The CAMAC report on the Sons of Gwalia decision
The High Court’s judgment in the Sons of Gwalia case has raised significant debate amongst secured lenders, creditors and shareholders. Here is a link to this publication’s report on this in March 2007.
In its narrowest form, the court’s decision confirmed that, as the Corporations Actpresently stands, the debt owed to a shareholder of an insolvent company ranks equally to the debts owed to other unsecured creditors if the shareholder’s debt arises from an act of misrepresentation or improper disclosure by the company that caused the shareholder to acquire their shares. In a wider sense, the case indicates that debts owed to a shareholder other than in their “capacity as a member of the company” may rank equally with all other unsecured and non-priority creditors.
Clearly, the decision has fundamentally eroded the traditional position that shareholder interests in a liquidation would always be postponed behind conventional creditors.
As a result, in February 2007, the Commonwealth parliament referred a number of issues raised by the High Court’s decision to the Corporations and Markets Advisory Committee (CAMAC). In December 2008, CAMAC published its report.
CAMAC acknowledged that the present position may have negative implications “for companies seeking funds in the unsecured debt market”, for “the rehabilitation of financially distressed companies”, and for “the complexity of corporate external administrations”.
However, CAMAC has ultimately recommended maintaining the status quo as reflected in the High Court’s decision. Amongst other things, CAMAC was of the view that a change by parliament to the present legal position could undermine modern statutory protections that have armed shareholders with “direct rights of action in respect of corporate misconduct”.
Unfortunately, as a result of CAMAC’s report, it appears less likely that the Commonwealth parliament will now seek to amend the Corporations Act in order to reverse the effect of the High Court’s decision. Many lenders and corporations in financial difficulties will continue to be confronted by the implications of the decision in work-outs. Further, many creditors will continue to face long delays before external administrations can be finalised and dividends paid.