Sons of Gwalia

The Sons of Gwalia case has received much publicity. Here is our brief summary of the essential issues.

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 Court held 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.

The case particularly benefits shareholders, who may now be given the opportunity to have their claims ranked equally with those of unsecured creditors. The case is also a warning to creditors who could be exposed to greater risk, and may slow down returns to creditors and increase the costs of administrations.

Background

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 theTrade 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 theCorporations 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

A majority of the High Court found that:

1. a shareholder can be treated as a ‘creditor’ and is entitled to the rights afforded to creditors under Part 5.3A 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’;
2. Mr Margaretic’s claim fell within the definition of a provable debt; and
3. 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 satisfied.

Implications for Creditors

The decision means that shareholders’ claims to recover losses from an insolvent company can potentially rank equally alongside unsecured creditors when those losses are caused by certain wrongdoings of the company. Consideration of shareholders’ claims may expose unsecured creditors to greater risk, delay and dilute the returns to creditors and increase the costs of company administrations .

Implications for Shareholders

This case is significant for shareholders as they are now entitled to claim damages for losses incurred that were not previously available to them in a company administration. However, a shareholder will have to establish that their loss was caused by their reliance on misleading conduct of the company.

Conclusion
Several issues arising from the decision have now been referred to the Corporations and Markets Advisory Committee (CAMAC) for consideration and advice. Based on their findings, there may be a legislative response to the decision.

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Information contained in this article is intended as an introduction only and should not be relied on in place of legal advice.