In Sons of Gwalia v Margaretic; ING Investment Management v
Margaretic (2007) 232 ALR 232 (Sons of
Gwalia), the High Court held that a shareholder pursuing
remedies for misleading or deceptive conduct and non-disclosure
inducing him to purchase shares in Sons of Gwalia Ltd, was entitled
to prove in the administration of the company and rank equally with
general unsecured creditors.
The decision has been the subject of extensive legal, academic
and parliamentary attention and fuelled intense debate about the
need for law reform.
Recently legislation has been passed by the Australian
Parliament in the form of the Corporations Amendment (Sons of
Gwalia) Act 2010 (Cth) (Sons of Gwalia Act)
which amends the Corporations Act 2001 (Cth) (Corporations Act) and
means that in future all such shareholder claims will once again be
Commencement - the Sons of Gwalia Act
The Sons of Gwalia Act amendments took effect on 18 December
2010. However, the amendments will not operate retrospectively
subordination of shareholder claims under the amended s563A of
the Corporations Act will only apply to claims arising after 18
December 2010; and
the restrictions on voting rights and access to notices under
the new s600H of the Corporations Act will apply only to external
administrations commenced after 18 December 2010.
Overview - the Sons of Gwalia Act
The Sons of Gwalia Act makes three important amendments to the
The new s247E provides that a person is not precluded from
bringing a claim only because the person "holds, held or
has subscribed for shares in the company".
However, the amended s563A provides that a claim which
"arises from a person buying, holding, selling or
otherwise dealing in shares in the company [is] postponed [such
that only once] all other claims made against the company are
satisfied [can the] subordinate claim [be
This change, in effect, reverses the decision in Sons of Gwalia
and given that less than 5% of insolvencies see a payout to
unsecured creditors of 10c in the dollar or more, means that
typically there will be no funds available for distribution to
shareholder creditors of an insolvent company.
A new section 600H has been included in the Corporations Act
and provides that a person whose claim has been postponed under
s563A is entitled to receive copies of notices sent to creditors
only if they request the notice in writing and may only vote as a
creditor if ordered by the Court.
This latter change is likely to be of particular significance in
the context of meetings of creditors in voluntary administrations,
when large blocs of small creditors can exercise significant
control over the future of the insolvent company. It remains to be
seen in what circumstances the Court will allow shareholder
creditors to vote, but one probable scenario is where it is likely
that there will be adequate funds for a distribution to be made to
postponed shareholder creditors.
Analysis - the Sons of Gwalia Act
The new shareholder subordination regime introduced by the Sons
of Gwalia Act will be one of the strictest in the world. However,
there are two features which may give rise to uncertainty.
By only including claims arising from dealings in
"shares" in the subordination regime, the door is left
open to claims by investors who have purchased other
"securities" (as defined by the Corporations
Act). This inconsistency may be particularly problematic in
claims arising out of dealings with stapled securities.
There is an apparent contradiction between s562 and the amended
s563A of the Corporations Act. Section 562 requires that,
in appropriate circumstances, insurance proceeds held by a company
be paid as a priority payment to the third party whose claim
triggered the insurance policy. However, we query how this would
operate in circumstances where the third party's claim is a
shareholder action falling within the s563A subordination regime.
That is, it is not clear which provision is intended to prevail in
such circumstances and this anomaly may cause confusion and require
Leaving aside these two issues, the Sons of Gwalia Act
should generally alleviate pressure on liquidators and
administrators by making shareholder claims against insolvent
companies far less attractive. This in turn should assist
insolvency professionals to avoid the enormous cost and complexity
associated with large scale shareholder class-action type claims in
an insolvency setting.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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