Bowen tables Sons of Gwalia amendment

The Minister for Financial Services, Superannuation & Corporate Law, Chris Bowen, yesterday introduced a Bill into Parliament that will set aside a controversial 2007 High Court ruling that gave shareholders in certain circumstances the same rights as unsecured creditors in an insolvency.

The long-awaited Corporations Amendment (Sons of Gwalia) Bill 2010 contains three key measures. It provides that all claims in relation to buying, selling or otherwise dealing with shares are to be ranked equally and "after all other creditors' claims".

It removes the right of persons bringing claims regarding shareholders to vote as creditors in a voluntary administration or a winding up unless they receive permission from the Court.

And it eliminates any restriction on the capacity of a shareholder to recover damages against a company based on how they acquired the shares or whether they still hold the shares. In other words, a person's ability to bring a claim for damages against a company is not restricted by how they acquired shares and whether they continue to hold shares when bringing the action.

The High Court in Sons of Gwalia v Margaretic ruled that a shareholder in a failed company had the same right as an unsecured creditor to pursue a claim against the company in cases where the shareholder had suffered loss as a result of misleading and deceptive conduct by the company.

The court ruled that a compensation claim by a shareholder against a company was not subordinated by the Corporations Act.

The decision overturned the long-standing convention that shareholders stand behind unsecured creditors in an insolvency.

This was bad news for bankers, in particular, because it created the prospect of longer and more complex insolvencies with available funds to be shared by more parties.

The Government was sensitive to the claims of bankers and insolvency practitioners. The explanatory memorandum accompanying the bill says: "The amendment will facilitate the provision of credit to companies, the reduction of risk premiums charged and the extent of onerous terms and conditions imposed in order to offset the effects of non-subordination."

The Government also expects that the amendment "will reduce the costs of insolvency practitioners to carry out external administrations."