In brief
- The Corporations and Markets Advisory Committee recommended in its report Claims by shareholders against insolvent companies: implications of the Sons of Gwalia decision that there should be no change in the law in response to the Gwalia decision.
CAMAC report
The Corporations and Markets Advisory Committee (CAMAC) has released its report on Claims by shareholders against insolvent companies: implications of the Sons of Gwalia decision (the Report). In considering Sons of Gwalia Ltd v Margaretic [2007] HCA 1 (the Gwalia decision) CAMAC discussed the appropriate balance between investor and creditor rights in insolvency law. CAMAC recommended that there be no change to the law in response to the Gwalia decision. The High Court held in that case that a claim brought by a shareholder under statutory investor protection provisions ranked equally with the claims of other unsecured creditors.
Gwalia decision
The plaintiff shareholder, Margaretic, held shares in Sons of Gwalia Ltd (Gwalia) which was an ASX-listed gold mining company. Gwalia went into voluntary administration and the value of the shares fell to nil. Gwalia executed a Deed of Company Agreement that provided distributions from company's assets to take place in an order of priority which included s 563A of the Corporations Act 2001. The effect of s 563A is to rank payments to shareholders in their capacity as members behind other debts and claims against the company.
Margaretic commenced an action claiming that Gwalia breached the continuous disclosure requirements in s 674 of the Corporations Act, by failing to notify ASX of changes in its operations that meant it could no longer operate as a going concern. The claim was that Gwalia had misled or deceived the shareholder pursuant to s 52 of the Trade Practices Act 1974, s 1041H of the Corporations Act and s 12DA of the Australian Securities and Investments Commission Act 2001. Margaretic claimed the difference between the purchase price of the shares and their value after the company went into voluntary administration.
The majority of the High Court (6-1) followed the decision of the Federal Court and held that that was not a claim founded on any rights incurred by virtue of membership of Gwalia. Margaretic's claim therefore ranked with those of other unsecured creditors under Part 5.3A of the Corporations Act.
CAMAC on implications of the case
Chapter 2 of the Report highlights the implications of the Gwalia decision, particularly the determination of shareholder claims and conduct of external administrations.
The Gwalia decision brought into focus the conflict between shareholders' statutory remedies for corporate misconduct and the traditional notion of shareholder interests being postponed behind those of conventional unsecured creditors in a liquidation.
The High Court did not accept that s 563A embodied a 'creditors come first, shareholders come last' approach in all respects. Rather the High Court placed a shareholder with a claim under investor protection provisions on the same footing as a conventional unsecured creditor in voluntary liquidation or winding up, with the rights to receive information and exercise voting rights as creditors.
CAMAC also acknowledged that shareholder claims may add to the complexity of corporate reconstructions and proposed a number of measures to help manage shareholder claims more efficiently.
The Report discussed the following possible ramifications:
- Reduced availability or increased cost of finance - lenders may impose more onerous terms, charge higher interest;
- Loan agreements may become more complex; and
- Trade creditors may be less inclined to extend credit, and may build the added risk into cost of goods and services.
CAMAC was not persuaded that the decision should be overturned or that shareholders' rights should be postponed, capped or quashed. Any move to limit the rights of recourse of aggrieved shareholders where a company is financially distressed could be seen as undermining legislative aims to provide shareholders with direct rights of action in respect of corporate misconduct.
CAMAC went on to identify potential reforms to assist with the complexity of shareholder claims such as:
- a standardised proof of debt form for claims by aggrieved shareholders, which administrators may choose to use to assist them in making a "just estimate" of the value of those claims.
- a rebuttable presumption that a judicial determination in one proceedings of a question of fact common to other aggrieved shareholder claims applies in any subsequent proceedings.
- giving courts a general power to make orders in a liquidation which would cover creditors' meetings and the determination of shareholder claims.
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