By: Jassmine Girgis
Case Commented On: Henderson v Peerani, 2024 ABCA 370 (CanLII)
PDF Version: Narrow Interpretations v Commercial Realities: Striking the Right Balance in Poonian
In the recent case of Poonian v British Columbia (Securities Commission), 2024 SCC 28 (CanLII) (Poonian), the Supreme Court of Canada clarified s 178(1)(e) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA), the false pretence and fraudulent misrepresentation exception to bankruptcy discharge. Henderson v Peerani, 2024 ABCA 370 (CanLII), is one of the first cases to deal with the same exception after Poonian.
As an exception to the financial fresh start goal of the BIA, s 178(1)(e) must be interpreted narrowly. This is not a straightforward task, however, as it involves balancing the different policy objectives of the BIA: providing the debtor with a fresh start while instilling confidence in the credit system and addressing the legitimate concerns of creditors. To achieve this balance, the specific wrongdoing must be interpreted narrowly to ensure only the enumerated wrongful acts are captured, whereas the ways in which the wrongdoing can be perpetrated warrants a broader interpretation to ensure that regardless of the number of parties involved in its execution, the debtor’s wrongful behaviour is captured.
Poonian provided a welcome clarification of s 178(1)(e) because it demonstrated the way to properly apply a narrow interpretation to the provision. Prior to Poonian, some courts threw up artificial limitations, resulting in illogical conclusions that were divorced from the purpose of the provision. Other courts went the other way – interpreting the provision so broadly that it became divorced from the statutory wording.
Interpreting the provision in a more nuanced way meets the statutory requirements while allowing for commercial realities to prevail; it ensures that regardless of how creative the debtor is in executing the fraud, the provision does what it is supposed to do: preventing the fraudulently obtained debt from being discharged.
Facts
The appellant, Peggy Henderson, loaned approximately $600,000 to three interconnected companies (the Debtor Companies) between 2003 and 2012. She was also a minority shareholder in two of these companies.
Henderson alleged that three individuals involved in these companies, together, the respondents, made fraudulent representations to Henderson that Henderson relied on to her detriment to approve the sale of two properties by the Debtor Companies. Henderson maintained that even though these sales yielded substantial proceeds for the Debtor Companies, most of these proceeds were diverted, for no consideration, to other entities controlled by the other individuals. As a result of these transactions, Henderson claimed that her loans could not be repaid, nor could distributions be made to the other shareholders.
Henderson started litigation against the respondents to recover the monies she had loaned to the Debtor Companies. Before the actions proceeded to trial, however, each of the respondents made an assignment into bankruptcy, which stayed the proceedings against them pursuant to s 69.3 of the BIA. The appellant applied to terminate the stays.
The matter was dismissed in commercial chambers (2023 ABKB 301 (CanLII)). The Alberta Court of Appeal allowed the appeal, concluding that the chambers judge, not having had the benefit of the Supreme Court’s decision in Poonian, which clarified the correct interpretation of s 178(1)(e), erred in his interpretation of the provision by failing to find that the stay should have been terminated against each of the respondents.
Court of Appeal Decision
The chambers judge had found that Henderson’s loans to the Debtor Companies pre-dated the misrepresentations, leaving no causal link between the misrepresentations and the transfer of property.
The Court of Appeal overturned the decision, maintaining that a creditor does not need to be a “direct victim” or the “direct recipient of the false statement” under s 178(1)(e). Instead, the “direct link” is one between the amount of liability claimed and the value of the property or services obtained by the fraudulent misrepresentation. For that reason, while detrimental reliance is required, the property did not have to transfer from the appellant or to the bankrupt to engage s 178(1)(e) (at paras 46-48).
Having found that the appellant demonstrated an arguable claim of fraudulent misrepresentation within the scope of the s 178(1)(e) exception, the Court of Appeal set aside the chambers judge’s decision and declared the stay of proceedings in favour of each respondent bankrupt to be no longer operable against the appellant.
My Comments
One of the goals of the BIA is to provide a financial fresh start for honest but unfortunate debtors, which it does through the statutory discharge (s 178(2)). The discharge allows for a debtor’s debts to be forgiven after bankruptcy, providing them with the opportunity to “reintegrate into economic life so he or she can become a productive member of society” (Alberta (Attorney General) v Moloney, 2015 SCC 51 (CanLII) at para 36).
Not all debtors, however, are honest but unfortunate; indeed, some engage in intentional misconduct in an effort to evade their creditors. For that reason, the discharge does not apply to every debt. Exceptions to the discharge are found under s 178(1) of the BIA, where there is a list of enumerated debts that will survive the bankruptcy. The debts listed under s 178(1) fall along a broad spectrum, ranging from child support payments to an award of damages for intentionally inflicted bodily harm to government student loan debt. The one thread that appears to tie these debts together is that they all arise from immoral or wrongful behaviour, leading us as a society to determine that these wrongful acts should not be forgiven, and that the debtor should not profit from their wrongdoing by having those debts discharged.
Because the exceptions to discharge are exceptions to the statutory goal of financial rehabilitation and because courts do not have discretion in applying them once the facts are made out, the exceptions must be interpreted narrowly. The exceptions must be viewed, not as wrongful conduct in general, but as the specific wrongful conduct listed in the statute. The Ontario Court of Appeal maintained that these exceptions are not “a catchall of debts arising from morally objectionable conduct” but are “categories of specific wrongful conduct” (Shaver-Kudell Manufacturing Inc v Knight Manufacturing Inc, 2021 ONCA 925 (CanLII) (Shaver-Kudell) at para 39; Poonian at paras 26-27).
One of these types of debts is found under s 178(1)(e), a debt that is obtained under false pretences or through fraudulent misrepresentation. As shown below, Poonian was careful to narrowly interpret the definition of the wrongdoing but ensured that the ways in which the wrongdoing in s 178(1)(e) could be executed would be more broadly interpreted. I will highlight these ways by going through the test for s 178(1)(e).
The test to apply for s 178(1)(e) is threefold: a creditor must establish a false pretence or fraudulent misrepresentation, a passing of property or provision of services, and a link between the debt or liability and the fraud (Poonian at para 54).
With regard to the first element, the requirements for fraudulent misrepresentation are the same in the BIA and the Companies’ Creditors Arrangement Act, RSC 1985, c C-36: a creditor must show that a debtor knowingly made a fraudulent representation to obtain property. This has four elements: the debtor made a representation to a creditor; the representation was false; the debtor knew that the representation was false; and the false representation was made to obtain property or a service (Poonian at para 58, adopting the test from Montreal (City) v Deloitte Restructuring Inc, 2021 SCC 53 (CanLII) at para 25). These elements must be rigorously proven in a narrow interpretation (see Jassmine Girgis & Thomas Telfer, “Do Securities’ Commissions’ Debts Survive a Bankruptcy Discharge? An Analysis of Poonian v British Columbia (Securities Commission) (BCCA)” (2023) 67:3 Can Bus LJ 438).
The second element is that there must be a passing of property or provision of services. In Poonian, the Supreme Court said that the property of which a person was deprived need not have passed to the bankrupt in order to qualify under s 178(1)(e). Instead, the property could have passed to a third party at the bankrupt’s direction or on the bankrupt’s behalf (Poonian at paras 72-73). In Henderson v Peerani, counsel argued that the debt was not caught under (e) because the transfer of property in this case had not been from the creditor and had not been transferred to the bankrupt (at paras 45-48). The Court of Appeal however, found that the property did not have to transfer from the creditor to engage s 178(1)(e), nor did the bankrupt need to have been the recipient of the property of which a person was deprived.
The third element, the link between the debt or liability and the fraud, has created confusion as to the extent of its application prior to Poonian. Section 178(1)(e) requires a causal connection between the debt and the fraud. Specifically, the provision says, “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation”, with “resulting from” establishing the connection between the debt in question and the creditor to whom the debt is owed (see also McAteer v Biles, 2006 ABCA 312 (CanLII) at para 7, leave to appeal refused McAteer v Biles, 2007 CanLII 66750 (SCC)).
This language has created the “directly victimized” requirement, that the creditor needed to have been directly victimized by the debtor, which is an interpretation that flows directly from the wording of the provision. However, in Alberta Securities Commission v Hennig, 2021 ABCA 411 (CanLII), which was decided prior to Poonian, the Alberta Court of Appeal imposed two overly limiting requirements into the provision, requirements not found in the language of the statute: that only statements made by the debtor would qualify, not statements for which the debtor was responsible, and that the statements depriving the creditor of its property must have been made directly to the creditor, not to a third party (see Hennig at paras 79, 92).
Although these requirements technically allow for a narrower interpretation, they also create illogical outcomes in the process, outcomes that do not take commercial realities into account; a creditor can be directly victimized even if the statements were made by someone other than the debtor, and/or were not made directly to that creditor. In other words, it is commercially realistic for a debtor to collude with another person to defraud a creditor or to deprive a creditor of its property (see Jassmine Girgis & Thomas Telfer, “The Fraudulent Misrepresentation and False Pretences Exception to the Bankruptcy Discharge: Balancing the Debtor’s Fresh Start with Confidence in the Credit System” (2022) 20 Ann Rev Insol L).
The Ontario Court of Appeal also adopted an overly narrow interpretation to s 178(1)(e) in Shaver-Kudell. This case was about a debtor misappropriating trade secrets and confidential information then manufacturing the product and selling it as his own. However, because the debtor had not made false statements to effect the sales, meaning the customers had not relied on such statements, the Ontario Court of Appeal found that s 178(1)(e) did not apply. In overturning the lower court’s decision, the Court of Appeal did not adopt the motion judge’s reasoning that implicit in every sale was the holding out that the product belonged to the debtor and that he had the right to sell it. By focusing on the lack of express misrepresentation, the Ontario Court of Appeal failed to see that every aspect of these transactions was based on deceit and that the protection offered by the provision should not have been provided to that debtor.
On the opposite end of the spectrum, the British Columbia Court of Appeal drew a conclusion so broad that it completely erased the “directly victimized” requirement. In Poonian v British Columbia (Securities Commission), 2022 BCCA 274 (CanLII), which was overturned by the Supreme Court, the BC Court of Appeal maintained that the Securities Commission’s administrative penalties that had been imposed on the Poonians for their fraudulent conduct towards investors could be claimed under s 178(1)(e). This was despite the fact that the Securities Commission was not the victim of the fraud. On appeal, the Supreme Court ruled that “[t]he words ‘resulting from’ in s 178(1)(e) connote a strict causation requirement” and that s 178(1)(e) therefore requires a “direct link” (Poonian at paras 75-76).
Fifteen years ago, the Manitoba Court of Appeal found the right interpretive balance for this provision in Ste Rose & District Cattle Feeders Co-op v Geisel, 2010 MBCA 52 (CanLII) (Ste Rose). In Ste Rose, the debtor’s son, in collusion with the debtor, had made false pretences to a third party. Despite the statements not having been made to the creditor, the Court found that the creditor had been directly victimized (Ste Rose at paras 90-92).
The Supreme Court’s decision in Poonian now provides clear guidelines about how to interpret the provision, which will help as more creative methods are employed by resourceful debtors to obtain funds by false pretences or pursuant to fraudulent misrepresentations.
This post may be cited as: Jassmine Girgis, “Narrow Interpretation v Commercial Realities: Striking the Right Balance in Poonian” (17 March 2025), online: ABlawg, http://ablawg.ca/wp-content/uploads/2025/03/Blog_JG_Poonian.pdf
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