Shareholders locked out of external administrations: Sons of Gwalia overcome by key amendments

On Tuesday 2 June 2010, the Minister for Financial Services, Superannuation and Corporate Law introduced into Parliament proposed legislation that will reverse the effect of the High Court of Australia’s decision in Sons of Gwalia Ltd v Margaretic (2007) 232 ALR 232 by altering the rights of persons bringing claims for damages against insolvent companies in relation to their shareholdings.

The High Court’s widely publicised decision in that case determined that certain shareholder claims against an insolvent company ranked equally with the claims of other unsecured creditors.

The need for reform

The Minister said the Government had decided to enact legislation reversing the general principle enunciated by the High Court because:

• ‘It is inequitable for shareholder claimants to rank as creditors alongside ordinary unsecured creditors, like small businesses’; and
  
  
• ‘The uncertainty created by the Sons of Gwalia decision had also increased the cost – and limited the availability – of credit, to the detriment of companies and their shareholders’.

Key changes effected by the Bill

The Corporations Amendment (Sons of Gwalia) Bill 2010 (Bill) will amend section 563A of the Corporations Act 2001 to postpone ‘subordinate claims’ made in external administration until all other claims against the company are satisfied.  A ‘subordinate claim’ is defined as a claim for a debt owed by the company to a shareholder or any other claim arising from a person buying, holding, selling or otherwise dealing in shares in the company.  Further amendments remove the rights of persons bringing claims regarding their shareholdings to:

• vote in their capacity as creditors of the company (during external administration) unless so ordered by the Court; and
  
  
• receive copies of notices, reports or statements to creditors unless they make a request in writing to the administrator or liquidator of the company.

In addition, the amendments will eliminate current restrictions 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.

The provisions of the Bill do not have retrospective operation.  Shareholders’ claims arising from the day after the date of Royal Assent will be ranked in accordance with section 563A, as amended, however shareholders’ claims made prior to that date will still be ranked in accordance with the High Court’s analysis in Sons of Gwalia. 

High hopes

The Explanatory Memorandum to the Bill sets out the Government’s expectations that the amendments will:

• facilitate the provision of credit to companies;
  
  
• reduce the costs for insolvency practitioners to carry out external administrations; and
  
  
• improve the efficacy of external administration.

Lavan comment

Essentially, the reform is aimed at returning the priority of shareholders’ claims in a winding-up to the position that was commonly understood to exist before the High Court delivered its judgment in Sons of Gwalia.  The removal of the uncertainty created by Sons of Gwalia and the cost savings expected to flow from the amended procedures are sure to be welcomed by insolvency practitioners and creditors alike.  The reaction of shareholders is, however, likely to be less enthusiastic.

For further information please contact:
Alison Robertson on (08) 9288 6872 / alison.robertson@lavanlegal.com.au; or
Amy Rumble on (08) 9288 6809 / amy.rumble@lavanlegal.com.au.