The chair of the British Columbia Securities Commission is calling on the federal government to change legislation to protect investors after the Supreme Court of Canada ruled fines issued by regulators can be wiped out by bankruptcy.

Brenda Leong said the high court鈥檚 ruling is a 鈥渟et back,鈥� but also a 鈥減artial win鈥� for investors because their direction to pay back ill-gotten gains 鈥� known as disgorgement orders 鈥� will remain in place even after an individual is discharged from bankruptcy.

鈥淭his commission has long advocated for changes to the bankruptcy legislation in order to expressly exempt securities sanctions,鈥� Leong said at a news conference Wednesday. 鈥淭he federal government needs to act now to make that change in order to protect investors in this country.鈥�

The ruling handed down Wednesday says penalties imposed by 鈥渁dministrative tribunals or regulatory agencies鈥� are not covered by a list of exceptions in the Bankruptcy and Insolvency Act, which outlines specific types of debts that 鈥渟urvive bankruptcy.鈥�

The case involved a B.C. couple, Thalbinder Singh Poonian and Shailu Poonian, who were ordered by the British Columbia Securities Commission to pay $13.5 million in administrative penalties and $5.6 million to repay those who lost money in a market manipulation scheme that 鈥渃aused vulnerable investors to lose millions of dollars.鈥�

University of British Columbia law professor Cristie Ford said the high court鈥檚 ruling is a 鈥渂it of a blow to the securities commission and its ability to protect investors in the capital markets.鈥�

鈥淚t鈥檚 a powerful regulator with important priorities,鈥� Ford said. 鈥淪ometimes, the important priorities that securities regulators are trying to take care of can run up against other important priorities when it comes to other areas of law.鈥�

Ford said provincial securities regulators are empowered to penalize bad actors in the country鈥檚 capital markets, but this case saw it run up against a 鈥渄eep constitutional question around what courts can do and what administrative tribunals or the executive can do.鈥�

She said there is a 鈥渃onsiderable challenge around making sure that securities commissions can be as effective as possible within the bounds of these constraints that are imposed by deep constitutional principles.

鈥淚t鈥檚 tricky,鈥� she said.

A majority of the high court ruled penalties are not exempt because they aren鈥檛 imposed by a court, and don鈥檛 directly result from fraudulent conduct, but rather are made 鈥渋ndirectly鈥� through the commission鈥檚 decision to sanction the Poonians.

The court ruled that if debts from administrative penalties did survive bankruptcy by being covered by the law鈥檚 exemptions, there would be 鈥減otential to capture debts or liabilities that are not the direct result of deceit.鈥�

The court found, however, that disgorgement orders issued by the regulator 鈥渞epresent the value of the bankrupts鈥� fraud 鈥� the funds that they gained as a result of their market manipulation.鈥�

鈥淭here is therefore a direct link between the fraudulent conduct of the bankrupts and the commission鈥檚 disgorgement orders,鈥� the ruling says.

The high court said if Parliament wanted fines or penalties levied by regulators like the commission to survive bankruptcy, 鈥渋t could have said so expressly.鈥�

Amending Canada鈥檚 Bankruptcy and Insolvency Act, Ford said, would 鈥渂e the simplest fix for this problem,鈥� but whether that will happen is unclear.

鈥淲hile an amendment to the bankruptcy act would fix this immediate problem, it is sort of more of a Band-Aid solution to a bigger problem, which is that securities commission priorities don鈥檛 always fit perfectly well with other parts of the law,鈥� she said.

Jassmine Girgis, a University of Calgary law professor who specializes in bankruptcy and insolvency law, said Wednesday that she understands the set back for provincial securities commissions is significant.

鈥淚 feel for the securities commission. I mean, these are massive penalties that they鈥檙e not getting, and it鈥檚 important that they are able to collect their penalties because their functioning requires that,鈥� she said. 鈥淏ut it鈥檚 also really important that the legislation be read the way that it is written and according to its purpose.鈥�

Girgis said the high court distinguished between penalties issued by the regulator and disgorgement orders, which corresponds with how much was obtained through deceitful conduct and used to pay back amounts taken from victims.

鈥淭he securities commission is not the victim of the fraud,鈥� she said. 鈥淏ut that doesn鈥檛 mean that Parliament can鈥檛 revisit this and give something to the securities commission.鈥�

Girgis said there had been competing findings by courts in B.C., Alberta and Manitoba on the issue, and the Supreme Court鈥檚 ruling Wednesday clears up those disagreements.

鈥淚t鈥檚 probably why the Supreme Court wanted to hear this, but maybe now that there has been a clear voice from the Supreme Court, maybe the federal government would be interested in revisiting it,鈥� Girgis said.

The Poonians, she said, still remain in bankruptcy and haven鈥檛 been discharged, so their debts to the B.C. Securities Commission and the Canadian Revenue Agency remain in place for now, and in bankruptcy law, 鈥渢hat鈥檚 the price you pay for being a dishonest debtor.鈥�

鈥淭hese are long, hard-fought policy battles between different stakeholders,鈥� Girgis said. 鈥淚t leaves the court in a situation where they鈥檙e supposed to interpret the legislation and the court here did, which is great, and once they do that, then I guess it鈥檚 up to Parliament to consider: do we need to change something?鈥�

Darryl Greer, The Canadian Press