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Insolvency (BIA) - Discharge and Exceptions. Poonian v. British Columbia (Securities Commission)
In Poonian v. British Columbia (Securities Commission) (SCC, 2024) the Supreme Court of Canada dismissed an appeal against a tribunal order that held "disgorgement orders and the administrative penalties" exempt from bankruptcy discharge, here under BIA s.178(1)(a) ['fines'] and s.178(1)(e) ['fraud'].
Here the court reviews basic law of bankruptcy discharge and s.178 exceptions thereto:[1] The Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3 (“BIA”), furthers two important purposes: the equitable distribution of a bankrupt’s assets among creditors and the bankrupt’s financial rehabilitation. Financial rehabilitation means that a debtor will be afforded a “fresh start” when appropriate. The fresh start principle is codified in s. 178(2) of the BIA; it allows a bankrupt to be released from outstanding debts at the end of the bankruptcy process. Thus, subject to reasonable conditions, the BIA permits an honest but unfortunate debtor to be freed from the burdens of indebtedness and to reintegrate into economic life.
[2] Financial rehabilitation operates as the general rule, such that every provable claim is presumptively swept into the bankruptcy. However, it has its limits. Through s. 178(1) of the BIA, Parliament has enacted specific exceptions to this general rule. An order of discharge does not release the bankrupt from a claim captured by a s. 178(1) exception. Indeed, where an exception applies, the fresh start principle yields to certain overriding policy objectives which demand that such a claim survive a discharge from bankruptcy.
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A. General Principles Governing the Discharge of a Bankrupt
[21] The proper interpretation of the BIA “requires the acceptance of the principle that every claim is swept into the bankruptcy and that the bankrupt is released from all of them upon being discharged unless the law sets out a clear exclusion or exemption” (Schreyer v. Schreyer, 2011 SCC 35, [2011] 2 S.C.R. 605, at para. 20). This general rule is codified in s. 178(2), which states that “[s]ubject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.” The purpose of s. 178(2) “is to give effect to one of the goals underlying the BIA regime — the financial rehabilitation of the debtor — by releasing ‘the bankrupt from all claims provable in bankruptcy’” (Alberta (Attorney General) v. Moloney, 2015 SCC 51, [2015] 3 S.C.R. 327, at para. 77). Through discharge, the “honest but unfortunate” debtor is given a fresh start and is provided “with relief from the weight of oppressive indebtedness” (Moloney, at para. 77, citing L. W. Houlden, G. B. Morawetz and J. Sarra, Bankruptcy and Insolvency Law of Canada (4th ed. rev. (loose‑leaf), at p. 1‑2.1; J. D. Honsberger and V. W. DaRe, Honsberger’s Bankruptcy in Canada (5th ed. 2017), at p. 478). This process also allows “the discharged bankrupt to reintegrate into economic life so he or she can become a productive member of society” (Moloney, at para. 36).
[22] While financial rehabilitation is an important goal of the BIA, it has its limits. These limits are set out in both ss. 172 and 178(1) of the BIA (Moloney, at para. 37). Section 172 provides that an order of discharge may be granted, refused, its operation may be suspended, or it may be granted subject to conditions. Section 178(1) lists specific debts that are not released by discharge and that survive bankruptcy. “These provisions demonstrate Parliament’s attempt to balance financial rehabilitation with other policy objectives, such as confidence in the credit system, that require certain debts to survive bankruptcy” (Moloney, at para. 37, citing R. J. Wood, Bankruptcy and Insolvency Law (2009), at pp. 273 and 289). Both of these sections play a distinct and crucial role in the discharge process. I address each of them in turn.
(1) Section 172: Court May Grant or Refuse Discharge
[23] Section 172 of the BIA addresses the discharge of a bankrupt. It establishes that, on the hearing of a bankrupt’s application for discharge, a bankruptcy court retains broad discretion to grant or refuse an absolute order of discharge, to suspend the operation of such an order for a specified time or to grant a conditional order of discharge. The BIA provides no guidance for the exercise of this discretion, aside from stating that a court must refuse an absolute discharge if any fact referred to in s. 173 is proven against the debtor (J. Sarra, G. B. Morawetz and L. W. Houlden, The 2024 Annotated Bankruptcy and Insolvency Act (2024), at § 7:69). If a court finds that any fact referred to in s. 173 is proven, the bankrupt’s discharge must be refused, suspended or granted conditionally (s. 172(2)). Many of those facts bear directly on the bankrupt’s conduct and culpability, while others reflect standards of commercial morality (s. 173(1)(a) to (o); R. J. Wood, Bankruptcy and Insolvency Law (2nd ed. 2015), at pp. 297‑98). For example, ss. 172(2) and 173(1)(k) establish that a bankrupt who is guilty of any fraud or fraudulent breach of trust is not entitled to an absolute discharge.
[24] A court has broad discretion under s. 172(1). In exercising that discretion, the court considers three factors: the interests of the creditors in obtaining payment of their claims, the interests of the bankrupt in obtaining relief from his or her financial obligations, and the integrity of the bankruptcy process (F. Bennett, Bennett on Bankruptcy (26th ed. 2024), at p. 737, citing Shakell, Re (1988), 70 C.B.R. (N.S.) 270 (Ont. S.C.J.); Phenix, Re (1989), 1989 CanLII 4679 (SK KB), 76 C.B.R. (N.S.) 82 (Sask. Q.B.)).
(2) Section 178(1): Debts Not Released by Order of Discharge
[25] Section 178(1) sets out a specific list of debts that are not released by an order of discharge and that therefore survive bankruptcy (Moloney, at para. 37). These debts are non‑discretionary exceptions to the general rule and represent “the kind of claims that society, through Parliament, considers to be of a quality that outweighs any possible benefit in the bankrupt being relieved of them” (Sarra, Morawetz and Houlden, at § 7:185, citing Jerrard v. Peacock (1985), 1985 CanLII 1148 (AB KB), 37 Alta. L.R. (2d) 197 (Q.B.)).
[26] The exceptions in s. 178(1)(a) through (h) must be interpreted narrowly and applied only in clear cases (Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53, at para. 25; Korea Data Systems (USA), Inc. v. Aamazing Technologies Inc., 2015 ONCA 465, 126 O.R. (3d) 81, at para. 63). A narrow interpretation is required partly because courts have no discretion respecting their application: “. . . the policy objective protected by the exception must, in all circumstances, trump the discharge of the bankrupt” (H. Murray and H. Fisher, “You’re Hot and You’re Cold, You’re Yes and You’re No: Conflicting Appellate Decisions Regarding Whether Regulators’ Fines, Penalties or Restitution Orders Survive Bankruptcy”, in J. Corraini and D. B. Nixon, eds., Annual Review of Insolvency Law 2022 (2023), 569, at p. 618; J. Girgis and T. G. W. Telfer, “Do Securities Commission Debts Survive a Bankruptcy Discharge? An Analysis of Poonian v. British Columbia (Securities Commission) (BCCA)” (2023), 67 Can. Bus. L.J. 438 (“Girgis and Telfer (2023)”), at pp. 453‑54). Section 178(1) is not “a catchall of debts arising from morally objectionable conduct”, but rather sets out “categories of specific wrongful conduct that give rise to debts that are not released, and specifies the criteria to be applied” (Shaver‑Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925, 160 O.R. (3d) 205, at para. 39; see also A. Nocilla, “Comment on Shaver‑Kudell Manufacturing Inc. v Knight Manufacturing Inc.” (2022), 45:2 Man. L.J. 177, at p. 187).
[27] The s. 178(1) exceptions must also be interpreted narrowly because of the fact that “the more claims that survive bankruptcy, the more difficult it becomes for a debtor to rehabilitate” (Moloney, at para. 79; see also Schreyer, at para. 19; Martin v. Martin, 2005 NBCA 32, 282 N.B.R. (2d) 61, at para. 11). As a result, “[w]here there is doubt as to whether a creditor falls within an exemption, the benefit should go to the bankrupt” (Murray and Fisher, at p. 576, citing Jerrard, at p. 206).
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