Question

Do you agree with the High Court's ruling in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 which provides greater protection to shareholders rights? Ordo you prefer the recent amendments to the Corporations Act as provided by the Corporations Amendment (Sons of Gwalia) Act 2010 (Cth)?

Answer 1

yes

The High Court’s decision in Sons of Gwalia

On 1 April 2007

The decision of the High Court of Australia in Sons of Gwalia Ltd v Luka Margaretic sent shockwaves through the business community when the judgment was handed down on 31 January 2007.

By a 6-1 majority (Callinan J dissenting), the Court held in favour of Mr Margaretic (“Margaretic”) and as a consequence the claims of more than 800 shareholders will now rank equally with the claims of general creditors.

It is submitted that the decision was not a reversal of widely held principles but instead the result of a purposive interpretation of the relevant provisions in the Corporations Act 2001 (“Act”) and a thorough examination of the case law. Creditors and insolvency practitioners may take some comfort in the Court’s view that Parliament could easily rectify the current position by amending section 563A of the Act. Justice Kirby argued that if it was Parliament’s intention that the payment of each and every debt owed by a company to a shareholder of the company is postponed until all other debts are paid, Parliament would have legislated to this effect.

a member can make a claim against the company and successfully argue that such a claim is not made in his or her capacity as a member of the company, examples of which are that the company breached its continuous disclosure obligations to members or alternatively, engaged in misleading and deceptive conduct, they will be able to prove their claim and receive a share of the asset pool alongside creditors.

In the absence of an amendment to section 563A of the Act, creditors will potentially receive less from the pool of company assets as certain claims by members will be of equal standing.

The main purpose of the Bill is to amend the Corporations Act 2001 (the Corporations Act) to reverse the effects of the decision of the High Court of Australia in Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 231 CLR 160; (2007) 232 ALR 232; (2007) 81 ALJR 525 (Sons of Gwalia).[2]

Under proposed paragraph 600H(b), the person is entitled to vote in his or her capacity as a creditor of the company during the external administration of the company, but only if the Court so orders. The Explanatory Memorandum suggests that in determining whether to make such an order, the Court ‘might be expected to have regard to whether the person might reasonably be considered to possess a real financial interest in the external administration’.[19] However, the Bill contains no indication of the sorts of matters to which the Court must, or may, have regard in determining whether to make the order