CHAPTER 1
Introduction
Background
1.1
On 23 June 2010, the Senate referred the provisions of the Corporations
Amendment (Sons of Gwalia) Bill 2010 (Bill) to the Legal and Constitutional
Affairs Legislation Committee (committee) for inquiry and report by 24 August 2010.[1]
On 23 July 2010, the committee tabled a short report which stated
that, as a result of the prorogation of the 42nd Parliament, the committee had resolved
not to continue the inquiry into the Bill. The report also noted that, if the
Bill were reintroduced in the new parliament, the Senate could again refer it
to the committee for inquiry.
1.2 Following the commencement of the 43rd Parliament,
the Bill was reintroduced into the House of Representatives on
29 September 2010 by the Hon. David Bradbury MP, Parliamentary
Secretary to the Treasurer. On 30 September 2010, the Senate again
referred the Bill to the committee for inquiry and report by 18 November 2010.
The High Court decision
1.2
The Bill results from a High Court of Australia decision relating to the
voluntary administration of a gold mining company, Sons of Gwalia Ltd. In Sons
of Gwalia Ltd v Margaretic (the Sons of Gwalia case), the plaintiff
shareholder had purchased shares in the company shortly before the company went
into voluntary administration.[2]
The shareholder commenced action against the company claiming that, at the time
of purchasing his shares, the company was in breach of its continuous
disclosure requirements under section 674 of the Corporations Act 2001 (Cth)
(Corporations Act). Alternatively the shareholder claimed that, as a
consequence of the non-disclosure, he was a victim of misleading and deceptive
conduct by the company under section 52 of the Trade Practices Act 1974
(Cth), section 1041H of the Corporations Act and section 12DA of the Australian
Securities and Investments Commission Act 2001 (Cth). He claimed damages
under each Act as a creditor of the company.
1.3
The issue for judicial determination was whether the shareholder should
be admitted as an unsecured creditor under the deed of company arrangement,
ranking equally with other unsecured creditors, on the basis he had been
induced to purchase shares of the company as a result of conduct prior to its
insolvency. Under section 563A of the Corporations Act, the payment of a debt
owed by a company to a person 'in the person's capacity as a member of a
company' is postponed until the debts of all other creditors are satisfied.
However, the High Court determined that claims by persons who purchased shares
in a company relying on misleading or deceptive information from the company,
or material non-disclosures, were not claims 'as a member of the company' and therefore
were not postponed under section 563A behind the claims of unsecured creditors.[3]
In making its decision, the High Court affirmed the decision of the House of
Lords in Houldsworth v City of Glasgow Bank, which established that a
person's capacity to bring a claim for damages can be affected by how the
person acquired the shares and whether the person still holds them.[4]
1.4
In February 2007, the then Parliamentary Secretary to the Treasury, Mr
Chris Pearce MP referred the issues raised in the Sons of Gwalia case to the
Corporations and Market Advisory Committee (CAMAC). CAMAC delivered its report
on this issue, Shareholder claims against insolvent companies, in
December 2008. The report noted that this was a policy area where certainty was
required but that the views of interested parties were divided. CAMAC commented
that, while all of its members were not of the same view, overall it was not persuaded
of the need for a change from the position established by the Sons of Gwalia
case.[5]
CAMAC noted a legislative trend towards the facilitation of private remedies in
corporate regulation:
Any move to curtail the rights of recourse of aggrieved
shareholders where a company is financially distressed could be seen as
undermining the apparent legislative intent to empower investors.[6]
1.5
On 19 January 2010, the Hon. Chris Bowen MP, then Minister for
Financial Services, Superannuation and Corporate Law (the minister) announced a
package of reforms to Australian corporate insolvency laws. As part of these
reforms, the Government proposed to introduce legislation designed to reverse
the effects of the decision of the High Court in the Sons of Gwalia case. The
minister stated:
Any direct benefits to aggrieved shareholders arising from
non- subordination are outweighed by the negative impacts on shareholders generally
as a result of restrictions on access to, and increases in, the cost of debt
financing for companies...The Government also remains concerned that the Sons
of Gwalia decision has the potential to further increase uncertainty and costs
associated with external administration...The decision has also been taken in
light of the decision's potential negative impact on business rescue
procedures.[7]
Purpose of the Bill
1.6
On 23 April 2010, the then minister released an exposure draft of the
Bill, which was used as part of a public consultation process undertaken by the
Treasury. The minister explained:
This Bill is designed to restore the position of the law as
it was commonly understood to apply before the Sons of Gwalia decision.
It is inequitable for shareholder claimants to rank as creditors alongside
ordinary unsecured creditors, like small businesses, in corporate insolvencies.
The Government has been concerned about the effects of the Sons of Gwalia decision
on access to, and the cost of, debt finance and the potential uncertainty it
created.[8]
1.7
According to the Explanatory Memorandum (the EM), the Bill:
- amends the rights of persons bringing claims for damages in
relation to shareholdings under the Corporations Act and is intended to reverse
the effect of the High Court of Australia's decision in Sons of Gwalia Ltd v
Margaretic; [9]
and
-
streamlines procedures for external administrations.
1.8
The Bill has three key consequences:
- all claims arising from the buying, selling, holding or otherwise
dealing in shares are to be ranked equally and postponed until after all other
creditors' claims have been satisfied;
- for persons bringing claims regarding shareholdings, their right to
vote as creditors in a voluntary administration or a winding up is removed unless
they receive permission from the court, and their right to receive reports to
creditors is removed unless they make a written request to the external
administrator; and
- any restriction on the capacity of shareholders to recover
damages against a company based on how they acquired their shares or whether
they still hold the shares, is eliminated.[10]
Conduct of the inquiry
1.9
The committee advertised the inquiry in The Australian newspaper and
details of the inquiry, the Bill and associated documents were placed on the
committee's website. The committee also wrote to a number of organisations and
individuals, inviting submissions by 27 October 2010. Submissions received
before the prorogation of the 42nd Parliament were accepted as
submissions to this inquiry.
1.10
The committee received seven submissions, and one supplementary (revised)
submission, all of which are listed at Appendix 1. All submissions were published
on the committee's website. In some cases these submissions duplicated comments
made to The Treasury's consultation regarding the exposure draft of the Bill (which
was termed the Corporations Amendment (No. 2) Bill 2010).
1.11
The committee held a public hearing in Canberra on 26 October
2010. A list of witnesses who appeared at the hearing is at Appendix 2, and
copies of the Hansard transcript are available online at https://www.aph.gov.au/hansard.
Acknowledgement
1.12
The committee thanks those organisations and individuals who made
submissions and gave evidence at the public hearing.
Scope of the report
1.13
Chapter 2 provides a brief outline of the key provisions of the Bill,
and Chapter 3 discusses the key issues raised in submissions and evidence.
Note on references
1.14
References in this report are to individual submissions as received by
the committee, not to a bound volume. References to the committee Hansard
are to the proof Hansard. Page numbers may vary between the proof and
the official Hansard transcript.
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