The High Court of Australia delivered its decision on 31 January in Sons of Gwalia v Margaretic upholding by a majority of six to one the claim by a shareholder for damages for losses sustained in the acquisition of the shares arising from the company’s misleading or deceptive conduct.
The High Court effectively held that such a claim is:
- a provable debt in the winding up or in the deed of company arrangement of a company, and
- not a debt due to a shareholder in his capacity as a member, so that section 563A of the Corporations Act 2001 does not subordinate such claims to the debts due to ordinary unsecured creditors.
Some practical implications and observations about this decision include:
- in practical terms shareholders’ claims in relation to losses on shares based on unlawful conduct on the part of the company and its officers rank equally with claims of other unsecured creditors
- the potential for such claims to significantly complicate administrations by requiring consideration of the basis of any such claims, increased costs, significant time allocation and reduced returns to other creditors
- increased risks to lenders, in particular, negative pledge lenders, may lead to additional costs of borrowing
- the possibility of parliament amending section 563A of the Corporations Act 2001 to invalidate such claims and restore the subordinated ranking of all shareholders regardless of the basis of a particular claim. The equivalent United States provision under the Bankruptcy Code is an example of how this could be done, and
- an increased focus on material disclosure by companies, with, in the immediate future, keen interest in the Australian Stock Exchange’s current consideration whether its governance rules should specifically cover the disclosure of material business risks.
This article was written by Konrad de Kerloy, Partner and Sam Dundas, Solicitor, Perth.
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