Radical Move In Insolvency
Newcastle Herald
Monday April 17, 2006
AS Australians tighten their purse strings in the wake of recent word on petrol prices, interest rates and a relatively uncertain economy, an interesting development has taken place in the area of insolvency.
Some readers may recall a Herald column in January that focused on the decision in the case of Sons of Gwalia (Administrator appointed) versus Margaretic [2005] FCAA 1305.If you missed the article, the case gained the interest of professional advisers and investors for several reasons but mainly because of its potential to set the radical precedent that shareholders who have been misled or deceived and suffered loss as a result of that misleading or deceptive conduct should rank with unsecured creditors when a company is wound up.Section 563A of the Corporations Act provides that payment of a debt owed by a company to a person, in the person's capacity as a member of the company, is to be postponed until all debts owed to or claims made by persons otherwise than as members of the company have been satisfied. The Federal Court's decision turned on its head previous interpretation of this section of the act. Where previously claims made by shareholders were liable to be postponed until the claims of all other creditors were satisfied, the decision in Sons of Gwalia resulted in shareholders' claims (based on misleading conduct by the company and non-disclosure) no longer being postponed and ranking equally with the claims of other creditors. The Federal Court decision was challenged by the administrators and one of the non-shareholder creditors.A decision handed down recently by the full court of the Federal Court of Australia has taken the case one step closer to realising the potential to set a radical precedent. In late February, the full court delivered three separate but concurring judgements dismissing the appeal of the administrators and upholding the decision of the Federal Court. A week before the hearing of the Sons of Gwalia appeal, a judge in the NSW Supreme Court delivered a judgement that expressed disagreement with the Federal Court's decision in Sons of Gwalia. The judge expressed the opinion that the claims of transferee shareholders against the company for damages in respect of misleading and deceptive conduct must be postponed under section 563A to the claims of non-shareholder creditors. A lawyer, somewhere, will be rubbing his hands together in glee following the full court's recent decision.No doubt the administrators and non-shareholder creditor will apply to the High Court of Australia for special leave to appeal against the decision of the full court. Legislative reform may be pursued if the decision in Sons of Gwalia is affirmed.External administrators are obliged to apply the full court's finding, which has the potential to:? Dilute the influence of creditors in a winding up.? Reduce the level of assets available to other unsecured creditors in a winding up.? Increase the duration and cost of company administrations.? Increase the number of class actions by shareholders. The opinions contained in this article are those of the author, are general in nature and should not be considered specific legal advice. Rob Faraday-Bensley is a solicitor director of Bilbie Dan Solicitors and Attorneys.
© 2006 Newcastle Herald