If you’re a corporate director or officer, you might find your company and/or yourself in need of relief from unmanageable debts. The federal Bankruptcy and Insolvency Act (BIA) governs bankruptcy in Canada for individuals and business entities. If your personal debts include items created because of your activities with the corporation, you may find that some opportunities for relief are expanded but others are eliminated. The Alberta Court of Queen’s Bench recently issued a decision refusing to discharge a former director’s responsibility for civil penalties for misdeeds under the provincial Securities Act (Alberta Securities Commission v Hennig).
What was the securities law case about?
Theodor Hennig is a chartered public accountant, involved with a company called Proprietary Industries Inc (PPI). From 1993 until August 2002, he was PPI's chief financial officer ("CFO"), secretary and treasurer; from December 2001 until August 2002 he was also one of PPI’s directors. In 2003, the Alberta Securities Commission (Commission) staff charged PPI, Hennig and PPI director Peter Workum with “improprieties” in PPI’s financial statements for 1998-2000 (identified as failure to follow generally accepted accounting principles (GAAP)), and with making misleading statements based on those improprieties. The Commission also charged Hennig and Workum, and two other corporations, with insider trading and unreported “secret commissions.” During this time, PPI was listed on the Alberta Stock Exchange and then on the Toronto Stock Exchange. After an extensive administrative hearing, the Commission found the two men guilty. As cited in the recent court decision, the Commission found that Hennig:
had been responsible for improper financial disclosure and misrepresentations in the 1998, 1999 and 2000 financial statements of PPI and other corporations with which he was involved, and related misrepresentations in other PPI disclosure in order to produce a misleading impression of financial positions and results, contrary to securities laws;
obtained financial benefits from investor funds that were not disclosed to investors as required;
participated in market manipulation that resulted, or could reasonably be expected to have resulted, in an artificial price for certain securities;
contravened the insider trade reporting requirements of Alberta securities laws;
made misrepresentations to the Alberta Securities Commission "so numerous as to constitute a pattern of conduct"; and
acted contrary to the public interest in carrying out all of the foregoing.
After further proceedings, the Commission sanctioned Hennig by imposing a permanent director and officer ban, 20-year trading and denial of exemptions bans, a $400,000 administrative penalty and $175,000 in costs. It sanctioned Workum by imposing permanent trading, and director and officer bans, imposing denial of exemption, a $750,000 administrative penalty and $200,000 in costs. (re Workum and Hennig)
What happened in the director’s bankruptcy case?
Hennig subsequently filed for bankruptcy protection under the BIA. As part of his bankruptcy, he asked the court to discharge the administrative penalties for his securities law violations. The Commission objected. In reaching its decision the Court considered BIA section 178, which identifies eight exclusions from dischargeability of debts in bankruptcy:
178 (1) An order of discharge does not release the bankrupt from
(a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail …
(b) any debt or liability for alimony or alimentary pension;
(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;
(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;
(e) any debt or liability resulting from obtaining property or services by false pretenses or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim;
(f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim;
(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred [within specified time periods]
(h) any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g.1).
Reviewing these exclusions, the Court found that exclusions (a) and (e) applied to Hennig’s situation, but (d) does not because the history and application of that provision apply to third party creditors who had been defrauded, not to regulatory agencies and their fines. Accordingly, it denied Hennig’s request, affirmed the earlier penalties, and assessed him for the costs of his appeal.
How should we think about this?
This decision reminds directors and officers that their corporate roles can have negative financial and legal impacts, if they do not execute their responsibilities fully and appropriately. This new decision is also a reminder that bankruptcy does not always provide an escape even if the financial burdens are unsustainable.
Although not involved in this case, directors and officers should also keep in mind that these exclusions are not symmetrical: if a corporation enters bankruptcies, some of its debts are transferred from the entity to individual directors. For example, corporations and employment laws throughout Canada provide that directors can be personally liable, jointly and severally among board members, for up to 6 months of unpaid compensation. (See, e.g., Canada Business Corporations Act s. 119).
Am I a director or officer of a Canadian business corporation?
Am I aware of my responsibilities to the corporation, including those imposed by specific laws and regulations relating to the company’s activities?
Have I verified that the company is in compliance with applicable responsibilities?
Have I verified that I am in compliance with my responsibilities under these laws and regulations, as a director or officer?
Where can I go for more information?
About the Author
Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years.
Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).
Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).
You may contact Mr. Elliott directly at: firstname.lastname@example.org