Securities regulators already have a hard time collecting the monetary sanctions they impose. Now, an Alberta court has ruled that these sanctions can be wiped away by bankruptcy.

The Court of Appeal of Alberta granted an appeal brought by Theodor Hennig, who was ordered by the Alberta Securities Commission (ASC) in 2008 to pay an administrative penalty of $400,000 and $175,000 in costs. The ASC had found that he violated securities law for his role in a company issuing misleading financial statements, failing to disclose secret commissions, failing to file insider trading reports, and market manipulation.

In 2011, Hennig declared bankruptcy, and in 2015, he was discharged from bankruptcy.

In 2018, the ASC sought to have his outstanding debt to the commission — now more than $600,000 — enforced.

According to the appeal court decision, “The ASC sought a declaration from the Court of Queen’s Bench that its debt arising from the administrative penalty and associated costs survive Mr Hennig’s discharge from bankruptcy.”

The judge granted the ASC’s application, finding that the debt to the ASC survived the bankruptcy because it arose as a result of fraud, or represented a penalty similar to sanctions imposed by a court.

Hennig appealed that decision, and the appeal court has now found in his favour, ruling that the lower court judge erred.

The appeal court noted the ASC didn’t find that Hennig committed fraud, nor did the regulator even allege fraud in its allegations against him.

“Almost two decades after the impugned conduct the ASC is claiming Mr Hennig made fraudulent statements, when it never chose to do so before,” the appeal court said in its decision.

It added that “the chambers judge erred by not considering the full context of the proceedings before concluding that the findings of fact made by the ASC panel amounted to Mr Hennig making fraudulent statements.”

The appeal court also found that a penalty imposed by the ASC isn’t equivalent to a court-ordered sanction that would survive bankruptcy.

As a result, it granted the appeal and ordered that Hennig’s debt to the ASC doesn’t survive his bankruptcy discharge.