Administrative Monetary Penalties In The Afterlife

• Published date: 07 June 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Financial Services, Insolvency/Bankruptcy, Securities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Gardiner Roberts LLP
• Author: Mr Kenneth Jull

Allegations of criminal or regulatory violations are often made in the civil and administrative law world. A securities broker may be alleged to have defrauded investors by making false statements regarding the use of their funds, and by using invested funds for improper purposes.¹ In the administrative regime, the securities broker may face restrictions on professional activities or an administrative monetary penalty ("AMP") of not more than a $1 million for each failure to comply.

Following the imposition of a significant AMP in the millions of dollars, that securities broker may think that she got off lightly, if she was not prosecuted for fraud under the Criminal Code. She may take some solace in the thought that the AMP, unlike a criminal fine, will not survive a pending bankruptcy which will enable her to get on her feet again. She would be wrong in making that assumption. Recent cases have demonstrated that AMPs for fraudulent conduct may survive in the afterlife of bankruptcy.

The case of Alberta Securities Commission v. Hennig² offers a twist on the interpretation of the divide between administrative monetary penalties and offences. An application by the Alberta Securities Commission sought a declaration that an administrative penalty levied against Hennig survived his discharge as a bankrupt pursuant to s. 178(1)(a), (d) and (e) of the Bankruptcy and Insolvency Act (BIA) was granted.

Bankruptcy and Insolvency Act

As a basic principle, a bankrupt is released from all claims provable in bankruptcy by an order of discharge: section 178(2) of the BIA. However, section 178(1) of the BIA sets out eight classes of exceptions to that rule. Relevant to the application in Hennig, were subsections 178(1)(a)(d) and (e) of the BIA provide that an order of discharge does not release the bankrupt from:

a) any fine, penalty, restitution order or other order similar in nature imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;

d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity; or

e) any debt or liability arising from obtaining property or services by false pretenses or fraudulent misrepresentation.³

The administrative penalty arose from the findings of a panel of the Securities Commission that Hennig was responsible for misrepresentations in the financial statements of a public company of which he was a director and officer, that he obtained financial benefits as a result of non-disclosure of material facts, that he participated in market manipulation which resulted in artificial prices for another company, and that he made ongoing misrepresentations to Commission staff, all contrary to the public interest. The decision of the Commission, upon filing with the Court, "has the same force and effect as if it were a judgment of the Court of Queen's Bench" pursuant to section 200 of the Securities Act.⁴ The decisions of the Commission were certified by the Court of Queen's Bench...