Sons of Gwalia debate goes another round

With the Australian government yet to make a response to the Corporations and Markets Advisory Committee's recent recommendation on the Sons of Gwalia issue, the lobbyists are giving the issue plenty of attention.

Chartered Secretaries Australia yesterday released a recommendation that the government overturn the controversial High Court ruling in the Sons of Gwalia case and restore the long-standing convention that shareholders stand behind unsecured credits in an insolvency.

The High Court's decision in the 2007 case Sons of Gwalia v Margaretic overturned that convention. The court 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.

This decision has meant that shareholder class actions are now more likely to proceed against failed companies that have funds to disperse.

For bankers, the ruling creates the prospect of longer and more complex insolvencies with available funds to be shared by more parties.

In January CAMAC recommended that the government take no action to overturn the effect of the High Court ruling in Sons of Gwalia.

The committee's report said: "Any move to curtail the rights of recourse of aggrieved shareholders where a company is financially distressed could be seen as undermining legislative initiatives to provide shareholders with direct rights of action in respect of corporate misconduct."

Chartered Secretaries Australia chief executive Tim Sheehy said the High Court decision was flawed and should not be followed.

Sheehy said: "We believe that shareholders should continue to be required to absorb the risk of insolvency as part of the risks they take in acquiring shares, which includes the risk of corporate fraud, misconduct and the non-disclosure of price-sensitive information.

"Shareholders traditionally assume greater risk for the chance of greater rewards, while creditors accept limited returns for lower risk."

Commentators have accused the critics of the High Court ruling of overkill. They argue that there will be very few shareholder class actions aimed at failed companies.

The managing director of the litigation funder IMF, John Walker, said most shareholder class actions were funded these days and funding would only be available when there were assets that could be recovered. In practice, litigation funders would turn down most applications to support a shareholder class action if the company was insolvent.

Sheehy said: "Whether there are one or 100 cases resulting from this ruling misses the point. It is not a precedent we want to see in the case law."