CAMAC Report On The Sons Of Gwalia Decision – Shareholder Claims Maintain Status

The Corporate and Markets Advisory Committee (CAMAC) report released on 29 January 2009 maintains the rights of aggrieved shareholders seeking to claim against insolvent companies.

The report supports the 2007 High Court decision in Sons of Gwalia which considered the conventional thinking that claims by shareholders are postponed to claims by creditors in the winding up of a company. The High Court had determined that, if a shareholder claim was based on non-compliance with disclosure laws, or some other corporate misconduct, then it was not a claim in the shareholder's capacity "as a member of the company" and would, as a consequence, rank equally with the claims of unsecured creditors.

CAMAC acknowledged the significant implications of the decision on unsecured creditors, including for unsecured corporate debt finance providers, who would have to compete with this class of investors to participate in a fixed and often limited pool of assets. Despite this, CAMAC has not recommended any legislative action to alter or overturn the effect of the decision. This recommendation has attracted much commentary, particularly from insolvency administrators charged with determining and admitting claims against companies in external administration. It is acknowledged that this task is made more difficult in the days of class actions and litigation funders.

Essentially, CAMAC considered that restricting an aggrieved shareholder's rights of remedy, where a company is under external administration, would undermine the legislative initiatives designed to give a shareholder a right of action in relation to corporate misconduct. It was noted that the threat of such private actions augments the regulatory armoury to promote corporate disclosure and an efficient and informed market.

The report noted that, even with the assistance of litigation funders and class actions, aggrieved shareholders will still need to overcome hurdles in substantiating their claims significantly greater than those faced by traditional unsecured creditors. Further, CAMAC referred to submissions which indicated that many lenders have already taken steps after the decision was handed down (such as increasing monitoring of borrowers, taking security or entering into creditors' schemes of arrangement) in order to protect their position against this threat of increased shareholder action. By implication, CAMAC appears to consider that lenders must first help themselves before expecting help in the form of legislative amendment.

Also, CAMAC noted the additional complexities of dealing with unsubstantiated shareholder claims and proposed various measures to assist external administrations including:

• a standardised proof of debt for claims by aggrieved shareholders

• a rebuttable presumption that a determination in one proceeding of a question of fact common to another aggrieved shareholder claim will apply in any subsequent proceedings

• giving the court a general power to make orders in a liquidation, which would cover creditors' meetings and the determination of shareholder claims.

We await any response from the Commonwealth Government following the release of the report.

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