The Sons of Gwalia case received much publicity. A brief summary of the essential issues follows.
Victorian Registry, Federal Court of Australia.
In August 2004, Mr Margaretic purchased shares to the value of $20,000 in Sons of Gwalia Ltd (Company). The Company went into voluntary administration 11 days later.
Mr Margaretic submitted that at the time he purchased his shares, the Company was in breach of s674 of the Corporations Act by failing to disclose information to the market which is not generally available and is information that a reasonable person would expect to have a material effect on the share price. Mr Margaretic further submitted that the Company had engaged in misleading and deceptive conduct, breaching s52 of the Trade Practices Act, s12DA of the Australian Securities and Investment Commission Act, and s1041H of the Corporations Act. Mr Margaretic sought damages for losses incurred from the Company’ s conduct.
Mr Margaretic claimed that he was entitled to be treated as a ‘creditor’ under the Corporations Act, as opposed to a ‘member’ and that he could therefore submit his claim for proof in the deed of company arrangement.
High Court Decision
In January 2007 the High Court delivered its judgment in the case of Sons of Gwalia Ltd v Margaretic; ING Investment Management LLC v Margaretic (2007] HCA 1. The majority of the High Court found that:
- during the external administration of a company and distribution of a fund under a deed of company arrangement, claims by shareholders for the recovery of losses due to wrongdoings by a company can rank equally with the claims of unsecured creditors;
- a shareholder can be treated as a ‘creditor’ and is entitled to the rights afforded to creditors under Part 3A of the Corporations Act for the purpose of a company administration when the shareholder’s claim was not made in their capacity as a ‘member’;
- Mr Margaretic’s claim fell within the definition of a provable debt; and
- there is no potential liability owed to Mr Margaretic in his capacity as a member of the company, therefore payment to Mr Margaretic does not need to be postponed until other creditors’ claims are.
Equal ranking was subsequently eradicated by Federal Legislation deeming claims by shareholders for damages to rank below other unsecured creditors.
What does the Sons of Gwalia act do?
The Sons of Gwalia Act reverses the effect of the High Court’s decision in an insolvency context. It does so by amending section 563A of the Corporations Act to expressly provide that all claims in relation to the buying, selling, holding or otherwise dealing with shares are to be ranked equally and after all other creditors’ claims.
It is important to note that the subordination of a debt under section 563A does not extinguish the debt, thus a shareholder may still claim rights as a creditor. However, the Sons of Gwalia Act also inserts a new section 600H which removes the right of persons bringing claims regarding shareholdings to vote as creditors in a voluntary administration or winding up, unless they receive permission from the court.
Section 563A only applies prospectively to claims by shareholders arising after 18 December 2010.
As a result of the High Court decision in Sons of Gwalia, proceedings for the benefit of Sons of Gwalia creditors were taken against the Companies’ auditors seeking damages for Sons of Gwalia’s shareholders arising from the auditors’ negligent audits which permitted the Companies’ accounts not to reflect a true and fair view in material respects. These proceedings settled for $125m with a material portion being received by shareholder creditors.
1. Houldsworthy First Instance (15 September 2005).
2. Houldsworthy Full Court (27 February 2006).
3. Costs (15 June 2006).
4. Leave Application (16 June 2006).
5. Houldsworthy High Court (31 January 2007).