In the highly publicised decision, the High Court ranked shareholder claims against a company for misleading conduct equally with claims by unsecured creditors in an external administration. Following significant debate on the merits of the decision, the Government commissioned an independent review by the Corporations and Markets Advisory Committee (CAMAC).

CAMAC canvassed a number of competing issues in its December 2008 report, such as the need to protect the equity markets with robust continuous disclosure laws and the negative impact the decision may have on the availability of unsecured finance to companies facing financial stress. CAMAC ultimately supported the Sons of Gwalia decision on the basis that it promoted investor confidence in the sharemarket. However, the Government appears to have tipped the balance in favour of protecting debt markets. Minister Bowen cited the following factors as driving Government policy on the issue:

  • The benefits flowing to shareholders from the increased availability of debt financing to companies.
  • The benefits of streamlining the external administration process and providing greater certainty.
  • The potential negative impact that Sons of Gwalia could have on business rescue procedures.

Amendments to the Corporations Act

Although section 563A of the Act appears to subordinate all debts owed to shareholders by a company to debts owed to other unsecured creditors, the High Court in Sons of Gwalia held that a shareholder's right to damages against a company for misleading conduct did not fall within the scope of section 563A as it was not a debt owed in their 'capacity as a member'.

While the Government has signalled an intention to legislate against the effect of Sons of Gwalia, the substance of the proposed amendments to the Act has not yet been disclosed. The Government also intends to:

  • Remove the right of subordinated shareholder claimants to vote as creditors in insolvency proceedings, unless permitted by a court.
  • Remove any requirement for an administrator or liquidator to provide such claimants with reports to creditors, except where a claimant makes a specific request for a copy of a particular report.
  • Legislate against the rule in Houldsworth v City of Glasgow Bank (which allows a shareholder to make a claim for damages against a company in certain circumstances provided it rescinds its share subscription contract).

Implications

The proposed amendments should reduce complexity in corporate restructures and insolvency administrations. By providing greater certainty regarding the position of unsecured creditors, the proposed amendments may also assist in opening up unsecured corporate debt markets, particularly in overseas corporate bond markets.

Following the proposed amendments, shareholders may still have recourse against companies for breaches of disclosure laws in a number of ways without their claims being subordinated. As the scope of Sons of Gwalia was confined to the context of an insolvent company, shareholders may still take action against solvent companies for misleading conduct without their claims being postponed to those of other unsecured creditors. Solvent or not, shareholders of a company may also still pursue actions against directors for breaches of disclosure laws.

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