UK: Shareholder Successfully Claims For Loss In Share Value

In the Margaretic case, a shareholder successfully argued his case against the administrators of a company for his claim of losses suffered by him as a result of depreciation of the value of his shares.

In the recent case of Sons of Gwalia Ltd v Margaretic (2005), Luka Margaretic brought a claim against the Sons of Gwalia Ltd ( the "Company") for loss and damage that he alleged he had suffered by conduct of the Company. The alleged loss and damage occurred in relation to his acquisition of 20,000 shares in the capital of the Company which subsequently became worthless.

Mr Margaretic bought the shares on 18 August 2004 on the market conducted by Australian Stock Exchange Limited, and his name was entered in the register of members of the Company on 23 August 2004 as the holder of 20,000 shares. On 29 August 2004, administrators of the Company were appointed. It later emerged that the shares in the Company were worthless at the moment of the appointment of the administrators. Nevertheless, the administrators claimed that Mr Margaretic was not entitled to be treated as a creditor of the Company regarding the claim that he said he had in respect of the purchase of worthless shares in the Company.

Mr Margaretic’s claim against the Company was based on the fact that, at the time when he bought the shares, the Company was in breach of its obligations under Australian legislation which requires companies to comply with certain listing laws. He therefore argued that he was entitled to be treated as a creditor of the Company in relation to his claim and in connection with the administration of the Company. In particular, he claimed that he should be treated as a creditor in connection with any meeting convened to consider a deed of company arrangement and that his claim should not be treated as a debt or claim due to him in his capacity as a member of the Company. These assertions were disputed by the administrators and by other creditors of the Company.

The Company, through the administrators, commenced proceedings against Mr Margaretic seeking a declaration that his claim would not be provable under the proposed deed of company arrangement or, alternatively, a declaration that payment of his claim under the proposed deed of company arrangement should be postponed until all debts owed to persons otherwise than in their capacity as members of the Company have been satisfied. Mr Margaretic filed a counter-claim against the Company seeking a declaration that he was a creditor of the Company within relevant legislation and entitled to all the rights of a creditor, including attending meetings of creditors of the Company, voting at meetings of creditors of the Company and receiving information and circulars sent by the Company to its creditors. The Company claimed that, insofar as Mr Margaretic’s claim was a debt owed by the Company, it was owed to him in his capacity as a member of the Company and accordingly, it should be postponed until all debts owed to, or claims made by, persons otherwise than as members of the Company have been satisfied.

The judge did not consider that Mr Margaretic’s claim was a debt owed by the Company to him in his capacity as a member of the Company.

The judge considered that if it was a debt at all, it would be a debt arising as a result of the operation of consumer protection provisions. Insolvency provisions would not require postponement of a debt arising as a result of the operation of consumer protection provisions until debts owed to, or claims made by, persons otherwise than as members, had been satisfied. Therefore, the judge was of the opinion that the proposed deed of company arrangement should not require the postponement of Mr Margaretic’s claim in the course of the administration.

In conclusion, the judge held that as Mr Margaretic’s claim was not a debt due to him in his capacity as a member of the Company, there should be no restriction on him exercising incidental rights as a creditor of the Company under the proposed deed of company arrangement. The judge said that even if he was wrong in his conclusion, he did consider that Mr Margaretic would nonetheless be properly regarded as a creditor of the Company in respect of his claim. Even if his claim were to be postponed until other debts and claims had been paid in full, it is nevertheless a debt proveable in the winding up of the Company. It followed that Mr Margaretic was a creditor as the term is defined in a proposed deed of company arrangement and accordingly would be entitled to attend a meeting of the creditors of the Company to vote at such meetings and to receive information and circulars sent by the Company to its creditors.

Although this is an Australian case, it may be considered by English courts. English law provides that the order of priority in which a company’s assets in a winding up are applied starts with the costs of winding up and ends with distribution to members of the company in accordance with their rights, unless the articles otherwise provide. As members are last in priority to receive distribution, often there are no distribution funds left for them to receive. It will be interesting to observe whether English courts will, in particular circumstances, adopt the Sons of Gwalia ruling and benefit members of a company with the right to claim from distribution funds in the same manner as unsecured creditors.

The decision is being appealed by the Company.

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