Claims by regulatory bodies and bankruptcy

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A monetary claim against the bankrupt, whether liquidated or contingent at the time of bankruptcy, will be dealt with as a claim provable in bankruptcy. However, when the monetary claim is by a regulatory body, unique considerations may apply.

Regulatory bodies include professional bodies and regulating agencies, such as a securities regulator. Depending on the situation, the regulatory body may have wide powers to impose charges such as fines or penalties and assess costs arising from regulatory proceedings, in addition to imposing other administrative sanctions. If the regulatory proceedings were started before a bankruptcy, but the assessment of the penalty, fine or costs does not occur until after the bankruptcy, it is not a forgone conclusion that the amounts assessed will be claims caught by the bankruptcy. If the amount is not a claim provable in bankruptcy, it will be recoverable as a post-bankruptcy obligation of the bankrupt.

The recent decision in Chartered Professional Accountants of Alberta v. Neilson, 2018 ABQB 170, highlights the analysis that will be undertaken in respect of a monetary claim by a regulatory body which is assessed or determined after the date of bankruptcy.

Mr. Neilson was the subject of three allegations by the CPAA related to professional misconduct. Two of the allegations related to conduct well before the bankruptcy. The third related to failure to cooperate with the investigation, which allegation was issued after the bankruptcy. Mr. Neilson, while still an undischarged bankrupt, entered into an agreement (the “Sanction Agreement”) with the CPAA in which he agreed to the assessment of fines for each of the three allegations and to a global assessment of costs in respect of the three allegations. His expectation was that the fines and costs would be claims dealt with in his bankruptcy. However, the CPAA applied to court to enforce the Sanction Agreement, claiming that all amounts were outside of the bankruptcy proceeding.

Mr. Justice Eamon provided a detailed analysis of the law related to determining whether a regulatory fine or penalty and costs will be considered a claim provable in bankruptcy. He noted that the starting point for the analysis is the case of Re AbitibiBowater Inc., 2012 SCC 443. In that case the Supreme Court of Canada (SCC) concluded that financial regulatory charges are a provable claim if three requirements are met: “First, there must be a debt, a liability or an obligation to a creditor. Second, the debt, liability or obligation must be incurred before the debtor becomes bankrupt. Third, it must be possible to attach a monetary value to the debt, liability or obligation.”

With Mr. Neilson, the CPAA was the regulatory body entitled to regulate Mr. Neilson’s conduct and by the Sanction Agreement it had issued fines and assessed costs in accordance with its jurisdiction. The first two allegations were issued before Mr. Neilson was bankrupt, so were obligations in existence before he was bankrupt.

It is the third of the SCC’s requirement’s that can be the most problematic. If there is a fixed penalty that will be assessed in the event of a specific finding being made by the regulatory body, then there is arguably an obligation which is dependent only upon the contingency of completing the regulatory process. However, where the regulatory body has significant discretion in assessing fines or penalties and costs, there may well be doubt as to whether it is possible to attach a monetary value to the obligation. If costs are generally assessed if the allegation is proved, then the costs might be a claim provable in bankruptcy whereas the fine or penalty that is assessed is not.

With Mr. Neilson, not surprisingly, the court concluded that the fine in respect of the third allegation was not a claim provable in bankruptcy since the events that lead to that allegation had not yet occurred as of the date of bankruptcy.

The issue of costs was more problematic since under the Sanction Agreement costs were assessed globally in respect of all three allegations. The court found that the CPAA always assessed costs when an allegation was established. While the amount for the costs might be uncertain, there was a monetary value that would be attached. As such the costs, as a contingent claim, were a claim provable in bankruptcy. However, since the costs included some amount related to the third allegation, the court found that the incremental costs associated with the third allegation were not a claim provable in bankruptcy.

It might be expected that the fines in respect of the first two allegations would be dealt with based on a similar analysis as the costs. However, the court concluded that those fines were not claims provable in bankruptcy. The court stated:

It is one thing to predict that costs would be imposed if there was misconduct. It is a very different thing to predict as of the date of bankruptcy whether a tribunal would see fit to impose a fine. As mentioned earlier, discipline tribunals must be sensitive to proportionality and the relevant facts and circumstances at the time of sanctioning. Their sanction decision depends on a myriad of information about the specific circumstances of the Respondent, and would likely include any aggravating circumstances (such as refusing to cooperate in the investigation) and any mitigating circumstances (such as an early and meaningful acknowledgment of responsibility or guilty plea). There is nothing in the record that suggests the regulator would have had such information at the date of bankruptcy. Important pieces of the puzzle did not exist at the date of bankruptcy, including information about the Respondent’s cooperation or an early and meaningful guilty plea. At the date of bankruptcy, the disciplinary fines must have been remote or speculative.

The take away from the Neilson decision is that persons who are considering assigning into bankruptcy while the subject of an incomplete regulatory proceeding should consider holding off on such step until the regulatory body has made its decision and assessed all fines or penalties and any costs. If the regulatory body has concluded the proceeding, there should be little doubt that the amounts assessed will be claims provable in bankruptcy. If, however, the regulatory proceeding continues after a bankruptcy has occurred, the bankrupt may require more detailed legal advice with respect to negotiated settlement agreements and on whether any monetary assessments by the regulatory body will be a claim provable in bankruptcy.

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