Commission to make a substantial payment could declare bankruptcy and then wait a prescribed period of time and be free of the financial consequences of his or her actions”. Since the bankruptcy process has the power to eliminate a debtors obligations, it has the potential to undermine regulators who are reliant on financial penalties to punish and deter wrongdoing – a risk that the court in this case wanted to prevent. With securities regulators increasingly handing out stiffer administrative penalties, a topic this blog has discussed before, this decision shows that courts will act to ensure that wrongdoers’ penalties are not erased by the bankruptcy process.