Shareholders Equal to Creditors

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This case has ramifications for Australian Corporations law because the High Court was called upon to determine when the claims of members might be equal to those of creditors, upon a company becoming insolvent. The background to this case and a summary of the High Court’s Decision are contained below.

Sons of Gwalia Ltd was a publicly listed gold mining company. On 18 August 2004, Luka Margaretic invested $26,288 by purchasing 20,000 shares in the company. Eleven days later, administrators were appointed pursuant to the Corporations Act, and the shares were then worthless. The allegation by Mr Margaretic was that the Sons of Gwalia had failed to notify the Australian Stock Exchange that its gold reserves were insufficient to meet its sale contracts and that it could not continue as a going concern. He also asserted that he was a victim of misleading and deceptive conduct in contravention of the Trade Practices Act, the Corporations Act and the Australian Securities and Investment Commission Act. He claimed compensation for the lost value of his shares.

The High Court, by a 6-1 majority, found for Mr. Margaretic. They held that section 563A of the Corporations Act, which provides that dividends for company members should be postponed until all other debts are paid, did not apply in instances where a shareholder claimed damages for the loss sustained in a share acquisition when they were less valuable than represented.

The High Court also held that the claim fell within section 553 of the Corporations Act because it arose in circumstances which occurred before the “relevant date”, with the “relevant date” being the date of commencement of the company’s administration.

In a key part of its judgment, the court stated that, “A person who buys shares in a company in reliance upon misleading or deceptive information from the company, or misled as to the company’s worth by its failure to make disclosures required by law, may have a claim for damages against the company which ranks equally with claims of other creditors”.

This decision is set to have wide ranging implications for shareholders who have lost money in the same circumstances as Mr. Margaretic. Interestingly, a short time after the High Court’s decision was handed down, listed litigation funder IMF (Australia) Ltd confirmed that it was funding the claims of 800 Sons of Gwalia shareholders valued at $70 million in total.

Reference: A. Hobbes, Shareholders could be equal to creditors: High Court, WA Business News Online, 31 January 2007.