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
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
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).
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
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.
DLA Phillips Fox is one of the largest legal firms in
Australasia and a member of DLA Piper Group, an alliance of
independent legal practices. It is a separate and distinct legal
entity. For more information visit
This publication is intended as a first point of reference and
should not be relied on as a substitute for professional advice.
Specialist legal advice should always be sought in relation to any
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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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