The Corporations and Markets Advisory Committee recommended in
its report Claims by shareholders against insolvent companies:
implications of the Sons of Gwalia decision that there should
be no change in the law in response to the Gwalia
The Corporations and Markets Advisory Committee (CAMAC) has
released its report on Claims by shareholders against insolvent
companies: implications of the Sons of Gwalia decision (the
Report). In considering Sons of Gwalia Ltd v Margaretic
 HCA 1 (the Gwalia decision) CAMAC discussed the
appropriate balance between investor and creditor rights in
insolvency law. CAMAC recommended that there be no change to the
law in response to the Gwalia decision. The High Court
held in that case that a claim brought by a shareholder under
statutory investor protection provisions ranked equally with the
claims of other unsecured creditors.
The plaintiff shareholder, Margaretic, held shares in Sons of
Gwalia Ltd (Gwalia) which was an ASX-listed gold mining company.
Gwalia went into voluntary administration and the value of the
shares fell to nil. Gwalia executed a Deed of Company Agreement
that provided distributions from company's assets to take place
in an order of priority which included s 563A of the
Corporations Act 2001. The effect of s 563A is to rank
payments to shareholders in their capacity as members behind other
debts and claims against the company.
Margaretic commenced an action claiming that Gwalia breached the
continuous disclosure requirements in s 674 of the Corporations
Act, by failing to notify ASX of changes in its operations
that meant it could no longer operate as a going concern. The claim
was that Gwalia had misled or deceived the shareholder pursuant to
s 52 of the Trade Practices Act 1974, s 1041H of the
Corporations Act and s 12DA of the Australian
Securities and Investments Commission Act 2001. Margaretic
claimed the difference between the purchase price of the shares and
their value after the company went into voluntary
The majority of the High Court (6-1) followed the decision of
the Federal Court and held that that was not a claim founded on any
rights incurred by virtue of membership of Gwalia. Margaretic's
claim therefore ranked with those of other unsecured creditors
under Part 5.3A of the Corporations Act.
CAMAC on implications of the case
Chapter 2 of the Report highlights the implications of the
Gwalia decision, particularly the determination of
shareholder claims and conduct of external administrations.
The Gwalia decision brought into focus the conflict
between shareholders' statutory remedies for corporate
misconduct and the traditional notion of shareholder interests
being postponed behind those of conventional unsecured creditors in
The High Court did not accept that s 563A embodied a
'creditors come first, shareholders come last' approach in
all respects. Rather the High Court placed a shareholder with a
claim under investor protection provisions on the same footing as a
conventional unsecured creditor in voluntary liquidation or winding
up, with the rights to receive information and exercise voting
rights as creditors.
CAMAC also acknowledged that shareholder claims may add to the
complexity of corporate reconstructions and proposed a number of
measures to help manage shareholder claims more efficiently.
The Report discussed the following possible ramifications:
Reduced availability or increased cost of finance - lenders may
impose more onerous terms, charge higher interest;
Loan agreements may become more complex; and
Trade creditors may be less inclined to extend credit, and may
build the added risk into cost of goods and services.
CAMAC was not persuaded that the decision should be overturned
or that shareholders' rights should be postponed, capped or
quashed. Any move to limit the rights of recourse of aggrieved
shareholders where a company is financially distressed could be
seen as undermining legislative aims to provide shareholders with
direct rights of action in respect of corporate misconduct.
CAMAC went on to identify potential reforms to assist with the
complexity of shareholder claims such as:
a standardised proof of debt form for claims by aggrieved
shareholders, which administrators may choose to use to assist them
in making a "just estimate" of the value of those
a rebuttable presumption that a judicial determination in one
proceedings of a question of fact common to other aggrieved
shareholder claims applies in any subsequent proceedings.
giving courts a general power to make orders in a liquidation
which would cover creditors' meetings and the determination of
When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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