In brief

The Government has reintroduced the Corporations Amendment (Sons of Gwalia) Bill 2010 into Parliament to give effect to the Government's decision to reverse the High Court's decision in Sons of Gwalia v Margaretic.

We have been sending Client Updates since 2007 concerning the decision of the Australian High (Supreme) Court in Sons of Gwalia Ltd v Margaretic. Specifically, the High Court held that the damages claims of shareholders of insolvent companies for fraud and misrepresentation should be treated pari passu with the claims of all other unsecured creditors, rather than being treated as subordinated to unsecured claims as is the case in the U.S.

As foreshadowed earlier this year, on 2 June 2010 the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP introduced the Corporations Amendment (Sons of Gwalia) Bill 2010. Associate, Justin Le Blond summarises the Bill.

The proposed amendments in the Bill will return the order of claims in a corporate winding-up to the situation that was commonly understood to exist prior to the Sons of Gwalia judgment. That is, priority will be given to creditors ahead of shareholders in granting access to the equity of an insolvent company.

Summary

In an exciting week for insolvency, the Minister for Financial Services, Superannuation and Corporate Law has released a package of reforms to Australia’s corporate insolvency laws. This reform package includes:

The High Court of Australia’s Sons of Gwalia Ltd v Margaretic (Sons of Gwalia) decision recognised an aggrieved shareholder’s claim for damages (in relation to the acquisition of shares) on equal footing with those of an insolvent company’s other unsecured creditors. Dispute Resolution Associate, Justin Le Blond, examines the Government’s response to the decision.

There have recently been a number of significant developments in relation to schemes of arrangement. These include:

• the Federal Court refusing to make orders convening a meeting of CSR’s shareholders to vote on a demerger proposal by way of scheme, on public policy and commercial morality grounds relating to CSR’s potential asbestos liabilities
• the Government’s corporate law advisory body recommending significant reforms to the scheme regime, and
• developments regarding ‘hostile schemes’.

Each of these developments is discussed below.

Effectively, the High Court held that aggrieved shareholders (shareholders whose debt arises as a result of misrepresentation or improper disclosure by the company causing the shareholder to acquire shares) would be ranked equally with the debts of other unsecured creditors.

When disputes between shareholders escalate, one of the shareholders may be tempted to transfer the business to a new entity. Can the shareholder be stopped if he succeeds in obtaining a majority vote?

THE FACTS:

Summary

In a very recent avoidance law decision the Austrian Supreme Court held that shareholders of Austrian limited liability companies, even if they are only small minority shareholders, can under certain circumstances be under a specific duty to investigate the company’s financial situation because of their statutory information and book inspection rights. If they fail to do so, they may have to return received payments if challenged by the insolvency administrator (Supreme Court file no. 3 Ob 117/18d).

Legal framework