We earlier blogged here about Alberta Securities Commission v Hennig (Hennig QB) in which a chambers judge held that an administrative penalty levied by the Alberta Securities Commission (ASC) survived an individual’s discharge from personal bankruptcy under ss 178(1)(a) and (e) of the Bankruptcy and Insolvency Act (BIA).
This decision was recently overturned by the Alberta Court of Appeal in Alberta Securities Commission v Hennig, 2021 ABCA 411 (Hennig CA).
The Court of Appeal majority (Watson and Khullar JJA) held that exceptions to the release of liabilities under s 178(1) of the BIA “should be construed narrowly and applied only in clear cases.”
The appellate analysis started with an examination of s 178(1)(a), which holds that certain fines and penalties are not released by an order of discharge. The majority held that “fine” and “penalty” in s 178(1)(a) only entail such fines and penalties as may be imposed in criminal or quasi-criminal proceedings. The main rationale for exempting criminal fines and penalties from being released upon a bankrupt’s discharge is to ensure that an individual subject to criminal sanction does not escape a resulting burden through bankruptcy, thereby preventing a civil bankruptcy proceeding from clashing with criminal law. While the ASC could have referred the matter to the Crown to lay charges in a quasi-criminal proceeding against Mr. Hennig, it did not do so. Section 178(1)(a) was therefore not engaged by the ASC’s administrative penalty.
The majority next examined s 178(1)(e), which holds that liabilities resulting from certain fraudulent statements are not released by an order of discharge. It drew a distinction between fraudulent statements within the contemplation of s 178(1)(e) and other morally reprehensible conduct.[1] It may not always be clear from a prior judicial or administrative decision if liability was established in fraud (as distinct from other grounds of liability). Whether the debtor was held liable in fraud is to be evaluated based on, inter alia, the nature of the proceedings, the pleaded allegations, the evidence relied upon, the arguments, and the reasons for decision.
Although the ASC found that Mr. Hennig was responsible for misleading disclosures, the ASC did not allege “fraud” against him, nor did it make any express finding of “fraud”. The majority was therefore not satisfied that Mr. Hennig had made fraudulent statements for the purposes of s 178(1)(e).
The majority also found that, under s 178(1)(e), there must be a “link” between the fraudulent statement and the debt or liability. For a debt or liability to survive discharge through s 178(1)(e), the creditor invoking it must have been directly victimized by the bankrupt debtor (or alternatively the creditor must have received a full assignment of rights from the originally victimized creditor). This link did not exist in Mr. Hennig’s case because, even if there were fraudulent statements, they were not directed at the ASC, but rather at non-party market participants. In this regard, the majority found that “[a] regulatory body imposing an administrative penalty for conduct contrary to the public interest will rarely be able to establish such a link, as typically it only becomes involved after the impugned conduct has already occurred.”
Additionally, the majority found that false statements made to the ASC during the investigation did not satisfy the link between the liability and the fraud.
Pentelechuk JA concurred in the result. She agreed with the majority’s holding that s 178(1)(a) was not engaged by the ASC’s administrative penalty. She disagreed with the majority’s holding that the ASC had not established fraud by Mr. Hennig within the contemplation of s 178(1)(e), however, she agreed with the majority’s holding that s 178(1)(e) was not engaged because the ASC was not itself victimized by Mr. Hennig.
Ultimately, this new decision in Hennig CA clarifies four main points:
(1) the exceptions to the release of liabilities under s 178(1) of the BIA should be construed narrowly and applied only in clear cases;
(2) a fine or penalty is only likely to engage s 178(1)(a) if it is imposed in a criminal or quasi-criminal proceeding;
(3) section 178(1)(e) applies to liabilities owing to creditors who are directly victimized by the bankrupt debtor’s fraudulent statements; and
(4) an administrative penalty for conduct against the public interest is unlikely to survive a bankrupt’s discharge under s 178(1)(e).
[1] For further discussion about the types of fraudulent statements that are captured by s 178(1)(e), see the recent Ontario Court of Appeal decision, Shaver-Kudell Manufacturing Inc v Knight Manufacturing Inc, 2021 ONCA 925.
