Written by Robert Kite in April, 2011

There have been some recent changes to the legacy afforded by the Sons of Gwalia decision, however, in order to comprehend the reason for the changes, one first needs to understand the context from where the legacy commenced. In order to do so, this matter will be briefly considered from its inception, inclusive of the recent changes.

The Sons of Gwalia matter basically comes down to a decision of the High Court of Australia in January 2007 whereby by a shareholder was allowed to prove against the Company as a Creditor.

When a Company enters into insolvency, it is a requirement that the claims of Creditors are paid in full, prior to any funds being available to the shareholders. Being classed as a Creditor also allows a party to attend and vote at Meetings of Creditors.

In the case of Sons of Gwalia, Mr Margaretic purchased a quantity of ordinary shares in the Company prior to the Company being placed into Voluntary Administration. (The Company subsequently entered into a Deed of Company Arrangement (“DCA”)).

Mr Margaretic, realising that his shareholding was worthless, sought to make an application to the Court to enable him to lodge a claim against the Company as a Creditor, because of the dealings in which the Company engaged in prior to Mr Margaretic purchasing the shares. In the event that Mr Margaretic was entitled to lodge a claim as a Creditor, he stood a chance of making a recovery from the pool of funds available in the Deed of Company Arrangement (which the Company subsequently entered into), where as a shareholder he would not have made any recovery at all.

In Mr Margaretic’s case, he purchased 20,000 shares in the Company 11 days prior to the Company being placed into Voluntary Administration. One of the core arguments for Mr Margaretic’s case was such that the Company had mislead him at the time he purchased his shares, as the Company had failed to notify the ASX of the deficiency in certain areas as is required by the Corporations Act. Mr Margaretic’s argument was such that had the appropriate disclosure been made, then he as an informed investor would not have purchased the shares. Accordingly, Mr Margaretic contended that he was misled by the Company, and was entitled to damages equal to the money he paid for his shares.

The High Court ruled in favour of Mr Margaretic, and accordingly, he was entitled to claim as a Creditor in the DCA of the Company.
From Mr Margaretic’s point of view, this was a significant victory on his part. But if you consider the position of Creditors generally, the admission of shareholders into the pool of Creditors will result in the total pool of Creditors increasing, and therefore, the available funds for distribution will have to be spread even thinner by the dilution of the Creditor pool.

Amendments to the Corporations Act have been passed by the Australian Parliament to rectify this situation such that shareholders will not be entitled to claim as Creditors in the future, and that their claims will remain (as they were prior to the decision in Sons of Gwalia) subrogated to the claims of Creditors.

PLEASE NOTE:  All information contained in the articles below was correct at time of publishing.