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Gwalia's legalistic approach slammed

Gwalia's legalistic approach slammed

Commentators have taken the federal government's move to overturn the effect of the High Court's decision in Sons of Gwalia v Margaretic as a chance to slate the court's decision.

COMMENTATORS have taken the federal government's move to overturn the effect of the High Court's decision in Sons of Gwalia v Margaretic as a chance to slate the court's decision. 


The federal government's move restores the traditional rights of creditors over shareholders in the winding up of a company, the independent body for government and risk management said. The move is both "equitable" and "practical", it said. 

The Corporation Act is to be amended to reverse the effect of the court decision, which determined that in a corporate winding up, certain compensation claims by shareholders were not subordinated below the claims of other creditors. 

Corporate Law Minister Chris Bowen made the decision as part of the government's reforms to insolvency laws aimed at proving better protection for directors involved in rescuing fallen companies. 

Welcoming the move to reverse the effect of the decision in Sons of Gwalia, Chartered Secretaries Australia chief executive, Tim Sheehy, said: “The federal government is to be applauded for rejecting the High Court’s legalistic approach in favour of what is clearly in the nation’s best interests.

“Capital market investors can finally take comfort that the time-honoured and well-understood distinction between the rights and risks of debt and equity investment will again prevail."

The CSA had long condemned the High Court decision, saying it flew in the face of the traditional principle that shareholders assume greater risk for the chance of greater reward, while creditors accept limited returns for lower risk.  

CSA’s view was that Sons of Gwalia distorted the capital markets by forcing creditors to compete with shareholders in a winding-up and effectively underwrite shareholders’ speculative risks with no compensating benefits.   

CSA said the decision was also bad for governance by inadvertently creating a privileged class of shareholder when, in principle, all ordinary shareholders should have identical rights.

Sons of Gwalia gave only those shareholders who purchased their shares at the time of a company’s misleading conduct equal standing with creditors, the CSA said, while it excluded those who had bought their shares at an earlier time.  

“The government has now delivered the right result by confirming that shareholders must continue to absorb the risk of insolvency as part of the broad range of risks they assume in acquiring shares and which properly include the risks of corporate fraud, misconduct and the non-disclosure of price-sensitive information,” said Sheehy.  

“The government’s decision promotes regulatory certainty and greater equity – both of which are good for governance,” he added.

In Sons of Gwalia, a shareholder alleged that he had been induced to buy shares in an ASX-listed company as a result of the company’s misleading conduct. 

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