Alberta Securities Commission v Hennig, 2021: The Conflict Between the Fresh Start Principle in Bankruptcy Law and the Enforcement Actions of Securities Regulators


The Alberta Court of Appeal overturned a decision of the Alberta Court of Queen’s Bench, holding that an administrative penalty from the Alberta Securities Commission (the “ASC”) does not not survive bankruptcy. We discussed the Alberta Court of Queen’s Bench decision in a previous legal update foundhere.


The ASC imposed administrative penalties against Hennig after an ASC panel found that Hennig violated Alberta securities laws and acted contrary to the public interest. In particular, the ASC found that Hennig violated securities laws by misrepresenting financial statements, participating in market manipulation, violating insider trading reporting requirements, obtaining financial benefits from investors’ funds and making false statements to the ASC. As a result of these findings, the ASC panel imposed administrative penalties on Hennig totaling $400,000. Hennig did not pay the penalties imposed on him and instead filed for bankruptcy. In the Alberta Court of Queen’s Bench decision under appeal, the Court ruled that Hennig’s discharge from Alabama bankruptcy did not exempt him from ASC sanctions, as they fell within the categories of excluded claims set out in s. 178(1) of Bankruptcy and Insolvency Law (the “BIA”). The exceptions set out in the BIA that are relevant to this decision are as follows:

Debts not discharged by discharge order

‎178 (1) A discharge order does not release the bankrupt from

‎(a) any fine, penalty, restitution order or other order of a similar nature to a fine, sentence or restitution order, imposed by a court in respect of an offence, or any debt arising from a recognizance or a caution ;


(e) any debt or liability resulting from the obtaining of goods or services by false pretenses or fraudulent misrepresentations, other than a debt or liability arising from a capital action.

With respect to the interpretation and scope of the BIA, the Alberta Court of Queen’s Bench concluded that the exceptions provided for in s. 178(1) “exists to ensure that debtors who have engaged in fraudulent or dishonest conduct are not entitled to a discharge. In the opinion of the Court, the exceptions provided for in s. 178(1) of the BIA must be interpreted purposively bearing in mind policy considerations, including the consideration that “a debtor who has engaged in fraudulent or dishonest conduct is not entitled to a fresh start offered by a general bankruptcy discharge”.

The decision of the Alberta Court of Appeal

Contrary to the broad and purposive interpretation of s. 178(1) adopted by the Court of Queen’s Bench, the Court of Appeal adopted a narrower interpretation. In particular, the Court held that “the proper approach to interpreting the exemptions of Article 178(1) assumes that all debt is discharged upon a discharge of the bankrupt unless one or more of the exceptions of Article 178(1)’s subsections clearly exempt the debt from discharge”.

With respect to the specific exceptions, the Court of Appeal held that the ASC’s debt is not covered by s. 178(1)(a) of the BIA which exempts from fines, penalties or restitution orders. In finding that this provision did not apply, the Court noted that the ASC had proceeded administratively against Mr. Hennig, not by criminal or quasi-criminal prosecution.

Under Alberta Securities Law, an administrative penalty imposed by the ASC qualifies as a debt for enforcement purposes.

The Court rejected the ASC’s argument that the administrative penalty and costs order was “court-imposed” because the ASC had filed the ASC panel’s decisions with the Court. of the Queen’s Bench of Alberta. The Court noted that the Court’s involvement was passive as it “took no action other than to put ‎‎[the ASC decisions] on file” and that is not compatible with being “imposed by the court”. Moreover, the Court held that the word “offence” in paragraph 178(1)(a) of the BIA refers to a violation of criminal or quasi-criminal law, which further reinforces the Court’s conclusion that the debt of the ASC does not fall within the scope of paragraph 178(1)(a) of the BIA.‎

Respecting art. 178(1)(e) which exempts debts arising from false pretences or fraudulent misrepresentations, the Court of Appeal identified three required elements for this provision:

  1. fraudulent misrepresentation or pretence;
  2. a link between debt and fraud; and
  3. a transfer of ownership as a result of the fraud.

The majority of the Court of Appeal found that the ASC did not allege that Hennig committed fraud in its Notice of Hearing and that the ASC panel made no express findings of fraud against Hennig. . Given the finding that the ASC “is a sophisticated regulatory body that operates with the assistance of in-house counsel and conducts many complex hearings”, the Court concluded that the ASC was not able to satisfy the first requirement of art. 178(1)(e). However, the minority opinion, while agreeing with the result, disagreed with the majority that the first requirement of s. 178(1)(e) had not been complied with. In particular, the minority opinion held that the chambers judge was entitled to look beyond the pleadings and assess the factual findings of the ASC to determine whether there had been a fraudulent or false statement. pretend.

Although the majority found that the ASC could not prove the first element, it also probed the second element, namely the link between the debt and the fraud. In this regard, the Court held that “…the required connection between the fraudulent representation and the debt is established only if the debtor makes the fraudulent representation to the creditor on the basis of Article 178(1)(e)” . The Court reviewed the decision of the ASC committee to conclude that “the ASC’s debt against Mr. Hennig is not based on Mr. Hennig’s lies to ASC staff. [but] Mr. Hennig’s Misleading Capital Markets Statements and Other Market Wrongdoings” and that the required link between the fraudulent statements and ASC’s debt was therefore not established. ‎

Take away food

The move follows statements from securities regulators about the challenges they face when trying to collect monetary penalties for securities violations and the recent sweeping amendments to the British Columbia Securities Act, giving the British Columbia Securities Commission some of the strongest collection and enforcement powers in Canada. As part of these efforts, The British Columbia Minister of Finance has also called on the federal government to amend the BIA to provide securities commissions with an explicit exemption from discharge. The BCSC said the proposed amendments to the BIA would be another step toward improving collection rates by securities regulators across the country so that those sanctioned by regulators cannot use the bankruptcy to escape payment of penalties. It remains to be seen whether Parliament will act on such proposals to extend discharge exemptions under Art. 178(1). In the absence of such legislative change, securities regulators will need to rely on other remedies available to them (including, but not limited to, pursuing quasi-criminal enforcement actions ) to ensure that their monetary orders survive bankruptcy.


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