Senator FIFIELD (Victoria) -The Corporations Amendment (Sons of Gwalia) Bill 2010 will amend the Corporations Act 2001 to reverse the effect of the High Court’s decision in Sons of Gwalia Ltd v Margaretic and to make other amendments to streamline external administrations of companies.
The Sons of Gwalia case was heard by the High Court in February 2007.
The court held that a compensation claim by a shareholder against a company was not subordinated below the claims of other unsecured creditors by virtue of section 563A of the Corporations Act. The coalition realised the importance of the decision and referred it to the Corporations and Markets Advisory Committee in 2007 for consideration.
In late 2008 CAMAC advised that to overturn the decision would stymie the trend of shareholder empowerment. Nevertheless, the coalition understands that incorporated businesses have found it difficult to obtain credit since the financial crisis.
The decision in Sons of Gwalia had the potential to raise the risk and cost of lending, which in turn could increase borrowing costs, especially for companies in financial distress.
Moreover, the Sons of Gwalia decision could delay the external administration of companies because it would become necessary to work out which shareholders are ranked alongside unsecured creditors.
The confusion about rights of creditors and shareholders could provoke costly legal action against the company which is ultimately borne by creditors and other shareholders.
The bill contains three measures. The first says that all claims in relation to shares are to be ranked equally and after creditors’ claims.
The second removes the rights of persons bringing claims regarding shares to vote as creditors in a voluntary administration or a winding-up unless they receive permission from the court.
The third provides that any restriction on the capacity of a shareholder to recover damages against a company based on how they acquired the shares is removed.
In practice, these measures are designed to ensure that shareholder compensation claims are paid from the pool of funds available to shareholders rather than out of the pool available to unsecured creditors.
Shareholders assume a higher level of risk-and potential reward, for that matter-than unsecured creditors. Unlike unsecured creditors, they are part owners of a company.
As such, shareholders themselves could undertake due diligence to avoid corporate misfortune.
Ranking all shareholders after unsecured creditors restores the appropriate risk balance between creditors and shareholders.
The coalition supports this bill.
We reserved our final opinion until the Senate Legal and Constitutional Affairs Legislation Committee had considered the bill in detail.
The committee has now published its final report, and we are pleased that the government is amending the bill to incorporate the recommendations
of the committee.
The committee’s recommendations were put to the committee by the Law Council of Australia, and they improve the drafting of the bill.
The amendments include measures to ensure the consistent use of terminology in the Corporations Act to avoid ambiguity, to clarify the types of claims which rank above subordinated claims and to ensure that the bill does not disturb the effective operations of creditors’ schemes of arrangement.
Finally, we understand that the government has undertaken to refer the impact of this bill to the Senate economics committee in a year’s time and that the committee will examine whether the bill is having its intended effect.